Deck 10: Tests of Controls

Question 1

Tests of controls are auditing procedures performed to determine:

A)whether required internal controls have been put in place.
B)the efficiency of the information flow.
C)the effectiveness of the design and operation of internal controls.
D)b and c.

Answer 1

C

Question 2

Based on a study and evaluation completed at an interim date, the auditor concludes that no significant internal accounting control weaknesses exist.The records and procedures would most likely be tested again at year-end if:

A)the internal accounting control system provides a basis for reliance in reducing the extent of substantive testing.
B)tests of controls were not performed by the internal auditor during the remaining period.
C)inquiries and observations lead the auditor to believe that conditions have changed.
D)the auditor uses non-statistical sampling during interim compliance testing.

Answer 2

C

Question 3

Which of the following is a limitation of using 'observation' for tests of controls?

A)Employees may perform the control differently when not being observed.
B)The evidence applies for the entire period.
C)It is a dual-purpose test.
D)It shows how employees perform their duties.

Answer 3

A

Question 4

If the auditor decides to seek a further reduction in control risk, this will require them to:

A)perform additional tests of control.
B)increase, proportionately, assessed inherent risk.
C)rely exclusively on analytical procedures.
D)expand the scope of substantive testing during interim work.

Question 5

After the auditor planned the audit based on the lower assessed level of control risk approach it was found that the tests of control did not support this approach.Although the controls were well designed they were not implemented and therefore ineffective.What audit strategy should the auditor now pursue?

A)Adopt a predominantly substantive approach.
B)Perform more extensive tests of control than originally planned.
C)Reduce the level of substantive procedures.
D)None of the above.

Question 6

Assessing control risk at a level below high most likely would involve:

A)identifying specific internal controls relevant to specific assertions.
B)changing the timing of substantive tests by omitting interim testing and performing the tests at year-end.
C)reducing inherent risk for most of the assertions relevant to significant account balances.
D)performing more extensive substantive tests with larger sample sizes than originally planned.

Question 7

Which of the following would be a necessary control to avoid an invoice being paid twice?

A)Segregating the duties of approving invoices and signing cheques.
B)Invoice stamped paid when the cheque is issued.
C)Making payments by cheque.
D)Periodic bank reconciliations.

Question 8

The timing of tests of controls refers to:

A)whether they relate to part or the whole of the accounting period.
B)the end of the year being audited.
C)whether they are performed earlier or later during the audit.
D)none of the above.

Question 9

The relationship between the required understanding of the internal control structure and the preliminary audit strategy is that:

A)normally, greater understanding is required when the lower assessed level of control risk approach is used.
B)normally, greater understanding is required when the primarily substantive approach is used.
C)no understanding is required in the planning stage unless tests of controls are a planned part of the strategy.
D)normally, less understanding is required when the lower assessed level of control risk approach is used.

Question 10

Of the following, the procedure that would produce the most reliable evidence on the segregation of duties is:

A)analytical procedures.
B)reconciliation.
C)re-performance.
D)observation.

Question 11

What is the purpose of the preliminary assessment of control risk?

A)To obtain a reasonable expectation of controls so as to decide on an appropriate audit strategy.
B)To determine the extent to which internal controls have been implemented.
C)To obtain the necessary information for developing the flowchart.
D)To provide management with an opinion on the effectiveness of controls.

Question 12

Which of the following statements is true?

A)Tests of controls are not a form of audit evidence.
B)With good results from tests of controls, an auditor will most likely increase the level of substantive testing of transactions and balances.
C)Where the auditor decides to use a substantive approach to obtaining evidence, it is not necessary to obtain an understanding of internal controls to assess the risk of possible financial statement misstatements.
D)If the preliminary assessment of internal controls suggests that controls cannot be relied on, the auditor should go straight to performing substantive testing.

Question 13

Testing the work of the internal auditors is least likely when the external auditor has decided that:

A)the internal auditors will be used to directly assist in the conduct of the audit.
B)the internal auditors have operating responsibilities as well as their auditing role.
C)the internal auditors are full-time employees of the client.
D)the reports of the internal auditors are consistent with the results of the work performed.

Question 14

Which of these would be a necessary control to prevent a cash payment being made for an unauthorised purpose?

A)Invoices being required before cheques are issued.
B)Only authorised people being able to issue cheques.
C)The duties of approving invoices and signing cheques are separated.
D)All of the above.

Question 15

The incorrect statement is: The external auditor:

A)may coordinate their audit work with that of the internal auditor.
B)may use the internal auditors to provide direct assistance with some types of audit work.
C)may delegate some of the substantive testing to the internal auditor.
D)none of the statements is incorrect, i.e.all are correct statements.

Question 16

The audit test that would normally be regarded as a test of control is:

A)enquiries of third parties.
B)test of the specific items making up the balance in a given general ledger account.
C)test of the additions to property, plant, and equipment by physical inspections.
D)test of the signatures on purchase orders to a list of approved signatories.

Question 17

After performing additional tests of controls, the auditor reassesses control risk from the initial planning level of slightly below maximum to moderate.The auditor should now:

A)decrease the level of detection risk, and decrease substantive testing.
B)increase the level of detection risk, and increase substantive testing.
C)increase planned substantive testing.
D)increase the level of detection risk, and decrease substantive testing.

Question 18

'Enquiring' is a control test used by auditors.It requires the auditor to:

A)re-perform the control.
B)observe client personnel perform their duties.
C)inspect documents for signatures that indicate the control was performed.
D)question client personnel about the performance of their duties.

Question 19

The test of control that is known as a dual-purpose test is:

A)inspecting.
B)observing.
C)enquiring.
D)re-performing the control.

Question 20

When tests of controls are not performed while obtaining an understanding under the predominantly substantive approach:

A)preliminary control risk must be assessed at below maximum.
B)preliminary control risk must be assessed at the minimum.
C)they must be performed at year-end.
D)preliminary control risk must be assessed at the maximum.

Question 21

What audit strategy is the auditor likely to adopt if at the planning stage, control risk is assessed as less than high?

Question 22

A disadvantage of the integrated test facility approach to a computer-assisted audit is:

A)it does not overcome the limitations of the use of test data.
B)it is disruptive to the client.
C)there is a risk that errors could be created in the client's data.
D)all the above are limitations.

Question 23

At what stage during the audit is the existence of internal controls tested and how are these tests carried out?

Question 24

When an auditor is designing tests of the operational effectiveness of controls they must decide their nature, timing and extent.Explain what each of these concepts mean and why they are important in designing these tests.

Question 25

For the following potential misstatements for cash payments, identify a necessary control and a test of the operational effectiveness of that control.
1 a cash payment may be made for an unauthorised purpose.
2 an invoice may be paid twice.
3 a cheque may be issued for the wrong amount.
4 a cash payment transaction may not be recorded.

Question 26

To determine whether the internal control structure policies and procedures operate effectively to minimise errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the:

A)subsidiary customer accounts ledger.
B)sales invoice file.
C)bill of lading file.
D)customer order file.

Question 27

External auditors have a duty to communicate in writing significant deficiencies in internal control to those charged with governance.Which of the following is unlikely to be relevant when determining whether a 'significant deficiency' exists?

A)The susceptibility to loss or fraud of the related asset.
B)The extent of substantive procedures performed.
C)The likelihood of deficiencies leading to material misstatements in the financial statements in the future.
D)The importance of controls to the financial reporting process.

Question 28

When it is concluded that the nature and frequency of deviations exceeds the tolerable level, the auditor should:

A)increase the extent of substantive procedures.
B)adopt a lower assessed level of control risk strategy.
C)reduce the level of control risk.
D)increase the level of detection risk.

Question 29

When control risk is assessed at the maximum, the extent of documentation required in the working papers is that:

A)only the basis for the assessment must be documented.
B)only the conclusion needs to be documented.
C)the basis for the assessment and the conclusion must both be documented.
D)no documentation is necessary.

Question 30

In a computer information system control procedures that provide reasonable assurance that the recording, processing and reporting of data are properly performed for specific applications are known as:

A)application controls.
B)general controls.
C)user controls.
D)integrated testing.

Question 31

Discuss the test data approach to testing controls.

Question 32

The name given to the test of control where the auditor reprocesses actual entity data using auditor-controlled software is:

A)parallel simulation.
B)dual-purpose testing.
C)test data approach.
D)integrated test facility.

Question 33

The untrue statement concerning the communication of internal control matters to management during a financial statement audit is:

A)the duties relating to communication are included in ASA 265/ISA 265.
B)the auditor shall communicate in writing significant deficiencies in internal control identified.
C)circumstances where it may be inappropriate to communicate deficiencies in the internal control system include situations where there are other deficiencies that are of sufficient importance to merit management's attention.
D)none of the statements are untrue, i.e.all are true statements.

Question 34

Which of the following is not an advantage of the test data approach?

A)It is simple to use.
B)It is a way of auditing 'through the computer'.
C)There is no examination of the documentation actually processed by the system.
D)There is not much disruption to the client's computer system.

Question 35

Outline the factors that will determine whether the auditor has obtained sufficient appropriate evidence to support a particular risk assessment.

Question 36

The statement that is accurate concerning audit testing is:

A)the test data approach involves dummy transactions prepared by and processed under the control of the auditor.
B)the test data approach is relatively complicated, time consuming and expensive.
C)the test data approach involves dummy transactions prepared by the client and processed under the control of the auditor.
D)the test data approach involves dummy transactions prepared by the auditor and processed under the control of the client.