Deck 8: Planning and Testing Operating Effectiveness of Internal Control Over Financial Reporting

Question 1

AS #4 stipulates ways in which auditors can use electronic tools in their audit.

Answer 1

False

Question 2

Sampling error occurs when incorrect conclusions are drawn from testing a sample versus the entire population.

Answer 2

True

Question 3

An audit by the IRS may indicate an illegal act.

Answer 3

True

Question 4

Control objectives relate to assertions.

Question 5

Recalculation is a form of reperformance.

Question 6

Selecting the wrong control to test is an example of non sampling risk.

Question 7

The PCAOB does not allow haphazard sampling.

Question 8

Discussions with client personnel as to the effectiveness of controls are not recommended.

Question 9

Deciding that internal controls are not effective when they in fact they are is an example of assessing control risk too low.

Question 10

Auditors are not allowed to roll-forward tests of ITGC to year-end.

Question 11

Examining vouchers for evidence of correct authorization is an example of attribute sampling.

Question 12

The use of computer-assisted audit techniques replaces traditional auditing judgment.

Question 13

Deciding that internal controls are effective when they in fact they are not is an example of assessing control risk too high.

Question 14

Sampling risk is the risk that your sample is not representative of the population.

Question 15

Transactions between a client and its employee trusts are considered related-party transactions.

Question 16

Benchmarking allows auditors to skip testing of application controls if ITGC are effective.

Question 17

Manual controls require more testing than automated controls.

Question 18

In selecting controls to test, the auditor chooses those designed to prevent the greatest risk.

Question 19

Related-party transactions frequently present greater risk than those transacted at "arm's length".

Question 20

"Tone at the top" is an example of a "soft" internal control.

Question 21

Use of benchmarking allows the auditor to:

A) test the application controls only when changes are made to the application program.
B) test the general controls only when changes are made to the operating system.
C) reduce the scope of testing for general controls.
D) All of the above.

Question 22

Entity-levels controls are preventative, not detective.

Question 23

Generally, there are two types of files: current and permanent.

Question 24

Audit risk is a function of inherent risk, control risk, and engagement risk.

Question 25

AS#3 addresses audit documentation standards.

Question 26

Manual control testing:

A) occurs more frequently than automated control testing.
B) must be performed prior to automated control testing.
C) is more important than automated control testing.
D) needs more testing than a similar automated control.

Question 27

If detection risk is set too "high," then the sample sizes needed for testing are increased.

Question 28

Substantive testing can be reduced as a result of ITGC testing performed at year-end.

Question 29

Entity-level controls include ITGC.

Question 30

A material weakness occurs when it is reasonably probable or possible that a material misstatement of an account balance or disclosure would not be prevented/detected by an internal control.

Question 31

The auditor must index the files to conform to the balance sheet.

Question 32

Inherent risk cannot be controlled by the auditor.

Question 33

An operating deficiency occurs when a control fails to prevent or detect a material misstatement.

Question 34

Reviewing sales invoices and asking a sales manager to explain why a price deviation occurred is an example of which audit testing procedure(s):

A) observation.
B) inquiry.
C) inspection.
D) Both b and

Question 35

An auditor wishing to reperform a control review over a voucher invoice would:

A) recalculate the amount paid for accuracy.
B) trace the vendor to the approved vendor list.
C) trace price paid to the approved vendor price list.
D) All of the above.

Question 36

Preventative controls are preferred over detective controls.

Question 37

When testing the occurrence assertion, the auditor may:

A) examine supporting documentation for paid invoices.
B) examine open purchase orders.
C) examine the appropriate journals for evidence of posting.
D) All of the above.

Question 38

A significant deficiency is more serious than a material weakness.

Question 39

Tick marks are optional and used to provide a "short cut" notation of work performed.

Question 40

It is acceptable for auditors to reduce test of balances and transactions if the ITGC are effective.

Question 41

An auditor tests a sample of transactions for proper authorization. Assume the auditor performs test of transactions and concludes that the authorization control is operating effectively when in fact it is not, this is termed:

A) sampling error.
B) sampling risk.
C) detection error.
D) All of the above.

Question 42

Auditor A accepts a client in an industry where change is constant and rapid. Such a client presents which type of risk:

A) engagement risk.
B) inherent risk.
C) control risk.
D) detection risk.

Question 43

Which of the following transactions is considered a related-party transaction?

A) Borrowing funds from the pension fund maintained by the company.
B) Transferring monies to a subsidiary.
C) Selling inventory to a parent.
D) All of the above.

Question 44

All things being equal, as the risk of assessing control risk too low __________; sample size __________:

A) increases; decreases.
B) increases; increases.
C) decreases; decreases.
D) None of the above.

Question 45

The client's correct interpretation of GAAP in company policies is approved by:

A) the board of directors.
B) top financial management.
C) the audit committee.
D) Both b and

Question 46

If the auditor expects that internal control is weak, then this implies that:

A) the sample size should increase.
B) the tolerable rate of deviation should increase.
C) the expected rate of deviation should increase.
D) Both a and

Question 47

Which of the following is an illegal act that has an indirect effect on the financial statements?

A) Fraud detected in the payment cycle by the auditor.
B) Bribing local officials for favorable lease terms.
C) Failure to pay required taxes.
D) Placing foreign substances in food in an effort to save money.

Question 48

An auditor concludes that the internal controls are not operating effectively when in fact they are. This most likely would result in:

A) a qualified opinion on the ICFR.
B) additional substantive testing.
C) additional scope requirements.
D) All of the above.

Question 49

The auditor discovers that the likely rate of deviation in a population is increasing. This affects:

A) the sample size.
B) the tolerable rate of deviation.
C) the risk of assessing control risk too low.
D) All of the above.

Question 50

As AP risk decreases, then:

A) detection risk increases.
B) audit risk decreases.
C) inherent risk increases.
D) Both a and

Question 51

If serious control deficiencies are detected prior to year-end and management implements changes to its systems to correct the deficiencies, the auditor:

A) must retest the ITGC again to ensure no additional deficiencies exist.
B) cannot rely on the ICFR in planning its financial statement audit.
C) must test the changes made to the system to determine if the deficiency was resolved.
D) All of the above.

Question 52

Examples of controls tested in the period-end financial reporting process include:

A) an estimation of the contingent liabilities at year-end.
B) a review of appropriate authorization over paid invoices.
C) the client's accounting policies conform to GAAP and/or IFRS.
D) All of the above.

Question 53

The risk of associating with a client known to have a dubious reputation for honesty is referred to as:

A) audit risk.
B) detection risk.
C) engagement risk.
D) Both b and

Question 54

An auditor concludes that the internal controls are operating effectively when in fact they are not. This most likely would result in:

A) reduced audit testing.
B) increased detection risk.
C) increased audit risk.
D) All of the above.

Question 55

Sample size increases as the:

A) risk of assessing control risk too high increases.
B) risk of assessing control risk too low decreases.
C) tolerable rate of deviation increases.
D) All of the above.

Question 56

An auditor tests a sample of transactions for proper authorization. She concludes that the control is not operating effectively, although it actually is. This is an example of:

A) sampling error.
B) sampling risk.
C) detection risk.
D) All of the above.

Question 57

Benchmarking is appropriate when:

A) client ITGC are strong.
B) client application controls are operating effectively.
C) the application program has not changed.
D) All of the above.

Question 58

Which of the following risks can the auditor control:

A) audit risk.
B) detection risk.
C) inherent risk.
D) control risk.

Question 59

Client A has equity interests in several affiliates. In addition, Client A sits on the Board of Directors for Company B, one of the affiliates. If Client A decides to appoint his spouse as the managing director at Company B, then which of the following would be an example of a related-party transaction?

A) Sales between Client A and all of its affiliates.
B) Sales between Client A and Company B.
C) Sales from Company B to another of Client A's affiliates.
D) All of the above.

Question 60

To rely on the ICFR in the financial statement audit, the auditor must:

A) test the ITCG at both interim and year-end.
B) assess the control risk below maximum.
C) Both a and

Question 61

The ICFR attests that the controls were operating effectively:

A) for the entire period under audit.
B) since the date of the previous ICFR.
C) for the majority of time under audit.
D) None of the above.

Question 62

As the expected population deviation rate increases, the:

A) degree of assurance desired by the sample's audit evidence increases.
B) tolerable rate of deviation decreases.
C) tolerable rate of deviation increases.
D) degree of assurance desired by the sample's audit evidence decreases.

Question 63

Which of the following information would be transferred from the current file to the permanent file?

A) Current year financial statement.
B) List of new corporate officers.
C) Changes to accounting policies.
D) Both b and

Question 64

An expert system can be used to:

A) assist in planning the audit.
B) assist in selecting samples.
C) assist in evaluating results from testing details of balances.
D) All of the above.

Question 65

Requiring that the supervisor pay and request reimbursement from the next level manager whenever the supervisor entertains her subordinates is an example of:

A) management style.
B) soft controls.
C) operating effectiveness.
D) All of the above.

Question 66

Which of the following would be a control deficiency?

A) The person assigned to implement the control does not understand how to do so.
B) The control does not allow management to detect or prevent a material misstatement.
C) The control does not operate as intended.
D) All of the above.

Question 67

The advantages of using parallel processing verses the test data approach is:

A) parallel processing tests the entire input, processing, and output functions.
B) parallel processing uses actual client data.
C) parallel processing prevents the risk of client data being infected with test data.
D) All of the above.

Question 68

Which of the following would be an example of an operating deficiency?

A) The control operates as intended but the person assigned to perform the control lacks sufficient knowledge.
B) The control fails to detect material misstatements.
C) The control fails to detect material misstatements on a timely basis.
D) The control fails to prevent material misstatements on a timely basis.

Question 69

The difference between a significant deficiency and a material weakness is:

A) one of dollars amounts; the material weakness has a greater dollar impact than a significant deficiency.
B) a material weakness has a reasonable possibility that a material misstatement will not be detected; a significant deficiency is less severe.
C) a material weakness has a reasonable probability that a material misstatement will not be detected; a significant deficiency is less severe.
D) All of the above.

Question 70

Which of the following information would be stored in the permanent files?

A) Current year financial statements.
B) Current organization chart.
C) Audit plan.
D) All of the above.

Question 71

Use of an ITF allows:

A) test data to be processed alongside actual data.
B) a comparison of test data output with real data output.
C) for the possible contamination of company data with test data.
D) All of the above.

Question 72

Detection risk is a function of:

A) tests of details of balances.
B) the scope of substantive balances.
C) the risk a material misstatement is missed by the audit's analytical procedures.
D) Both a and

Question 73

Benford's law assists in the audit of which area(s):

A) leases.
B) cash disbursements.
C) accruals and reserves.
D) All of the above.

Question 74

Professional skepticism means that the auditor:

A) should not trust the client.
B) should allow negative past opinions formed about the client to affect the current year under audit.
C) not be satisfied with less than persuasive evidence because of positive attitudes towards the client.
D) All of the above.

Question 75

Entity-level controls:

A) are pervasive.
B) affect only top management.
C) can be less than effective if application controls are strong.
D) All of the above.

Question 76

The test data approach works well when testing which type of control?

A) Output controls.
B) Error handling procedures.
C) Output accuracy.
D) All of the above.

Question 77

Which of the following is considered a service organization?

A) arrangements between a company and its pension trustee.
B) arrangements between contracted workers and the company.
C) arrangements between landscapers and the company.
D) All of the above are potential service organizations.

Question 78

Under what circumstances can an auditor rely exclusively on entity-level controls for its test of IFGC?

A) If the controls are pervasive.
B) If the controls achieve the greatest precision.
C) If the controls support those in the application processes.
D) All of the above.

Question 79

Client A hires part-time seasonal employees to perform routine accounting tasks during periods of high transaction volume. The employees frequently make mistakes, some of which are material, but these are usually detected by a supervisor who reviews their work. This arrangement in said to:

A) be a serious control problem .
B) be a serious problem with an effective compensating control.
C) be a serious problem without an effective compensating control.
D) require a qualified audit opinion regarding the ICFR.

Question 80

The auditor can rely on the ICFR for substantive testing:

A) for certain accounts but not for others.
B) for all accounts.
C) for none of the accounts.
D) All of the above.