Deck 8: Execution of the Audit Performing Substantive Procedures

Question 1

Manny Regimbald is concerned about the audit of a high-risk client, the Lewiston Stampeders. He believes that there is a high likelihood that because his audit team is inexperienced, the testing procedures will not detect a material misstatement. This is a(n)

A) audit risk.
B) control risk.
C) detection risk.
D) none of the above

Answer 1

C

Question 2

The audit program serves as the instructions for the audit team members to complete the required testing.

Answer 2

False

Question 3

Maury Lions is ready to undertake substantive procedures at an educational institution. Which of the following factors will influence his substantive tests?

A) the nature of the test
B) the type of evidence required
C) the complexity of the client's data capturing systems
D) all of the above

Answer 3

D

Question 4

Corroborative evidence confirms audit findings from other procedures.

Question 5

Matilda Papas has been asked to lead her audit team in the audit of the Toronto Raptors basketball team. She performed a review of their risks and found that the team's risks tend to be driven by the nature of certain significant accounts or business activities that the Raptors pursue. This risk is

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

Question 6

Vouching involves tracking a source document back to the underlying accounting records.

Question 7

A significant account is one that could contain material misstatements based upon their materiality and/or relationship to identified inherent and financial statement risks.

Question 8

Audit sampling is the application of audit procedures to less than 100 per cent of items within a population.

Question 9

Comparing the number of days purchases in trade payables with prior years would provide persuasive evidence of accounts payable.

Question 10

Key item testing is an example of a technique used when conducting substantive procedures.

Question 11

The lack of significant change in an account balance from one year to the next does not necessarily mean that the auditor can assume the balance is reasonable.

Question 12

Misstatements can only arise from fraud.

Question 13

Roll-forward procedures are performed during the period between the end of the financial year and the date of the audit report.

Question 14

Ying Ye believes that she will have to employ sophisticated substantive audit procedures for her client. What contributes to this decision?

A) the nature of the client's accounting system
B) the nature of the internal controls
C) the complexity of the client's data capturing systems
D) none of the above

Question 15

After performing a risk assessment of a food processing company, Sean Spino has come to the conclusion that he will require more evidence to be obtained by his audit team from substantive procedures. Which of the factors below led him to this conclusion?

A) the level of assurance necessary
B) the type of evidence required
C) the nature of the test
D) the complexity of the client's data capturing systems

Question 16

Analytical procedures may not be useful when they are used on a company with significantly diverse operations and geographical segments.

Question 17

Normally, it is more efficient to carry out substantive procedures than to test and rely on controls.

Question 18

Control risk is assessed to be low when there are no internal controls tested or relied upon by the auditor.

Question 19

Analytical procedures that provide persuasive or corroborative evidence contribute minimal support for the audit conclusion.

Question 20

The timing of substantive procedures is directly influenced by the level of control risk.

Question 21

Which of the following factors would most likely influence an auditor's consideration of the reliability of data when performing analytical procedures?

A) if the data were developed in a computerized accounting system
B) if the data were prepared in conformity with GAAP
C) if the data were developed under a system with adequate controls
D) if the data were processed in an online system

Question 22

Performing substantive procedures prior to year end, in the absence of specific effective controls, may be acceptable when

A) the auditor is able to conclude overall that the client's control environment is effective.
B) the likelihood of errors or fraud is high.
C) the likelihood of errors or fraud is low.
D) both a and c

Question 23

Which of the following examples of substantive procedures would often be performed prior to year end?

A) confirming the client's bank balance
B) attending the client's annual inventory count
C) testing additions and disposals to the fixed asset register
D) performing confirmations of accounts receivable

Question 24

An auditor's ability to perform substantive procedures at an interim date is dependent on

A) the evaluation of audit risk.
B) convenience.
C) the materiality of the account to be tested.
D) an effective control environment.

Question 25

Jocelyne Yu is performing procedures and has decided to vouch the balance in the fixed assets ledger of a furniture manufacturing company back to supporting documentation. She is performing a

A) test of details.
B) test of controls.
C) risk assessment.
D) none of the above

Question 26

Roll-forward procedures are performed

A) to update the audit findings from the time of the interim procedures through to year end.
B) to detect fraud in various balance sheet accounts.
C) before the end of the financial year.
D) none of the above

Question 27

Roll-forward procedures are conducted to

A) update findings from the previous year's audit to the current year.
B) update findings from an interim date to year end.
C) adjust accounts at year end for prepayments.
D) none of the above

Question 28

Tobias Appel is trying to ensure that he can review controls over purchasing transactions. In addition, he would like to substantiate the dollar amounts he is reviewing. What type of procedures can he perform that will provide evidence as to whether a control is effective as well as if an item is being recorded properly?

A) statistical sampling
B) dual purpose tests
C) test of balances
D) test of controls

Question 29

Daniel Morency has performed evaluations of financial information and determined whether the fluctuations of his client's sales figures are consistent with other data he has gathered. He has used this information to predict year-end amounts of sales. This is an example of substantive procedures called

A) tests of details.
B) computer assisted audit techniques.
C) analytical procedures.
D) none of the above

Question 30

A substantive test that an auditor would conduct at year end is

A) physical inspection of assets on hand.
B) review of the audit client's credit procedures.
C) testing the mathematical accuracy of invoices.
D) confirmation of accounts receivable.

Question 31

The purpose of substantive procedures includes obtaining direct evidence as to

A) the reasonableness of the estimates and other information in the financial statements.
B) the completeness, accuracy and validity of data.
C) both a and b
D) none of the above

Question 32

Larry French is trying to determine the extent of testing his team will have to perform in order to determine whether controls are working. How will he decide how much testing to perform?

A) He will utilize statistical sampling.
B) He will use his professional judgment.
C) He will use last year's results as a basis for this year's tests.
D) none of the above

Question 33

Umberto Levinson has performed a test of controls of a flower shop. He is trying to determine the timing of substantive procedures at year end. Which factor will determine the timing of his audit procedures?

A) timing of the year-end work
B) audit risk
C) inherent risk
D) control risk

Question 34

Substantive testing can be conducted using which of the following procedures?

A) enquiry
B) confirmation
C) analytical review
D) all of the above

Question 35

Which of the following statements is correct?

A) If detection risk is high, significant substantive procedures are necessary to reduce detection risk.
B) There is an inverse relation between the auditor's assessed risk of material misstatement and detection risk.
C) There is no relation between the auditor's assessed risk of material misstatement and detection risk.
D) If detection risk is low, only a small number of substantive procedures are necessary to reduce the detection risk.

Question 36

Which of the following factors do not influence the extent and timing of substantive procedures to be undertaken?

A) the audit risk assessment
B) the nature of the procedures
C) complexity of the audit client's data capturing system
D) the level of assistance received from the internal auditor who responds directly to management

Question 37

Typically, substantive testing tends to be performed

A) at the start of the financial year.
B) at or near year end.
C) half way through the financial year.
D) only when the client's management allows the auditor to conduct the tests.

Question 38

Inherent risk is

A) assessed as high when there are no internal controls tested or relied upon by the auditor.
B) assessed as low when there are good internal controls in place.
C) the risk of a misstatement occurring irrespective of any internal controls put in place by management.
D) the risk that the auditor's testing procedures will not detect a material misstatement.

Question 39

Stella Zhang has been performing analytical procedures techniques as a substantive test. The techniques that can be used to perform analytical procedures are

A) preparation of common sized financial statements.
B) break-even analysis.
C) ratio analysis.
D) all of the above

Question 40

Which of the following factors should not influence the extent and timing of when substantive procedures are performed?

A) the type of audit opinion that the client would like the auditor to issue
B) the complexity of the client's data capturing systems
C) the level of assurance necessary
D) the type of evidence required

Question 41

Comparing sales commissions or bonuses with related sales provides what level of evidence?

A) corroborative
B) absolute
C) minimal
D) persuasive

Question 42

Jacqueline Martineau was told by her audit senior to ensure that the evidence she provided through analytical procedures was both persuasive and corroborative. Which of the following evidences are persuasive?

A) When reviewing accruals for commissions, refer to terms of agreements and payment dates.
B) When reviewing trade receivables or sales, review the volatility of the customer base and compare with expectations.
C) When reviewing sales and commissions expense, compare sales commissions or bonuses with related sales.
D) When reviewing payroll expense, compare payroll tax expenses to the annual payroll times the statutory tax rates.

Question 43

Analytical procedures may not be used

A) as primary tests of an account balance.
B) in testing internal controls.
C) to provide at least some minimal level of support for the conclusion.
D) as corroborative tests in combination with other procedures.

Question 44

Which of the following is not an event which causes a fluctuation in the accounting data?

A) changes in the payroll rates
B) the introduction of a new sales item
C) changes to the organizational chart of the entity
D) increased costs of inventory

Question 45

Which of following procedures provides an example of minimal support for conclusions?

A) comparison of sales commissions with related sales
B) comparison of direct labour costs and the number of employees with prior periods
C) comparing selling prices less selling costs to normal gross margins
D) none of the above

Question 46

Which of the following is the first step an auditor performs when performing analytical procedures?

A) determine appropriate procedures for investigating the reasons for differences if they are significant
B) draw conclusions
C) identify the computation, comparison or relationship to be made or investigated
D) assess the reliability of any data to be used

Question 47

An example of an analytical procedure which provides persuasive evidence is

A) calculating commissions paid as a percentage of sales.
B) comparing sales commissions and bonuses paid with related sales.
C) reviewing cash accounts in the general ledger for unusual items.
D) comparing the debtor's turnover in the current year to the previous year.

Question 48

Using computer assisted audit techniques (CAATs) makes the audit

A) more comprehensive.
B) more expensive.
C) more efficient.
D) both a and c

Question 49

Corroborative evidence

A) supplements the results from analytical procedures.
B) confirms audit findings from other procedures.
C) confirms the auditor's evaluation of internal controls.
D) none of the above

Question 50

The primary purpose of vouching is to ensure that

A) the balances or transactions are not understated.
B) sufficient information is disclosed in the notes to the financial statements.
C) the balances or transactions are not overstated.
D) all transactions have been recorded.

Question 51

The nature of substantive procedures normally consists of one or a combination of which of the following techniques?

A) analytical procedures
B) representative sampling
C) key item testing
D) all of the above

Question 52

Vouching involves

A) tracking a source document through to the underlying accounting records.
B) agreeing the details of a transaction to supporting evidence outside of the company's accounting records.
C) the application of audit procedures to less than 100 per cent of items within a population.
D) none of the above

Question 53

Common examples of substantive procedures related to key items testing and representative sampling include

A) tests of income statement accounts for account classification.
B) tests of client prepared schedules.
C) tests of underlying data to be used as part of the analytical procedures.
D) all of the above

Question 54

Analytical procedures may be used

A) as primary tests of a balance.
B) as corroborative tests in combination with other procedures.
C) to provide at least some minimal level of support for the conclusion.
D) all of the above

Question 55

Judgmental misstatements can arise from

A) the auditor conducting substantive tests inappropriate to the account being tested.
B) differences in the interpretation or application of accounting policies.
C) selecting a sample that is not representative of the population.
D) none of the above

Question 56

The levels of evidence obtained when performing substantive procedures includes

A) minimal.
B) persuasive.
C) general.
D) all of the above

Question 57

Tracing is primarily directed towards verifying which of the following assertions?

A) completeness
B) existence
C) occurrence
D) valuation

Question 58

Which of the following is not a type of analytical procedure?

A) confirmation analysis
B) ratio analysis
C) break-even analysis
D) trend analysis

Question 59

Variables estimation sampling is used

A) when the auditor does not expect any errors in an account balance.
B) to obtain a level of confidence that key attributes for the sample tested can be inferred to be in existence for the entire population.
C) when the auditor conducts tests of controls.
D) if the auditor expects more than a few errors in an account balance.

Question 60

Analytical procedures that provide persuasive evidence include

A) reviewing the cash accounts in the general ledger for unusual items.
B) relating average amounts invested to an average interest rate.
C) comparing the number of days purchases in trade payables with prior years.
D) reviewing the property, plant and equipment account in the general ledger for unusual items.

Question 61

Analytical procedures are evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. Discuss why analytical procedures are used by an auditor and explain several of the common types of analytical procedures.

Question 62

Discuss the factors that influence the extent and timing of substantive procedures.

Question 63

There are certain audit procedures that are required to be performed according to various auditing standards. Identify specific examples of such procedures and explain why the procedures are mandatory.

Question 64

Before they can complete an audit, auditors need to evaluate the causes of any unexpected fluctuations in a client's financial statements detected by the use of analytical procedures. Explain how auditors interpret the results of analytical procedures and why it is done.

Question 65

Judgmental misstatements can arise from

A) the auditor conducting substantive tests inappropriate to the account being tested.
B) differences in the interpretation or application of accounting policies.
C) selecting a sample that is not representative of the population.
D) none of the above

Question 66

Identify the steps used by the auditor when performing analytical procedures.

Question 67

Fluctuations in financial data identified by the auditor when planning the audit may be caused by

A) dependent relationships.
B) seasonal patterns.
C) external decisions directly impacting the business.
D) all of the above

Question 68

Explain the four different levels of evidence obtained when performing substantive procedures.

Question 69

Explain the three common sampling strategies that can be applied when the auditor applies representative sampling.

Question 70

Raisa Alexseev was getting ready to perform analytical procedures at Vulcan Spice Mills. She had made the following notes in her audit file:
1. Review allowance for doubtful accounts.
2. Don't forget to bring calculator to work.
3. Figure out the probability of $5,000,000 sales commissions threshold of last year.
4. Perform variance analysis.
Instructions
Can you summarize the steps Raisa will have to go through using analytical procedures before she can draw any conclusions about the subject matter?

Question 71

Explain the difference between vouching and tracing.

Question 72

Overall significant account conclusion statements are captured on

A) audit programs.
B) lead sheets.
C) confirmation requests.
D) minutes of board of directors' meetings.

Question 73

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Svetlana Petrova was reviewing the risk profile of Gaz Prom Industries in order to determine detection risk. She concluded: "Both my inherent and control risks are low. I guess I should be willing to accept high detection risk."
b) Boris Ivanov had performed an assessment of the accounts payable system at Magnitogirsk Iron and Steel Works Operations in the Urals. His focus was on the completeness assertion for accounts payable balances. Inherent risk and control risk were both high. He decided that because the overall risk assessment was high he would have to set his detection risk high.
c) Jana Novotna, the auditor in charge of the Mosenergo petroleum giant, was explaining to Valentin Titov the importance of the timing of substantive procedures: "Although we associate examinations of internal controls with interim work and substantive procedures with year-end work, we can perform substantive procedures before year end if there exists an effective control environment."
d) Susan Martin, the audit senior at Canadian National Railways, was explaining to the junior auditor how vouching works: "We take a balance or a transaction from the underlying accounting records and agree it to the supporting evidence inside the company."
e) Larisa McCarthy, the auditor in charge of the Firestone audit, feels that the large population of sales transactions warrants the use of representative sampling. She mentions to her staff: "Representative sampling using audit risk tables is especially useful when a lot of errors exist in an accounting system and the auditor perceives the risk of understatement to be high."

Question 74

Which of the following statements is correct?

A) Misstatements can only arise from fraud.
B) Misstatements can only arise from error.
C) Misstatements can arise from error or fraud.
D) none of the above

Question 75

When an auditor identifies unexpected misstatements or errors, he/she will

A) re-evaluate the effectiveness of internal controls and overall assessment of risk.
B) plan to conduct predominately substantive tests.
C) increase the level of tests of internal controls.
D) none of the above