Deck 8: Execution of the Audit Testing of Controls

Question 1

The purpose of prevent controls is to discover fraud or errors that may have occurred during transaction processing and to rectify those errors.

Answer 1

False

Question 2

To improve efficiency, auditors test only those controls that they believe are critical to their opinion.

Answer 2

True

Question 3

The more complex the client's operations and its internal controls, the less experienced the auditor who performs the work needs to be.

Answer 3

False

Question 4

Attribute sampling is a sampling technique used to reach a conclusion about the total dollar amount of misstatement in an account balance.

Question 5

An example of a purely manual control is a locked stock cage for high dollar-value items.

Question 6

A computer program that will not allow a sale to be processed if a customer has exceeded their credit limit is an example of a:

A) prevent control.
B) test of controls.
C) detect control.
D) substantive procedure.

Question 7

The greater the degree of reliance on an internal control, the less they test the control to provide the required assurance.

Question 8

Which of the following is an example of a detect control?

A) Account coding on purchase orders being checked by the computer to a table of valid account numbers.
B) Quarterly reviews of credit balances in accounts receivable to determine their causes.
C) Amounts are not able to be paid to employees without first matching a valid tax file number to the employee master file.
D) None of the above.

Question 9

Controls can be classified as:

A) information technology general controls.
B) automated controls.
C) manual controls.
D) All of the above.

Question 10

Re-performance involves the auditor re-performing the control to test its effectiveness.

Question 11

If the tests of controls confirm the auditor's preliminary evaluation of controls, the planned substantive audit procedures are not modified.

Question 12

Transaction-level controls are implemented by businesses to reduce the risk of misstatements due to error or fraud and to ensure that processes are operating effectively.

Question 13

Tests of account balances can often provide evidence about the continued functioning of controls.

Question 14

Enquiry involves the auditor observing the actual control being performed.

Question 15

IT general controls are driven by the particular software application being used.

Question 16

Benchmarking is an audit strategy that can be used to carry forward the benefit of certain application controls testing into future audit periods.

Question 17

An example of a program change control is:

A) the accounts receivable clerk does not have access to the cash payments application.
B) regular and timely back-ups of data.
C) program change forms must be authorised by the IT manager.
D) All of the above.

Question 18

Tracing certain amounts on the bank reconciliation to the accounting records is an example of inspection of physical evidence.

Question 19

Manual controls:

A) generally rely on the client's IT applications in some way.
B) support the ongoing functioning of the programmed aspects of prevent and detect controls.
C) can be classified as program change controls or logical access controls.
D) do not rely on the client's IT environment for their operation.

Question 20

Which of the following is an example of a prevent control?

A) Management level reviews of actual performance versus budgets.
B) Credit manager following up on an exception report showing sales made to a customer who has exceeded their credit limit.
C) Sales invoices are automatically priced using the information in the price master file.
D) A bank reconciliation.

Question 21

Tracing certain amounts on the bank reconciliation to the accounting records is an example of which technique for testing controls?

A) Observation
B) Enquiry
C) Inspection of physical evidence
D) Re-performance

Question 22

Tests of controls do not include which of the following auditing techniques?

A) Re-performance
B) Confirmation
C) Enquiry
D) Observation

Question 23

What are the main items commonly included in tests of controls working papers?

Question 24

Explain the differences between prevent controls and detect controls.

Question 25

A sampling technique used to reach a conclusion about a population in terms of a rate of occurrence is known as:

A) dollar unit sampling.
B) random sampling.
C) attribute sampling.
D) haphazard sampling.

Question 26

The Committee of Sponsoring Organisations (COSO) of the Treadway Commission has produced guidance for designing and implementing effective internal controls, as well as the effective monitoring of a system of internal controls. Explain the various aspects of this guidance and critically evaluate its impact at enhancing internal controls within companies.

Question 27

If the tests of controls confirm the auditor's preliminary evaluation of controls, the planned substantive audit procedures are:

A) increased.
B) not modified.
C) reduced.
D) changed.

Question 28

The factors to consider when deciding the extent of testing of controls include which of the following?

A) The persuasiveness of the evidence produced by the control
B) The degree to which the auditor intends to rely on the control as a basis for limiting their substantive tests
C) How often the control is performed
D) All of the above

Question 29

Which of the following would not be included in a test of control working paper?

A) The purpose of the test
B) A conclusion about whether the account balance is materially misstated
C) The work performed
D) The findings/results of the testing

Question 30

The Australian Securities and Investments Commission (ASIC) inspects audit firms' compliance with audit quality and auditor independence requirements. Explain the process used by ASIC in conducting these inspections and critically evaluate their effectiveness at enhancing audit quality.

Question 31

Benchmarking is appropriate when:

A) a reliable trail of program changes exists.
B) a programmed control can be matched to a defined program within an application.
C) the application is stable.
D) All of the above.

Question 32

If inherent risk is high and no assurance has been obtained from controls testing:

A) only overall analytical review procedures need to be performed to reduce detection risk to an acceptable level.
B) no further substantive testing needs to be performed.
C) extensive substantive procedures need to be performed to estimate the dollar value of any error in the account balance.
D) None of the above.

Question 33

Explain and provide examples of the various techniques commonly used when testing controls.

Question 34

Enquiry involves the auditor:

A) using questioning skills to determine how the control is completed and whether it appears to have been carried out properly and on a timely basis.
B) re-performing the control to test its effectiveness.
C) the auditor observing the actual control being performed.
D) testing the physical evidence to verify that a control has been performed properly.

Question 35

When the auditor decides to include controls testing in their audit strategy, they select those controls that:

A) are the easiest to test.
B) provide the most efficient and effective audit evidence.
C) provide no assurance that the controls operated effectively throughout the period of reliance.
D) provide the least efficient and effective audit evidence.

Question 36

ASA 230 Audit Documentation requires auditors to document each stage of the audit in their working papers. What are the specific requirements in ASA 230 regarding the contents of working papers and explain the importance of auditors effectively documenting the tests of controls that they have performed?

Question 37

Tests of controls will usually be carried out:

A) at an interim date.
B) only after year-end.
C) only by the audit engagement partner.
D) by the client's board of directors.

Question 38

What are the factors considered by auditors in determining whether there is a need for additional detailed tests of controls?

Question 39

In trying to determine whether there is a need for additional detailed tests of controls, which of the following factors are considered?

A) Evidence provided by other tests
B) Changes in the overall control environment
C) Results of enquiries and observations
D) All of the above

Question 40

The major limitation with the observation technique for testing controls is that:

A) the employee may not be truthful in telling the auditor how the control procedure is performed.
B) the employee may perform the control procedure more diligently when they know they are being observed.
C) Both a and b
D) None of the above.