Question 1

Which of the following would be a necessary control to avoid an invoice being paid twice
A) periodic bank reconciliations.
B) segregating the duties of approving invoices and signing cheques.
C) invoice stamped paid when the cheque is issued.
D) making payments by cheque.

Accepted Answer

Stamping an invoice as "paid" when the cheque is issued helps ensure that the invoice is not processed and paid again.

Question 2

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.

Accepted Answer

When assessing control risk at a level below high, the auditor would identify specific internal controls relevant to specific assertions, which means that there are some controls that the auditor believes will be effective in preventing or detecting material misstatements in the financial statements. This would allow the auditor to reduce substantive testing, which saves time and resources. Changing the timing of substantive tests (B) could increase the risk of not identifying material misstatements, reducing inherent risk (C) would not be appropriate as inherent risk is largely determined by the nature of the business and the financial reporting environment, and performing more extensive substantive tests (D) would not be necessary if control risk is assessed at a lower level.

Question 3

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.

Accepted Answer

Normally, a greater understanding of the internal control structure is required when auditors plan to rely on the controls (lower assessed level of control risk approach), as this helps in determining the nature, timing, and extent of substantive procedures.

Question 4

Of the following, the procedure that would produce the most reliable evidence on the segregation duties is:
A) observation.
B) analytical procedures
C) reconciliation.
D) re-performance.

Accepted Answer

Observation is the most direct method to assess the actual performance of duties and their segregation within an organization. It allows the auditor to see firsthand how procedures are carried out and how duties are segregated, providing reliable evidence.

Question 5

The name given to the test of control where the auditor reprocesses actual entity data using auditor-controlled software is:
A) test data approach.
B) integrated test facility.
C) parallel simulation.
D) dual-purpose testing.

Accepted Answer

Parallel simulation involves the auditor reprocessing actual entity data using auditor-controlled software to verify the accuracy of the entity's software processing. This method allows the auditor to compare the results of the entity's software with the results obtained from the auditor's software to identify any discrepancies or errors.

Question 6

If the auditor decides to seek a further reduction in control risk, this will require them to:
A) expand the scope of substantive testing during interim work.
B) rely exclusively on analytical procedures.
C) perform additional tests of control.
D) increase, proportionately, assessed inherent risk.

Accepted Answer

Performing additional tests of control allows the auditor to assess the effectiveness of the entity's internal controls more accurately, potentially leading to a further reduction in control risk.

Question 7

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

Accepted Answer

The integrated test facility approach involves setting up a fictitious entity in the client's system to process test transactions alongside live data. The risk here is that if not carefully managed, the test data could interfere with or corrupt the client's actual data.

Question 8

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.

Accepted Answer

When tests of control do not support the initially assessed lower level of control risk because controls, although well-designed, were not effectively implemented, the auditor should shift to a predominantly substantive approach. This involves focusing more on direct testing of financial statement balances and transactions rather than relying on the effectiveness of internal controls.

Question 9

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.

Accepted Answer

The test data approach involves dummy transactions that are prepared by the auditor and processed under the control of the auditor to test the client's system.

Question 10

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

Accepted Answer

Tests of controls in auditing are specifically designed to evaluate the effectiveness of the design and operation of internal controls, not just their existence or the efficiency of information flow.

Question 11

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.

Accepted Answer

When an auditor reassesses control risk from a higher level to a moderate level, it means they have more confidence in the internal controls than initially thought. Therefore, they can afford to take on a higher level of detection risk (because the risk of material misstatement due to control failure is now perceived to be lower) and can reduce the extent of substantive testing needed to reach an acceptable level of audit risk.

Question 12

When tests of controls are not performed while obtaining an understanding under the primarily substantive approach:
A) they must be performed at year-end.
B) preliminary control risk must be assessed at the maximum.
C) preliminary control risk must be assessed at below maximum.
D) preliminary control risk must be assessed at the minimum.

Accepted Answer

When tests of controls are not performed while obtaining an understanding under the primarily substantive approach, it implies that the auditor cannot rely on the controls to prevent or detect material misstatements. Therefore, the preliminary control risk must be assessed at the maximum, indicating the auditor plans to rely more on substantive procedures.

Question 13

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.

Accepted Answer

The preliminary assessment of control risk is conducted to understand the effectiveness of an entity's internal controls, which helps auditors decide on the appropriate audit strategy and the extent of substantive testing needed.

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.

Accepted Answer

All the options listed are necessary controls to prevent cash payments for unauthorized purposes. Requiring invoices ensures that there is documentation for each transaction. Limiting cheque issuance to authorized personnel helps prevent fraudulent transactions. Separating the duties of approving invoices and signing cheques introduces a system of checks and balances, making it harder for a single person to commit fraud.

Question 15

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

Accepted Answer

The timing of tests of controls refers to whether they relate to part or the whole of the accounting period, as auditors assess the effectiveness of controls throughout or at specific points in the period under review.

Question 16

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.

Accepted Answer

If inquiries and observations lead the auditor to believe that conditions have changed, it may indicate that the internal controls could have been affected, necessitating further testing at year-end.

Question 17

When control risk is assessed at the maximum, the extent of documentation required in the working papers is that:
A) no documentation is necessary.
B) the basis for the assessment and the conclusion must both be documented.
C) only the conclusion needs to be documented.
D) only the basis for the assessment must be documented.

Accepted Answer

The answer of When control risk is assessed at the...

Question 18

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.

Accepted Answer

Application controls are specific to a particular application and ensure the integrity of the data and processing for that application. They include input controls, processing controls, and output controls to ensure that data is accurately recorded, processed, and reported.

Question 19

The audit test that would normally be regarded as a test of controls 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.

Accepted Answer

Testing the signatures on purchase orders against a list of approved signatories is a test of controls. It verifies that the company's internal control procedures regarding authorization for purchases are being followed.

Question 20

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.

Accepted Answer

The answer of Testing the work of the internal auditors...

Quiz 11: Tests of Controls

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

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

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

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

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

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

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

The statement that is accurate concerning audit testing is:

Tests of controls are auditing procedures performed to determine:

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:

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

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

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

The timing of tests of controls refers to:

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:

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

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:

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

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