Question 1

AU 342.09 explains that the auditor should normally concentrate on the key factors and assumptions used by management including all of the following except those that are:

Accepted Answer

AU 342.09 focuses on key factors and assumptions that are significant to the accounting estimate, sensitive to variations, subject to misstatement and bias, and deviations from historical patterns. It does not emphasize factors that are insignificant to the accounting estimate.

Question 2

The extent of substantive tests, in practice means the length of time during which substantive tests are to be performed.

Accepted Answer

The extent of substantive tests refers to the volume or quantity of testing (e.g., number of transactions or items to be tested) rather than the duration or length of time the tests are performed.

Question 3

In performing tests of details of balances, the auditor would obtain the bank statement directly from the bank, prepare the bank reconciliation, and verify all reconciling items and mathematical accuracy if detection risk was:

Accepted Answer

When detection risk is very low, the auditor performs more extensive and thorough testing procedures to minimize the risk that they might not detect material misstatements. Obtaining the bank statement directly from the bank, preparing the bank reconciliation, and verifying all reconciling items and mathematical accuracy are examples of such extensive procedures.

Question 4

SAS 57 lists all of the following objectives in evaluating accounting estimates except:

Accepted Answer

SAS 57 focuses on ensuring that accounting estimates are reasonable, developed for all material aspects, presented in conformity with applicable accounting principles, and properly disclosed. It does not specifically require that estimates follow standard industry practices.

Question 5

Tests of details of balances generally tend to be the:

Accepted Answer

Tests of details of balances are often the most costly because they are labor-intensive and require auditors to examine a significant amount of documentation and evidence. However, they are also considered the most effective audit procedures because they provide direct evidence about the accuracy of account balances and transactions.

Question 6

The primary means by which the auditor meets the requirements of the third field work standard is through:

Accepted Answer

The answer of The primary means by which the auditor...

Question 7

Who is responsible for establishing the process and controls for preparing accounting estimates?

Accepted Answer

Management is responsible for establishing the process and controls for preparing accounting estimates, as they are in charge of the day-to-day operations and financial reporting of the company.

Question 8

The least costly form of testing is usually:

Accepted Answer

Analytical procedures are generally considered the least costly form of testing because they involve reviewing financial information and ratios to identify any unusual or unexpected trends or relationships, rather than detailed testing of transactions or balances. This can often be done using existing data and does not require the extensive collection and verification of new information.

Question 9

Revision of the planned level of detection risk will be necessary whenever:

Accepted Answer

The need to revise the planned level of detection risk arises when the final assessed control risk does not support the planned level, indicating that the initial risk assessments were not accurate, necessitating adjustments to the audit plan to ensure sufficient audit evidence is obtained.

Question 10

Use of auditor judgment or of a risk matrix is necessary in revising planned detection risk whenever:

Accepted Answer

The answer of Use of auditor judgment or of a...

Question 11

The auditor would prepare a bank reconciliation using the bank statement obtained from the client and verify major reconciling items and mathematical accuracy when detection risk is:

Accepted Answer

The answer of The auditor would prepare a bank reconciliation...

Question 12

Confirmation and direct knowledge by the auditor are most associated with:

Accepted Answer

Confirmation and direct knowledge by the auditor are most associated with tests of details of balances, as these involve verifying the accuracy of account balances through direct evidence and confirmations.

Question 13

Which standards of fieldwork primarily affect substantive tests and tests of controls?

Accepted Answer

The answer of Which standards of fieldwork primarily affect substantive...

Question 14

Assume the preliminary audit strategy was based on a planned assessed level of control risk at a low level. Based on the final assessed level of control risk, the auditor would need to move substantive tests from interim to year-end and increase the extent of tests of details in order to accommodate a lower acceptable level of detection risk if:

Accepted Answer

If the final assessed level of control risk is moderate or high, it indicates that the controls are not as effective as initially thought. Therefore, the auditor would need to perform more substantive tests at year-end rather than interim and increase the extent of tests of details to lower the acceptable level of detection risk. This is because a higher control risk means the auditor cannot rely as much on the controls to prevent or detect material misstatements, necessitating more extensive substantive testing.

Question 15

An inaccurate form of the audit risk model would show that:

Accepted Answer

The answer of An inaccurate form of the audit risk...

Question 16

An auditor has computed the revised level of detection risk by direct use of the audit risk model. This means that the auditor must have:

Accepted Answer

The audit risk model involves quantifying inherent risk, control risk, and detection risk to determine the acceptable level of audit risk.

Question 17

When evaluating the planned level of substantive tests for each significant financial statement assertion, the auditor will consider the evidence obtained from all of the following except:

Accepted Answer

The assessment of detection risk is considered when determining the nature, timing, and extent of substantive tests, not when evaluating the planned level of these tests. The auditor uses detection risk to adjust the substantive tests' scope but does not consider it as evidence obtained for planning those tests.

Question 18

In practice, the use of analytical procedures has proven to be:

Accepted Answer

Analytical procedures are effective in identifying significant misstatements by analyzing financial data and identifying unusual trends or variances.

Question 19

In performing tests of details of balances, the auditor would scan the client-prepared bank reconciliation, and verify the mathematical accuracy of the reconciliation if detection risk was:

Accepted Answer

The answer of In performing tests of details of balances,...

Question 20

Tests of details of transactions generally use evidence from:

Accepted Answer

Tests of details of transactions typically involve examining documents found in the client's files to verify the accuracy and completeness of transactions recorded in the financial statements.

Quiz 12: Audit Procedures in Response to Assessed Risks: Substantive Tests