Question 1

After completing tests of key controls, the auditor should review the results and consider whether
A) the planned degree of reliance on internal controls is justified.
B) the audit evidence obtained from the study of internal controls can provide a reasonable basis for an opinion.
C) further study of internal controls is likely to justify any restriction of tests of details of balances.
D) sufficient knowledge has been obtained about the entity's entire internal control structure.

Accepted Answer

The answer of After completing tests of key controls, the...

Question 2

The auditor has decided that there is a risk of material misstatement with respect to sales revenue. Which of the following audit tests should the auditor use to quantify the potential error?
A) discuss the process used to assign credit limits with the sales manager and the controller
B) send external confirmations to customers with accounts receivable balances
C) determine whether all sales tested have a supporting customer purchase order
D) determine whether all sales tested have a matching bill of lading

Accepted Answer

Sending external confirmations to customers with accounts receivable balances is the most appropriate test to quantify the potential error related to sales revenue. This test helps to confirm the validity of sales transactions and the accuracy of the recorded balances. Option A is not a relevant test to quantify potential misstatement in sales revenue. Options C and D, while important tests in the audit of sales, do not provide a direct way to quantify potential misstatement in sales revenue.

Question 3

The audit program for most audits is designed in three parts. These parts are
A) risk assessment procedures, tests of controls, and tests of details.
B) risk assessment procedures, analytical procedures, and tests of details.
C) obtaining an understanding of internal controls, analytical procedures, and tests of details.
D) tests of controls, analytical procedures, and tests of details of balances.

Accepted Answer

The answer of The audit program for most audits is...

Question 4

Which of the following is an example of a substantive test that could be used for the audit of the accuracy of sales prices?
A) inspect sales price master authorization forms for the presence of an approval signature
B) observe that the point-of-sale system automatically pulls sales prices from the master file
C) inquire about the process that is used to update sales prices in the sales price master file
D) calculate the gross margin for each product that is sold by the company

Accepted Answer

Calculating the gross margin for each product sold by the company would be a substantive test for the accuracy of sales prices because it would involve comparing the selling price to the cost of the product, and verifying that the gross margin is reasonable and consistent with industry standards. Inspecting authorization forms, observing the point-of-sale system, or inquiring about the process used to update sales prices would not necessarily provide direct evidence about the accuracy of the sales prices themselves.

Question 5

Which of the following audit tests is usually the least costly to perform?
A) analytical procedures
B) tests of controls
C) tests of balances
D) confirmations

Accepted Answer

Analytical procedures are the least costly to perform because they involve the examination of relationships and trends within financial data rather than physical examination or confirmation of balances.

Question 6

A PA is conducting the audit of Middi Furniture Company, a medium-sized company with few effective controls and significant inherent risks. Management has decided that it is not cost-effective to implement better internal controls. What audit strategy will the PA likely select for this client?
A) combined audit approach for all transaction cycles and accounts
B) substantive audit approach for all transaction cycles and accounts
C) combined audit approach for all cycles except cash and inventory
D) substantive audit approach for all cycles except sales and payroll

Accepted Answer

Given the lack of effective internal controls and significant inherent risks, a substantive audit approach for all transaction cycles and accounts would be the most appropriate strategy for the PA. This approach would involve a greater focus on substantive testing of account balances and transactions to detect possible misstatements or errors. A combined audit approach or targeting certain areas for substantive testing only, would not provide sufficient coverage given the overall risk environment.

Question 7

A PA has designed an audit approach where she places maximum possible reliance on controls. This means that she will be
A) conducting only tests of controls.
B) using analytical review and tests of controls.
C) following a combined audit approach.
D) setting control risk at 100%.

Accepted Answer

The answer of A PA has designed an audit approach...

Question 8

Tests of details are designed based upon planned results of analytical review and planned results of tests of controls. Should the planned results differ materially from the actual results of analytical review and tests of controls, then
A) audit risk will be revised.
B) the planned audit program will require revision.
C) inherent risk will be revised.
D) tests of controls will not be considered for overall risk assessment processes.

Accepted Answer

If the planned results of analytical review and tests of controls differ materially from the actual results, it means that the initial assessment of risk may not have been correct. This would require a revision of the planned audit program to ensure that the audit is tailored to the new risk assessment. Therefore, choice B is the correct answer.

Question 9

When considering the relationships between types of audit tests and evidence, which of the following procedures are used for both obtaining an understanding of internal control and for conducting tests of controls?
A) inspection, recalculation, observation, inquiry, and reperformance
B) inspection, recalculation, external confirmation, and reperformance
C) recalculation, observation, inquiry, analytical procedures, and reperformance
D) analytical procedures, inspection, recalculation, and reperformance

Accepted Answer

Inspection, observation, inquiry, and reperformance are procedures used for both obtaining an understanding of internal control and conducting tests of controls.

Question 10

There will be heavy emphasis on tests of controls when
A) controls are ineffective and assessed control risk is high.
B) controls are effective and assessed control risk is low.
C) the auditor is doing a "fraud audit."
D) it is a first-year audit.

Accepted Answer

When controls are effective and the assessed control risk is low, auditors place heavy emphasis on tests of controls to gain assurance that the controls are operating effectively throughout the period under audit. This approach allows the auditor to potentially reduce the extent of substantive testing.

Question 11

Control risk has been assessed at 100% for your client. What audit approach will you follow?
A) a combined approach
B) a substantive approach
C) reliance on analytical review and tests of controls
D) reliance on tests of controls and tests of details

Accepted Answer

If control risk has been assessed at 100%, it means that the auditors do not have confidence in the effectiveness of the client's internal control. In this case, a substantive approach would be the best option as it involves testing the transactions and balances directly rather than relying on the client's internal controls. The other options (A, C, and D) rely on some level of confidence in the client's internal controls, which is not the case when control risk is assessed at 100%.

Question 12

Symco Inc. has a policy that all cash disbursements of $2000 or more must be approved by the treasurer. While performing a test of controls on a sample of disbursements, Craig discovered that the assistant controller had authorized a cash disbursement of $3500 while the treasurer was on vacation. This control deviation is significant only if
A) it is determined that the assistant controller is not qualified to approve cash disbursements of this size.
B) it occurred with sufficient frequency to cause the auditor to believe there may be material dollar misstatements in the statements.
C) the amount of the deviation identified is larger than the planning materiality.
D) the amount of the deviation identified is larger than the planning materiality and no compensating control exists.

Accepted Answer

This deviation is significant if it happened often enough to suggest there might be material misstatements in the financial statements. The frequency of such deviations could indicate a systemic issue with the control environment, potentially affecting the reliability of the financial statements.

Question 13

You are conducting the audit of a medium-sized company that has a chief accountant and three employees. Segregation of duties is excellent, with jobs allocated to provide maximum levels of controls. Segregation is supported by accounting software with user identification and passwords that limit functions to the appropriate jobs.
Required:
A) What type of audit approach would you recommend? Why?
B) How would your answer change if the accounting department was organized on a job-sharing basis so that all employees did some of every task to keep the work more interesting? Why?

Accepted Answer

The answer of You are conducting the audit of a...

Question 14

The auditor has conducted tests of controls of the write-off of accounts receivable and found two exceptions. These exceptions are
A) an indication of the likelihood of errors or fraud and other irregularities.
B) confirmation that controls are not functioning as designed throughout the year.
C) information about the quantity of the dollar error in accounts receivable.
D) indications that employee training is required in the accounting area.

Accepted Answer

Exceptions found during tests of controls of the write-off of accounts receivable indicate a higher risk of errors, fraud, or other irregularities. These exceptions suggest that the controls in place may not be effectively preventing such issues from occurring. Therefore, the best choice is A.

Question 15

Which of the following audit tests is usually the most costly to perform?
A) analytical procedures
B) tests of controls
C) tests of details of balances
D) procedures to obtain an understanding of internal control

Accepted Answer

Tests of details of balances require extensive testing of individual account balances and transactions, which can be time-consuming and costly. Analytical procedures may require some level of data analysis, but the cost is usually lower compared to tests of details of balances. Tests of controls and procedures to obtain an understanding of internal control are also important, but they may not be as costly as tests of details of balances.

Question 16

Risks of fraud are assessed at which level(s) of the audit?
A) overall audit, transaction-related audit objectives
B) balance-related audit objectives only
C) overall audit, cycle, and account
D) cycle, account, and transaction-related audit objectives

Accepted Answer

Risks of fraud are assessed at the overall audit level to identify areas of the financial statements that are more susceptible to fraud. They are also assessed at the cycle and account level to gain a more detailed understanding of the specific areas where fraud is most likely to occur. Therefore, choice C, which includes overall audit, cycle, and account, is the best option.

Question 17

Julianne is performing an analysis of the bad debt expense as a percentage of total sales. When performing the analytical procedure, it is important that Julianne
A) can rely on the internal controls of the accounts receivable process.
B) has an expectation of the result that should be obtained.
C) has concluded that the accounts receivable balance is free from material misstatement.
D) has requested permission from the client.

Accepted Answer

When performing an analysis of the bad debt expense as a percentage of total sales, it is important for Julianne to have an expectation of the result that should be obtained. This expectation can be based on industry averages, past company performance, and other relevant factors. It is not necessary for Julianne to rely on internal controls of the accounts receivable process, conclude that the accounts receivable balance is free from material misstatement or request permission from the client for this analytical procedure.

Question 18

Cimco Forest is a client of your PA firm that has requested that the audit of its financial statements be completed 25 days after its year end. Given the time constraint, the auditor
A) should not accept Cimco as a client.
B) should increase the size of the audit team.
C) can perform audit procedures at an interim date and roll forward the interim balances to year end.
D) should change the audit program to include more tests of controls and fewer tests of details, as they are more time consuming.

Accepted Answer

By performing audit procedures at an interim date and rolling forward the balances to year end, the auditor can fulfill the client's request for a timely completion of the audit without sacrificing the quality of the audit. This approach is commonly used in audits with time constraints. Increasing the size of the audit team may be an option, but it may not be the best solution as it could lead to a higher cost for the client. Changing the audit program to include more tests of controls and fewer tests of details could result in a lower quality audit, as both types of testing are important and necessary to ensure the accuracy of financial statements. Rejecting Cimco as a client is not a valid option without careful consideration of the reasons for the time constraints and the potential impact on the auditor's reputation.

Question 19

Last year the materiality for the client was $590 000. This year it is $400 000. All things being equal, how will this change in materiality affect the extent of tests of details?
A) increase
B) decrease
C) no effect as the tests of controls will be increased
D) no effect as the tests of controls will be decreased

Accepted Answer

When materiality decreases, auditors typically increase the extent of tests of details to detect smaller misstatements that are now considered material.

Question 20

The highest-cost audit will be incurred when the auditor expects that the internal control system would
A) be effective but the auditor found extensive control test deviations.
B) have few effective controls but client's personnel were well-trained and knowledgeable.
C) be very sophisticated and the tests of controls confirmed this.
D) have few effective controls and tests of balances found many errors.

Accepted Answer

The answer of The highest-cost audit will be incurred when...

Quiz 10: Audit Strategy and Audit Program

After completing tests of key controls, the auditor should review the results and consider whether

The auditor has decided that there is a risk of material misstatement with respect to sales revenue. Which of the following audit tests should the auditor use to quantify the potential error?

The audit program for most audits is designed in three parts. These parts are

Which of the following is an example of a substantive test that could be used for the audit of the accuracy of sales prices?

Which of the following audit tests is usually the least costly to perform?

A PA is conducting the audit of Middi Furniture Company, a medium-sized company with few effective controls and significant inherent risks. Management has decided that it is not cost-effective to implement better internal controls. What audit strategy will the PA likely select for this client?

A PA has designed an audit approach where she places maximum possible reliance on controls. This means that she will be

Tests of details are designed based upon planned results of analytical review and planned results of tests of controls. Should the planned results differ materially from the actual results of analytical review and tests of controls, then

When considering the relationships between types of audit tests and evidence, which of the following procedures are used for both obtaining an understanding of internal control and for conducting tests of controls?

There will be heavy emphasis on tests of controls when

Control risk has been assessed at 100% for your client. What audit approach will you follow?

The auditor has conducted tests of controls of the write-off of accounts receivable and found two exceptions. These exceptions are

Which of the following audit tests is usually the most costly to perform?

Risks of fraud are assessed at which level(s) of the audit?

Julianne is performing an analysis of the bad debt expense as a percentage of total sales. When performing the analytical procedure, it is important that Julianne

Cimco Forest is a client of your PA firm that has requested that the audit of its financial statements be completed 25 days after its year end. Given the time constraint, the auditor

Last year the materiality for the client was $590 000. This year it is $400 000. All things being equal, how will this change in materiality affect the extent of tests of details?

The highest-cost audit will be incurred when the auditor expects that the internal control system would