Question 1

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 best test to quantify the potential error in sales revenue. This test provides independent evidence of the amount and timing of sales transactions and helps the auditor to assess the accuracy of the client's sales records. The other options do not directly relate to quantifying the potential error in sales revenue.

Question 2

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

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

Question 3

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 4

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

When control risk is assessed at 100%, it implies that the client's internal controls are weak or non-existent, and therefore the auditor cannot rely on them to limit audit risks. Hence, a substantive approach is the best audit approach to follow. This approach requires the auditor to gather audit evidence through the examination of significant account balances, transactions and disclosures as well as obtaining direct confirmations from third parties to ascertain their accuracy, completeness and validity. The objective of the approach is to detect any material misstatements that may exist in the client's financial statements.

Question 5

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 is a substantive test that directly tests the accuracy of sales prices. By comparing the sales price to the cost of the product sold, auditors can determine if the sales prices are accurate and if there are any potential pricing errors. Inspecting authorization forms and inquiring about the process used to update sales prices may provide some evidence as to how sales prices are set, but they do not directly test the accuracy of sales prices. Observing that the point-of-sale system pulls sales prices from the master file simply confirms that the system is working as it should, but it does not test the accuracy of the sales prices themselves.

Question 6

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 7

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 8

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 involve a review of financial information to identify any unusual or unexpected trends, ratios or relationships. This can often be done using existing software or tools and does not require extensive testing or data gathering. Therefore, it is usually the least costly audit test to perform.

Question 9

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

The auditor can perform audit procedures at an interim date and roll forward the interim balances to year end to meet the time constraint. This approach allows the auditor to perform audit procedures earlier and gather sufficient evidence to support the balances at year end. However, the auditor should ensure that there are no significant events or changes that occur between the interim date and the year end that would require additional audit procedures.

Question 10

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

In order to perform an analysis of the bad debt expense as a percentage of total sales, Julianne should have an expectation of the result that should be obtained. This will allow her to compare the actual result with the expected result and determine whether there may be any issues with the bad debt expense or the accounts receivable balance. Relying on internal controls, concluding that the accounts receivable balance is free from material misstatement, or requesting permission from the client are not directly relevant to this specific analytical procedure.

Question 11

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 12

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...

Question 13

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 involve extensive testing of individual transactions and account balances, which typically require significant time and resources to perform. In contrast, analytical procedures may use data analysis and comparison with industry benchmarks, requiring less time and resources. Tests of controls and procedures to obtain an understanding of internal control may also be time-consuming, but are typically not as costly as tests of details of balances.

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 can indicate the likelihood of errors or fraud and other irregularities. This means that additional audit procedures may be necessary to address these exceptions and ensure the accuracy of the financial statements. The other answer choices are not necessarily true based on the information provided.

Question 15

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 16

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 17

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 18

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

The PA will likely select the substantive audit approach for all transaction cycles and accounts because of the lack of effective controls and significant inherent risks. This approach focuses on the testing of account balances and transactions through substantive procedures, such as testing the completeness, accuracy and validity of transactions and account balances. As management has decided not to implement better internal controls, the substantive approach is the best way to obtain sufficient evidence to support the auditor's opinion on the financial statements. The other options (A, C and D) involve a combined audit approach, which involves both testing of controls and substantive procedures. However, this approach may be ineffective in situations where controls are weak or non-existent.

Question 19

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 indicates a deviation from the expected and planned procedures, thus requiring revision of the planned audit program. This helps to ensure that sufficient and appropriate audit evidence is obtained to support the auditor's opinion on the financial statements.

Question 20

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...

Quiz 10: Audit Strategy and Audit Program

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?

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?

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

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

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

There will be heavy emphasis on tests of controls when

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?

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

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

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

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

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

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

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

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

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?

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