10 arens aas 13ce tif 10 PDF

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Chapter 10 Audit Strategy and Audit Program10 Explain and develop an overall audit strategy based upon assessed risks A planned approach to the conduct of audit testing, taking into account assessed risks, is called an A) audit approach. B) audit plan. C) audit program. D) audit strategy. Answer: D ...

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Test Item File for Arens, Auditing, 13CE

10-1

Chapter 10 Audit Strategy and Audit Program 10.1 Explain and develop an overall audit strategy based upon assessed risks 1) A planned approach to the conduct of audit testing, taking into account assessed risks, is called an A) audit approach. B) audit plan. C) audit program. D) audit strategy. Answer: D Diff: 1 Type: MC Page Ref: 291-292 Learning Obj.: 10-1 Explain and develop an overall audit strategy based upon assessed risks 2) After finishing the procedures to obtain an understanding of internal control in an audit engagement, the auditor should perform tests of controls on A) those controls that the auditor plans to rely upon. B) those controls in which material weaknesses were identified. C) those controls that have a material effect upon the financial statement balances. D) a random sample of the controls that were reviewed. Answer: A Diff: 2 Type: MC Page Ref: 292 Learning Obj.: 10-1 Explain and develop an overall audit strategy based upon assessed risks 3) When the auditor assesses the likelihood of material misstatement in the financial statements, the auditor will use A) risk assessment procedures. B) procedures to obtain an understanding. C) tests of control. D) assessment of design effectiveness of controls. Answer: A Diff: 2 Type: MC Page Ref: 295 Learning Obj.: 10-1 Explain and develop an overall audit strategy based upon assessed risks 4) CAS 240 requires which of the following to be considered a significant risk? A) revenue recognition B) inventory valuation C) accounts receivable valuation D) calculation of income taxes Answer: A Diff: 3 Type: MC Page Ref: 297 Learning Obj.: 10-1 Explain and develop an overall audit strategy based upon assessed risks

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Test Item File for Arens, Auditing, 13CE

10-2

5) Which of the following areas is considered to have a high risk of fraud in the retail industry? A) point-of-sale sales B) customer refunds C) credit sales D) completeness of payroll Answer: B Diff: 3 Type: MC Page Ref: 297 Learning Obj.: 10-1 Explain and develop an overall audit strategy based upon assessed risks 6) A substantive procedure is used to A) assess the likelihood of material misstatement in the financial statements. B) obtain an understanding of internal controls. C) analyze the account balance to see if there are potential errors. D) quantify the amount of potential error in an account or transaction stream. Answer: D Diff: 1 Type: MC Page Ref: 300 Learning Obj.: 10-1 Explain and develop an overall audit strategy based upon assessed risks 7) Jane is a sole practitioner operating out of a local office. She is part of a regional group of firms and occasionally does small audits with the assistance of one staff person. Using automated working paper software, she runs a standard set of analytical review calculations for each audit, then puts them in the working paper file. She does not look at the analytical review process again. Since most of her audit clients have no internal controls, she then calculates materiality and conducts a substantive audit. She prefers to do more substantive testing rather than having to do all kinds of work with internal controls. Required: What is wrong with Jane's audit approach? Answer: First of all, Jane is violating generally accepted audit standards. She is also not conducting an effective audit: • She is not gathering sufficient information about internal controls to assess control risks and design her tests. • Analytical procedures are required to be conducted during the planning and completion phases of the audit, not just the planning phase. • The purpose of analytical review is to target subsequent audit work—analytical procedures work does not seem to be linked to the rest of the audit. • Her audit is not linked to a risk analysis process (she does not seem to be considering inherent or control risks, nor even planning in the context of a targeted audit risk). • Materiality does not seem to be used as an effective planning tool, but rather as a method of selecting tests of details. • Jane does not seem to be actively considering the risks of fraud or illegal acts. Diff: 3 Type: ES Page Ref: 291-297 Learning Obj.: 10-1 Explain and develop an overall audit strategy based upon assessed risks

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Test Item File for Arens, Auditing, 13CE

10-3

8) "This is really confusing! I've sat in on audit planning meetings for three different clients so far, and each one has gone differently. I've been responsible for the sales section each time. Sure the risks are all different, but in the first one I'm supposed to do flowcharts and detailed narrative for the sales systems, in the second one I'm supposed to use the firm's computerized system to answer detailed questions, and in the last one the partner only wants a brief description of the system in narrative form - no more than one page, he said." Required: Explain why it may be necessary to do different types of documentation to support an understanding of internal controls in the context of risks and evidence mix. Answer: It is likely that for both the first and second audit, the auditor will be relying upon internal controls and conducting a combined audit. To enable reliance, internal controls need to be thoroughly documented, so that assessments of control risk can be prepared for each account and for each transaction-related audit objective. It is possible that the client where flowcharts are to be prepared manually is a smaller client, and the number of possible key controls is small. Where there are a larger number of possible controls, it is more effective to use automated techniques so that the software can help ensure that each audit assertion has been properly considered for each material account, or where there is a risk of material misstatement for the account. The last client, where only a brief, one-page description is required, is probably an ownermanaged client where the primary control is exercised by the owner-manager. In that case, there will be few other key controls, as lack of segregation of duties in a small business means that controls executed by individual accounting employees may not be effective. Diff: 3 Type: ES Page Ref: 292-297 Learning Obj.: 10-1 Explain and develop an overall audit strategy based upon assessed risks

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Test Item File for Arens, Auditing, 13CE

10-4

9) Greenvale Construction Limited was started by four brothers who lived in the Toronto area. Over time, the brothers moved to different parts of the country. They decided it was a good idea to keep the company and organize their work as separate divisions under the same company. There are now three divisions, one for each of the brothers who are actively involved in construction. The fourth brother, Ted, is responsible for accounting and record keeping. Ted went back to school and completed an accounting designation, and now has three employees in the accounting area. Each of the brothers has moved on to specialize in a different kind of construction work. In Toronto, it is mainly new home construction. In Edmonton, the work is primarily renovations of large homes and small commercial enterprises. In Halifax, the work is mid-sized to large commercial projects. All of the brothers prefer to subcontract their work rather than hiring full time construction employees, although some of the subcontract relationships have lasted over fifteen years now. Required: Explain what you would do to document your understanding of internal control for Greenvale. Identify potential risk areas where you would need to focus additional attention.

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Test Item File for Arens, Auditing, 13CE

10-5

Answer: To document understanding: Update and evaluate the auditor's previous experience with Greenvale: • Review the prior year audit file. • Identify any risk areas from the prior year's audit that would likely be risk areas this year. Make inquiries of client personnel: • Discuss with Ted whether there have been any changes in procedures. • Review last year's management letter to determine if there have been any recommendations that were (or were not) followed up on by the client. • Walk through the descriptions of internal control with Ted and his staff to see if there have been any changes in procedures. • Contact each of the brothers in the other locations and inquire with respect to their changes in procedures. Read the client's policy and systems manuals: • Ask Ted whether there have been any changes to accounting systems in use. • If so, review the supporting documentation for any issues relevant to the audit. • Ask if there are any policy documents that have changed from the prior year and if so, review these. Examine documents and records: • Select a sample of transactions and walk them through the system descriptions updated with the client. Observe entity activities and operations: • Observe accounting staff activities while on premises. Potential risk areas: • Since transactions are sent from other locations to the Toronto head office, there could be cutoff errors or transactions could be sent late. • Segregation of duties at each of the locations would not exist, since there is essentially only one employee at each location: each of the brothers has the ability to override controls. • Procedures and controls for each of the construction divisions may be different and should be considered separately. • Consider issues like inventory of materials, whether it is material, and whether an accountant in Halifax or Edmonton should be involved in counting these materials. Diff: 3 Type: ES Page Ref: 292-299 Learning Obj.: 10-1 Explain and develop an overall audit strategy based upon assessed risks 10) You are a senior at a PA firm and this is your junior's first day. He would like you to explain to him the different types of audit tests that should be performed over the course of an audit to obtain sufficient and appropriate audit evidence. Be sure to indicate which component of audit risk each type of test is linked to. Answer: The types of audit tests are risk assessment, procedures to obtain an understanding of internal controls, tests of controls, analytical procedures, and tests of detail balances. Risk assessment is linked to the inherent risk. Procedures to obtain an understanding of internal controls and tests of controls are linked to the control risk. Analytical procedures and tests of details of balances are linked the the detection risk. Diff: 2 Type: ES Page Ref: 292-299 Learning Obj.: 10-1 Explain and develop an overall audit strategy based upon assessed risks

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Test Item File for Arens, Auditing, 13CE

10.2 Explain the purpose of the five types of audit tests 1) Analytical procedures are mandatory during which phases of the audit? A) tests of controls and tests of details B) planning and final evaluation C) planning and tests of details D) tests of details and final evaluation Answer: B Diff: 3 Type: MC Page Ref: 301 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 2) Choosing the appropriate analytical procedures requires the auditor to use A) the standards developed by the auditor's firm. B) automated working paper software. C) computer-assisted audit techniques. D) professional judgment. Answer: D Diff: 2 Type: MC Page Ref: 301 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 3) When does the auditor normally conduct tests of controls? A) prior to the completion of the tests of details B) after the completion of all analytical review C) prior to the preparation of the client risk analysis D) prior to the finalization of the audit risk model Answer: A Diff: 2 Type: MC Page Ref: 298 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 4) An example of an audit procedure that relates to the auditor's understanding of internal control is to A) reperform the counting of physical inventory. B) inspect documents and records. C) recalculate the depreciation expenses. D) trace all legal expenses to supporting invoices. Answer: B Diff: 3 Type: MC Page Ref: 298-299 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests

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Test Item File for Arens, Auditing, 13CE

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5) An example of an audit procedure that relates to the auditor's understanding of internal control is to A) count petty cash at all locations. B) use test data to verify functioning of data entry controls. C) observe entity activities and operations. D) trace all large fixed-asset purchases to supporting invoices. Answer: C Diff: 3 Type: MC Page Ref: 298-299 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 6) The purpose of tests of controls is to provide reasonable assurance that the A) accounting treatment of transactions and balances is valid and proper. B) accounting control procedures are operating effectively. C) entity has complied with the disclosure requirements of a generally accepted accounting framework. D) entity has complied with requirements of quality control. Answer: B Diff: 1 Type: MC Page Ref: 298-299 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 7) Eleonora is inspecting a sample of "Code of Conduct Acknowledgement" forms that must be signed by all employees to indicate that they have read and understood the company's code of conduct. Eleonora is ensuring that they have been signed by the employees. Eleonora is performing A) a test of controls. B) an analytical procedure. C) a substantive procedure. D) a procedure to obtain an understanding of internal controls. Answer: A Diff: 2 Type: MC Page Ref: 298-299 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 8) The auditor selects several transactions in each functional area and traces them through the entire accounting system, paying special attention to evidence about whether or not the control features are in operation. This is an example of a A) sequence test. B) test of controls. C) substantive test. D) functional test. Answer: B Diff: 1 Type: MC Page Ref: 298-299 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests

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Test Item File for Arens, Auditing, 13CE

10-8

9) The auditor would like to design a test of control to test that there is a separation of duties between billing, recording sales, and handling of cash receipts. Which of the following typical tests of controls would be suitable? A) Match the amounts billed to the amounts recorded. B) Verify that sales have been recorded in the proper period. C) Trace cash receipts to the duplicate bank deposit slips. D) Inquire about the duties of the accounting personnel. Answer: D Diff: 2 Type: MC Page Ref: 298-299 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 10) The auditor would like to design a test of control to test that shipping documents are issued in numerical order by the computer and are accounted for weekly. Which of the following typical tests of controls would be suitable? A) Trace sales documents issued to the sales journal and trace the daily total to the general ledger. B) Ask the shipping department about the process they use to issue shipping documents, paying particular attention to continuity of numerical sequence. C) Use computer-assisted audit testing to determine whether there are any numbers missing in the sequence (gap detection). D) Match shipments to the associated sales invoices. Answer: C Diff: 2 Type: MC Page Ref: 298-299 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 11) The auditor would like to design a test of control to test that unit selling prices are obtained from the price list master file of approved prices. Which of the following typical tests of controls would be suitable? A) Compare prices used on sales invoices to the authorized customer purchase order. B) Review changes to the price file throughout the year for proper authorizations and trace prices to copies of sales invoices. C) Use analytical review to compare total sales last year to total sales this year. D) Discuss the process used to authorize sales prices with the sales manager and the controller. Answer: B Diff: 3 Type: MC Page Ref: 298-299 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 12) The auditor would like to design a test of control to test that statements are mailed to all customers each month. Which of the following typical tests of controls would be suitable? A) Inquire about who is responsible for mailing the statements. B) Find out whether customers pay by statement or by invoice. C) Reconcile subsequent payments to particular invoices. D) Match remittance advices from customers to customer statements. Answer: A Diff: 2 Type: MC Page Ref: 298-299 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests

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Test Item File for Arens, Auditing, 13CE

10-9

13) When the auditor identifies an area of the accounting system with missing controls (i.e., a weakness or deviation), this would lead to a modification of the audit program in that area that would A) increase the amount of tests of controls. B) increase the reliance on tests of controls. C) cause the issuance of a qualified or adverse opinion. D) eliminate the need for a test of controls. Answer: D Diff: 2 Type: MC Page Ref: 298-299 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 14) Materiality is used to help decide the scope of testing, determine the sample size, and A) develop the audit report. B) decide which analytical review calculations to use. C) evaluate the results of testing. D) conduct understanding of business tests. Answer: C Diff: 2 Type: MC Page Ref: 298-300 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 15) If the auditor is not using tests of control, then A) tests of detail must be used. B) analytical procedures must be used. C) tests of design of internal controls must at least be used. D) the auditor will have to qualify the audit opinion. Answer: A Diff: 2 Type: MC Page Ref: 300 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 16) When the auditor has determined that there is a significant risk of misstatement for a particular assertion (for example, completeness of revenue), what type of audit testing does CAS 330 require? A) tests of risk assessment B) tests of understanding of internal control C) control tests D) substantive tests Answer: D Diff: 2 Type: MC Page Ref: 300 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests

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Test Item File for Arens, Auditing, 13CE

10-10

17) The auditor of ABC Ltd. has concluded that there are significant risks of misstatement of revenue at the company with potential overstatement of revenue. Which of the following audit tests should the auditor conduct to address this significant risk? A) control tests of authorization to ensure that credit limits for sales are all approved by the sales manager B) analytical review of sales comparing sales trends over the last five years by division and to the industry C) examination of sales after the year end to quantify potential cutoff errors (income from the subsequent period included in the current year) D) risk assessment procedures looking carefully at inherent risks associated with the handling of cash in the sales cycle Answer: C Diff: 3 Type: MC Page Ref: 300 Learning Obj.: 10-2 Explain the purpose of the five types of audit tests 18) If no material fluctuations are found using analytical procedures and the auditor concludes that differences should not have occurred, A) it will be necessary to increase the tests ...