Ch07-audit-planning-assessment-of-control-risk1AUD SOLMAN LECTURE cAUD SOLMAN LECTURE chap24hap24 PDF

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Chapter 7 Audit Planning: Assessment of Control RiskAudit Planning: Assessment of Control RiskMULTIPLE CHOICE: Which of the following is ordinarily considered a test of internal control procedures? a. Send confirmation letters to banks. b. Count and list cash on hand. c. Examine signatures on checks...

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Chapter 7 Audit Planning: Assessment of Control Risk 96

Audit Planning:

Assessment of Control Risk

MULTIPLE CHOICE: 1.

Which of the following is ordinarily considered a test of internal control procedures? a. Send confirmation letters to banks. b. Count and list cash on hand. c. Examine signatures on checks. d. Obtain or prepare reconciliations of bank accounts as of the balance sheet date. ANSWER:

2.

When obtaining an understanding of an entity's control environment, an auditor should concentrate on the substance of management's policies and procedures rather than their form because a. The auditor may believe that the policies and procedures are inappropriate for that particular entity. b. The board of directors may not be aware of management's attitude toward the control environment. c. Management may establish appropriate policies and procedures but not act on them. d. The policies and procedures may be so weak that no reliance is contemplated by the auditor. ANSWER:

3.

C

C

After the study and evaluation of a client's internal control policies and procedures has been completed, an auditor might decide to a. Increase the extent of substantive testing in areas where the internal control policies and procedures are strong. b. Reduce the extent of control testing in areas where the internal control policies and procedures are strong. c. Reduce the extent of both substantive and control testing in areas where the internal control policies and procedures are strong. d. Increase the extent of substantive testing in areas where the internal controls are weak. ANSWER:

D

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4.

Chapter 7 Audit Planning: Assessment of Control Risk A conceptually logical approach to the auditor's evaluation of internal accounting control consists of the following four steps: I. Determine whether the necessary procedures are prescribed and are being followed satisfactorily. II. Consider the types of errors and fraud that could occur. III. Determine the internal control policies and procedures that should prevent or detect errors and fraud. IV. Evaluate any weakness to determine its effect on the nature, timing, or extent of auditing procedures to be applied and suggestions to be made to the client. What should be the order in which these four steps are performed? a. III, IV, I, II b. III, I, II, IV c. II, III, I, IV d. II, I, III, IV ANSWER:

5.

An auditor evaluates the existing internal control in order to a. Determine the extent of substantive tests which must be performed. b. Determine the extent of control tests which must be performed. c. Ascertain whether irregularities are probable. d. Ascertain whether any employees have incompatible functions. ANSWER:

6.

C

A

The auditor is studying internal control policies and procedures within the sales, shipping, and billing subset of the revenue cycle. Which of the following conditions suggests a need for additional testing of controls? a. Internal control is found to be weak with regard to shipping and billing. b. Internal control over sales, billing, and shipping appears strong, but 80% of sales revenue is attributable to three major customers. c. Internal control over billing and shipping is thought to be strong and the auditor considers additional testing of selected controls will result in a major reduction in substantive testing.

Chapter 7 Audit Planning: Assessment of Control Risk d.

Internal control over the recording of sales is found to be weak and the sales are evenly divided among a large number of customers.

ANSWER: 7.

A

In studying the design and implementation of a client's internal controls, the auditor needs to identify necessary control points. Controls existing at these points may be classified as "accuracy" controls and "safeguard" controls. Which of the following controls may be regarded as a safeguard control? a. b. c. d.

In processing sales orders, the computer is programmed to compare the customer's credit limit minus the prior balance with the current sales order amount. Sales prices are stored in computer memory and are automatically applied as stock numbers are entered from customer orders. Although the payroll is prepared manually, a second employee recalculates gross pay, withholdings, and net pay. Negotiable securities are kept in a locked vault and are accessible only by the treasurer accompanied by one of her assistants.

ANSWER: 9.

C

A secondary objective of the auditor's study and evaluation of internal control is that the study and evaluation provide a. A basis for constructive suggestions concerning improvements in internal control. b. A basis for reducing the auditor's assessed level of control risk below the maximum level. c. An assurance that the records and documents have been maintained in accordance with existing company policies and procedures. d. A basis for determination of the resultant extent of the tests to which auditing procedures are to be restricted. ANSWER:

8.

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D

The auditor's review of the client's internal control is documented in order to substantiate a. Conformity of the accounting records with generally accepted accounting principles.

99

Chapter 7 Audit Planning: Assessment of Control Risk b. c. d.

Representation as to adherence to requirements of management. Representation as to compliance with generally accepted auditing standards. The fairness of the financial statement presentation.

ANSWER: 10.

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? a. Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks. b. Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks. c. Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports. d. Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports. ANSWER:

11.

B

When considering internal control, an auditor must be aware of the concept of reasonable assurance which recognizes that a. The employment of competent personnel provides assurance that the objectives of internal control will be achieved. b. The establishment and maintenance of a system of internal control is an important responsibility of the management and not of the auditor. c. The cost of internal control should not exceed the benefits expected to be derived from internal control. d. The segregation of incompatible functions is necessary to obtain assurance that the internal control is effective. ANSWER:

12.

C

C

Statement on Auditing Standards No. 60 requires the auditor to communicate "reportable conditions" to the audit committee of the board of directors or, in the absence of an

Chapter 7 Audit Planning: Assessment of Control Risk

100

audit committee, to a body having similar oversight authority. Of the following, which does not represent a reportable condition? a. Bank accounts have not been reconciled in the last nine months, including the last month of the fiscal year. b. The corporate controller, unknown to the board of directors, has submitted her resignation effective two months from now. c. Perpetual inventory records contain numerous errors and can no longer be relied upon to reflect proper inventory levels. d. Although documents are prenumbered, they are not safeguarded and are not being used in numerical sequence. ANSWER: 13.

In connection with the examination of financial statements by an independent auditor, the client suggests that members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be delegated to the internal audit staff? a. Selection of accounts receivable for confirmation, based upon the internal auditor's judgment as to how many accounts and which accounts will provide sufficient coverage. b. Preparation of schedules for negative accounts receivable responses. c. Evaluation of the internal control for accounts receivable and sales. d. Determination of the adequacy of the allowance for doubtful accounts. ANSWER:

14.

B

B

An auditor uses the knowledge provided by the understanding of internal control and the final assessed level of control risk primarily to determine the nature, timing, and extent of the a. Attribute tests. b. Compliance tests. c. Tests of controls. d. Substantive tests. ANSWER:

D

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15.

Chapter 7 Audit Planning: Assessment of Control Risk Flowcharting as a means of internal control evaluation provides the following advantage over the use of questionnaires and descriptive narratives: a. Ease of preparation. b. Comprehensive coverage of controls. c. Simplicity. d. Ease in following information flow. ANSWER:

16.

Which of the following factors most likely affects the auditor's judgment about the quantity, type, and content of working papers? a. The effectiveness of the existing internal control. b. The content of the client's representation letter. c. The timing of substantive tests completed prior to the balance sheet date. d. The usefulness of the working papers as a reference source for the client. ANSWER:

17.

A

If the independent auditors decide that the work performed by the internal auditor may have a bearing on their own procedures, they should consider the internal auditor's a. Competence and objectivity. b. Efficiency and experience. c. Independence and review skills. d. Training and supervisory skills. ANSWER:

18.

D

A

An auditor's purpose for further testing of internal control procedures is to a. Provide a basis for reducing the assessed level of control risk below that which resulted from the auditor's initial understanding of internal control. b. Reduce the risk that errors or fraud which are not prevented or detected by internal control are not detected by the independent audit. c. Provide assurance that transactions are executed in accordance with management's authorization and accessed to assets is limited by a segregation of functions. d. Provide assurance that transactions are recorded as necessary to permit the preparation of the financial statements in conformity with GAAP.

Chapter 7 Audit Planning: Assessment of Control Risk ANSWER: 19.

C

In the assessment of control risk, the auditor is basically concerned that the client's internal control provides reasonable assurance that a. b. c. d.

Management cannot override the system. Operational efficiency has been achieved in accordance with management plans. Errors and fraud have been prevented or detected. Controls have not been circumvented by collusion.

ANSWER: 22.

A

The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor's study and evaluation of internal control because a. The audit programs, working papers, and reports of internal auditors can often be used as a substitute for the work of the independent auditor's staff. b. The procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control. c. The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures. d. The understanding of the internal audit function is an important substantive test to be performed by the independent auditor. ANSWER:

21.

A

Control testing is performed in order to determine whether or not a. The assessed level of control risk can be reduced. b. Necessary controls are absent. c. Incompatible functions exist. d. Material dollar errors exist. ANSWER:

20.

102

C

Which of the following may be considered an appropriate means for further testing controls over vendor payments? a. Confirm year-end balances with vendors. b. Search for unrecorded invoices at year-end. c. Develop a set of hypothetical transactions designed to test existing controls over vendor payments (e.g.,

103

Chapter 7 Audit Planning: Assessment of Control Risk

d.

introduce into the system, a voucher containing an invoice for raw materials but lacking a purchase order and/or receiving report.) Construct an internal control flowchart covering the payment processing function.

ANSWER: 23.

Which of the following statements concerning the independent auditor's required communication of material weaknesses in internal control is correct? a. Weaknesses reported at interim dates must be repeated in the final communication. b. If the auditor does not become aware of any material weaknesses during the examination, that fact must be communicated. c. Weaknesses that had been reported in prior years' communications and have not been corrected need not be repeated in the current year's communication. d. Although written communication is preferable, the auditor may communicate the findings orally. ANSWER:

24.

D

Which of the following would be the best procedure to determine whether purchases were properly authorized? a. Discuss authorization procedures with personnel in the controller's and purchasing functions. b. Review and evaluate a flowchart of purchasing procedures. c. Determine whether a sample of entries in the purchase journal is supported by properly executed purchase orders. d. Vouch payments for selected purchases to supporting receiving reports. ANSWER:

25.

C

C

After studying and evaluating a client's existing internal control, an auditor has concluded that the policies and procedures are well designed and functioning as intended. Under these circumstances, the auditor would most likely a. Perform further control tests to the extent outlined in the audit program. b. Determine the control policies and procedures that should prevent or detect errors and fraud.

Chapter 7 Audit Planning: Assessment of Control Risk c. d.

Set detection risk at a higher level than would be set under conditions of weak internal control. Set detection risk at a lower level than would be set under conditions of weak internal control.

ANSWER: 26.

B

To determine whether the client's system of internal control operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the a. Customer order file. b. Bill of lading file. c. Open invoice file. d. Sales invoice file. ANSWER:

29.

D

The auditor's understanding of the client's internal control is documented in order to substantiate a. Conformity of the accounting records with generally accepted accounting principles. b. Compliance with generally accepted auditing standards. c. Adherence to requirements of management. d. The fairness of the financial statement presentation. ANSWER:

28.

C

An auditor is required to obtain a basic understanding of the client's internal control to plan the audit. The auditor may then decide to perform tests of controls on all internal control procedures a. That would aid in preventing fraud. b. Documented in the flowchart. c. Considered to be weaknesses that might allow errors to enter the accounting system. d. Considered to be strengths for which the auditor desires further reduction in the assessed level of control risk. ANSWER:

27.

104

B

When evaluating a client's system of internal control to determine whether the necessary procedures are prescribed and have been implemented satisfactorily, an auditor must a. Develop questionnaires and checklists. b. Obtain an understanding of internal control.

105

Chapter 7 Audit Planning: Assessment of Control Risk c. d.

Perform tests of internal control procedures. Evaluate administrative policies.

ANSWER: 30.

Of the following internal control policies or procedures, which would most likely allow for a reduction in the scope of the auditor's tests of depreciation expense? a. Review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation. b. Comparison of equipment account balances for the current year with the current-year budget and prioryear actual balances. c. Review of the miscellaneous income account for salvage credits and scrap sales of partially depreciated equipment. d. Authorization of payment of vendors' invoices by a designated employee who is independent of the equipment receiving function. ANSWER:

31.

B

A

Tracing copies of sales invoices to shipping documents will provide evidence that all a. Shipments to customers were recorded as receivables. b. Billed sales were shipped. c. Debits to the subsidiary accounts receivable ledger are for sales shipped. d. Shipments to customers were billed. ANSWER:

B

32. In assessing control risk, the auditor must, as a minimum a. Perform tests of all significant controls. b. Obtain an understanding of the design and implementation of the client's internal control. c. Obtain an understanding of the design of the client's internal control. d. Obtain an understanding of the design, implementation, and operating effectiveness of the client's internal control. ANSWER: 33.

B

An independent auditor has concluded that the client's records, procedures and representations can be relied upon

Chapter 7 Audit Planning: Assessment of Control Risk

106

based on tests made during the year when internal control was found to be effective. The auditor should test the records, procedures, and representations again at year-end if a. Inquiries and observations lead the auditor to believe that conditions have changed significantly. b. Comparisons of year-end balances with like balances at prior dates revealed significant fluctuations. c. Unusual transactions occurred subsequent to the completion of the interim audit work. d. Client records are in a condition that facilitate effective and efficient testing. ANSWER: 34.

An auditor is least likely to further test control procedures by examining documents with respect to controls relating to a. Segregation of the functions of recording disbursements and reconciling the bank account. b. Comparison of receiving reports and vendors' invoices with purchase orders. c. Approval of the purchase and sale of marketable securities. d. Classification of revenue and expense transactions by product line. ANSWER:

35.

A

An auditor usually examines receiving reports to support entries in the a. Voucher register and sales returns journal. b. Sales journal and sales returns journal. c. Voucher register and sales journal. d. Check register and sales journal. ANSWER:

36.

A

A

Regardless of whether the auditor decides to test controls for operating effectiveness, he/she must fully document his or her un...