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Chapter 13Multiple-Choice Questions1.easyA listing of all the things which the auditor will do to gather sufficient, competent evidence is the: b a. audit strategy. b. audit program. c. audit procedure. d. audit risk model.2.easyShown below (1 through 5) are the five types of tests which auditors us...

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Chapter 13 Multiple-Choice Questions 1. easy b

A listing of all the things which the auditor will do to gather sufficient, competent evidence is the: a. audit strategy. b. audit program. c. audit procedure. d. audit risk model.

2. easy b

Shown below (1 through 5) are the five types of tests which auditors use to determine whether financial statements are fairly stated. Which three are substantive tests? 1. procedures to obtain an understanding of internal control 2. tests of controls 3. tests of transactions 4. analytical procedures 5. tests of details of balances a. 1, 2, and 3. b. 3, 4, and 5. c. 2, 3, and 5. d. 2, 3, and 4.

3. easy c

Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor’s: a. audit strategy. b. tests of controls. c. risk assessment procedures. d. tests of transactions.

4. easy c

For efficiency, tests of controls are frequently done at the same time as: a. analytical procedures. b. compliance tests. c. tests of transactions. d. tests of details of balances.

5. easy c

Which of the following procedures are frequently performed in response to the auditor’s assessment of the risk of material misstatement? a. Ratio analysis b. Tests of controls c. Tests of details of balances d. Risk assessment procedures

6. easy b

In which stage(s) of an audit are analytical procedures not performed? a. In the planning stage. b. In the test of controls stage. c. In the completion stage. d. In conjunction with tests of transactions and tests of details of balances.

7. easy a

Tests of controls may include which of the following types of evidence?

a. b. Arens/Elder/Beasley

Reperformance Yes No

Observation Yes No

c. d.

Yes No

No Yes

8. easy b

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. internal control procedures are functioning as intended. c. entity has complied with GAAP disclosure requirements. d. entity has complied with requirements of quality control.

9. easy c

In the context of an audit of financial statements, substantive tests are audit procedures that: a. may be eliminated under certain conditions. b. are designed to discover significant subsequent events. c. may be either tests of transactions, tests of balances, or analytical tests. d. will increase proportionately with the auditor’s reliance on internal control.

10. medium c

Which of the following is not useful for obtaining an understanding of internal controls? a. Make inquiries of the client’s personnel. b. Examine documents and records. c. Read industry trade magazines. d. Observe client activities and operations.

11. medium c

A system walkthrough is used to: a. test balances. b. test details of transactions. c. gain an understanding of internal controls. d. determine acceptance of the client.

12. (Public) medium b

PCAOB Standard 2 _______ the auditor to perform walkthroughs of significant processes. a. encourages b. requires c. does not allow d. permits

13. medium d

The most important consideration in developing the audit plan and audit program is the: a. client’s size. b. client’s industry. c. audit firm’s available personnel. d. the audit risk model used in its planning form.

14. medium b

Tests of controls are directed toward the control’s: a. efficiency. b. effectiveness. c. efficiency and effectiveness. d. cost benefit ratio.

15. medium d

When the auditor finds that there are missing controls in an area of the accounting system, the audit program in that area would be modified in such a way as to: 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.

16. medium b

A procedure designed to test for monetary misstatements directly affecting the correctness of financial statement balances is a: a. test of controls. b. substantive test.

Arens/Elder/Beasley

c. d.

test of attributes. monetary-unit sampling test.

17. medium b

Which of the following is not appropriate for purposes of testing the effectiveness of controls? a. Make inquiries of client personnel. b. Evaluate prior experience with the client. c. Observe control-related activities. d. Reperform client procedures.

18. medium d

Which of the following is not a direct result of performing analytical procedures? a. Identify areas of potential misstatements. b. Reduce detailed audit tests. c. Understand the client’s business. d. Identify specific errors in the accounts.

19. medium a

If no material differences are found using analytical procedures and the auditor concludes that misstatements are not likely to have occurred: a. other tests may be reduced. b. it will be necessary to increase the tests of balances. c. it will not be necessary to perform tests of balances. d. it will be necessary to increase the tests of transactions.

20. medium a

The primary emphasis in most tests of details of balances is on the: a. balance sheet accounts. b. revenue accounts. c. cash flow statement accounts. d. expense accounts.

21. medium b

Analytical procedures are defined in the auditing standards as: a. compliance tests. b. substantive tests. c. tests of controls. d. helpful procedures not possessing the validity of other tests available to the auditor.

22. medium c

Tests of transactions are used to determine whether ___________ have been satisfied. a. compliance test requirements. b. balance coverage requirements. c. transaction-related audit objectives. d. existence assertions

23. medium b

Which of the following statements is not true? a. Analytical procedures emphasize the overall reasonableness of transactions and balances. b. Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify reducing control risk and thereby reducing analytical review procedures. c. Substantive tests of transactions emphasize the verification of transactions recorded in the journals and then posted in the general ledger. d. Tests of details of balances emphasize the ending balances in the general ledger.

24. medium a

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. Substantive tests of transactions.

25. medium

Which of the following audit tests is usually the most costly to perform? a. Analytical procedures.

Arens/Elder/Beasley

c

b. c. d.

26. medium c

Analytical procedures must be performed in: a. the planning and test of control stages. b. conjunction with tests of transactions and tests of details of balances. c. the planning and completion stages. d. the planning, test of control, and completion stages.

27. medium a

Which of the following tests commonly occur together? a. Substantive tests of transactions and tests of controls. b. Substantive tests of transactions and obtaining an understanding of internal controls. c. Analytical procedures and tests of controls. d. Tests of controls and tests of details of balances.

28. medium c

Which of the following relationships between types of tests and audit evidence is not correct? a. Tests of details and documentation. b. Tests of controls and observation. c. Tests of details and observation. d. Substantive tests of transactions and reperformance

29. medium c

An increased extent of tests of controls is most likely to occur when: a. it is a first-year audit. b. the auditor is doing a “fraud audit.” c. controls are effective and the preliminary control risk assessment is low. d. controls are ineffective and the preliminary control risk assessment is high.

30. medium c

Many auditors perform extensive analytical procedures on audits because: a. they are required by GAAS. b. they pinpoint errors in accounts. c. they indicate areas of potential risk and misstatement. d. they are required for tests of controls.

31. (Public) medium c

Which of the following types of procedures will be performed in an audit of internal control over financial reporting?

a. b. c. d.

Tests of controls. Tests of balances. Substantive tests of transactions.

Procedures to obtain an understanding of internal control Yes No Yes No

Ratio analysis Yes No No Yes

32. medium b

Tests of details of balances focus on: a. beginning of the year balances. b. end of the year balances. c. transaction details for the period under audit. d. accounting cycles.

33. medium c

Auditors who test manual controls that rely on IT-generated reports must consider: a. the benefits of relying on IT-generated reports. b. separation of duties related to the IT-generated reports. c. the controls related to the accuracy of the information in the report. d. whether the manual controls are approved by the audit committee..

34.

When an auditor believes that analytical procedures indicate a reasonable possibility of

Arens/Elder/Beasley

medium d

misstatement, the auditor usually would: a. b. c. d.

Perform additional tests of controls Yes No Yes No

Decide to modify tests of details of balances Yes No No Yes

35. medium d

If the results of the tests of controls, substantive tests of transactions, and analytical procedures are not consistent with the predictions, tests of details of balances will be: a. eliminated. b. increased. c. unaffected. d. changed.

36. medium a

When controls are deemed ineffective and assessed control risk is at the maximum for a private company, there will be ______ emphasis placed on tests of controls. a. no b. relatively little c. moderate d. heavy

37. medium b

Tests of controls address each of the following questions except: a. How were the procedures performed? b. Why were the procedures performed? c. Were the necessary procedures performed? d. Who performed the procedures?

38. medium b

Which of the following audit tests would be regarded as a test of controls? a. Comparison of the inventory pricing to vendors’ invoices. b. Tests of the signatures on canceled checks to board of directors’ authorizations. c. Tests of the additions to property, plant, and equipment by physical inspections. d. Review of the specific items making up the balance in a given general ledger account.

39. (Public) medium c

Which of the following tests form the basis for an auditor’s report on internal control over financial reporting? a. Analytical procedures b. Tests of transactions c. Tests of controls d. Tests of details of balances

40. medium a

After finishing the review phase of the study and evaluation of internal control in an audit, the auditor should perform tests of controls on: a. those controls that the auditor wants and 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.

41. medium b

At what point in the audit are tests of details most appropriately designed? a. Engagement evaluation. b. Planning. c. Testing. d. Communication of material weaknesses.

42. (Public) Medium

Which of the following is/are performed in an audit of internal control over financial reporting?

Arens/Elder/Beasley

b a. b. c. d.

Procedures to obtain an understanding of internal control Yes Yes No No

Test of details of balances Yes No Yes No

Analytical Procedures No No Yes Yes

43. medium b

The reliance placed on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily: a. parallel. b. inverse. c. direct. d. equal.

44. medium b

Which of the following is ordinarily designed to detect possible material dollar errors on the financial statements? a. Tests of controls. b. Analytical review procedures. c. Computer controls. d. None of the above.

45. challenging d

What type of test is used to obtain more types of evidence than any other? a. Substantive tests of transactions. b. Tests of controls. c. Analytical procedures. d. Tests of details.

46. challenging c

Only _______ involve physical examination and confirmation. a. tests of controls b. tests of transactions c. tests of balances d. analytical procedures

47. challenging c

Documentation is used in every type of test except ________. a. tests of controls b. tests of transactions c. analytical procedures d. tests of details

48. challenging b

Which of the following types of evidence is not available when using substantive tests of transactions? a. Documentation. b. Confirmation. c. Inquiries of the client. d. Reperformance.

49. challenging b

An exception in a test of control indicates the _______ of misstatements. a. the amount b. the likelihood c. the amount, likelihood, and classification d. the amount and the classification

50. challenging a

Which of the following is not a valid basis for omitting an audit test? a. the difficulty and expense involved in testing a particular item. b. the relative risk involved.

Arens/Elder/Beasley

c. d. 51. challenging b

the degree of reliance on the relevant internal controls. the relationship between the cost of obtaining evidence and its usefulness.

Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? a. The audit program. b. The auditor’s judgment. c. Generally accepted auditing standards. d. The auditor’s working papers.

Essay Questions 52. easy

Contrast the circumstances in which the auditor would choose not to test controls with those in which he or she would perform tests of controls. Answer: If the auditor believes that controls have not been operating effectively during the period under audit, or that it would not be cost-effective to test controls, then he or she would choose not to test controls. In contrast, if the auditor believes that controls have been operating effectively during the period under audit, and that it would be cost-effective to test controls, the auditor will perform tests of controls.

53. easy

Three factors the auditor considers when assessing control risk are: the auditor’s belief concerning the effectiveness of internal controls, the results of tests of controls, and the costeffectiveness of a reduced assessed control risk. Identify the combination of conditions for these three factors that is required before a reduction in substantive testing is permitted. Answer: A reduction in substantive testing is permitted when (1) the auditor identifies specific controls he or she believes have been operating effectively during the period under audit, (2) the auditor believes it will be cost-effective to test those controls, and (3) the results of tests of controls indicate that the controls have indeed been operating effectively.

54. medium

List each of the five types of audit tests and list at least two types of evidence that may be obtained from each type of test. Answer:  Procedures to obtain an understanding of internal control - documentation, observation, inquiries of the client, and reperformance.  Tests of controls - documentation, observation, inquiries of the client, and reperformance.  Substantive tests of transactions - documentation, inquiries of the client, and reperformance.  Analytical procedures - inquiries of the client and analytical procedures.  Tests of details of balances - physical examination, confirmation, documentation, inquires of the client, and reperformance.

55. medium

Must auditors always perform tests of controls? Answer: Auditors only need to perform tests of controls in the audit of a private company if they intend to rely on them. Auditors must always perform tests of controls in the audit of a public company.

Arens/Elder/Beasley

56. medium

Describe the five types of audit tests. Identify which of the five types are substantive tests, and which are used to reduce assessed control risk. Answer: The five types of audit tests used to determine whether financial statements are fairly stated are: procedures to obtain an understanding of internal control, tests of controls, substantive tests of transactions, analytical procedures, and tests of details of balances. Substantive tests of transactions, analytical procedures, and tests of details of balances are substantive tests, whereas procedures to obtain an understanding of internal control and tests of controls are used to reduce assessed control risk.

57. medium

Consider the audit risk model and the five types of audit tests. Which tests provide evidence pertinent to the various elements of the audit risk model? Answer: Evidence can be obtained about control risk via procedures to obtain an understanding of internal controls, tests of controls, and substantive tests of transactions. Evidence can be obtained about planned detection risk via substantive tests of transactions, analytical procedures, and tests of details of balances.

58. medium

Discuss the purposes of (1) substantive tests of transactions, (2) tests of controls, and (3) tests of details of balances. Give an example of each. Answer: The purpose of substantive tests of transactions is to determine whether all six transactionrelated audit objectives have been satisfied for each class of transactions. For example, as part of the auditor’s test of the accuracy objective for sales, the auditor would compare the amount recorded in the sales journal for a sample of sales transactions with the total on the corresponding sales invoices. The purpose of tests of controls is to determine the effectiveness of both the design and operations of specific internal controls. For example, the auditor might observe for a month whether statements are mailed to all customers. The purpose of tests of details of balances is to determine the monetary correctness of the accounts to which they relate. The confirmation of accounts receivable is an example.

59. medium

There are three stages of the audit in which analytical procedures are performed. Identify each of these three stages and, for each stage, discuss the purpose of performing analytical procedures in that stage. Also indicate in which stage(s) analytical procedures are required by current professional auditing standards. Answer: Analytical procedures are performed in the audit planning stage to help the auditor decide the other evidence needed to satisfy sufficient competent evidence requirements. Analytical procedures can also be performed as substantive tests in the testing phase of the audit. Analytical procedures are performed in the audit completion phase as a final ...