Tb09 - Testbank auditing PDF

Preview

Summary

Testbank auditing...

Description

CHAPTER 9 EXECUTION OF THE AUDIT – PERFORMING SUBSTANTIVE PROCEDURES SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES Item

LO

Item

LO Item

1. 2. 3.

1 1 1

4. 5. 6.

3 2 2

7. 8. 9.

16. 17. 18. 19. 20. 21.

1 1 1 1 1 2

22. 23. 24. 25. 26. 27.

3 2 3 3 3 4

28. 29. 30. 31. 32. 33.

53.

1,2,3

54.

2

LO Item LO Item True-False Statements 3 10. 4 13. 3 11. 4 14. 3 12. 4 15.

Multiple Choice Questions 1 34. 2 40. 1 35. 2 41. 1 36. 2 42. 1 37. 2 43. 2 38. 3 44. 3 39. 3 45. Short Answer Questions 55. 3 56. 3 57. Essay Questions

59.

1

62.

3

60.

3

61.

5 Case

LO Item

LO Item

LO

5

5 5 5 3 3 3 3 3 3

46. 47. 48. 49. 50. 51.

3 4 4 4 5 5

3

58.

4

52.

Test Bank for Auditing: a practical approach, 1st Canadian Edition

9–2

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item

Type Item

Type Item

Type

1. 2.

TF TF

16. 3.

MC TF

17. 18.

MC MC

5. 6.

TF TF

21. 23.

MC MC

32. 34.

MC MC

4. 7. 8. 9.

TF TF TF TF

22. 24. 25. 26.

MC MC MC MC

33. 38. 39. 40.

MC MC MC MC

10. 11.

TF TF

12. 27.

TF MC

47. 48.

MC MC

13.

TF

14.

TF

15.

TF

Note: TF = True-False MC = Multiple Choice

Item Type Item Study Objective 1 19. MC 28. 20. MC 29. Study Objective 2 35. MC 37. 36. MC 53. Study Objective 3 41. MC 45. 42. MC 46. 43. MC 53. 44. MC 55. Study Objective 4 49. MC 58. SA Study Objective 5 50. MC 51.

SA = Short Answer Ca = Case

Type Item

Type Item Type

MC MC

30. 31.

MC MC

MC SA

54.

SA

MC MC SA SA

56. 57. 60. 62.

SA SA ES Ca

MC

52.

MC

ES = Essay

53. 59.

SA ES

61.

ES

Execution of the audit – performing substantive procedures

9–3

CHAPTER STUDY OBJECTIVES 1.

Define substantive audit procedures. Substantive audit procedures are procedures designed to obtain direct evidence of the completeness, accuracy, and validity of data, and the reasonableness of the estimates and other information contained in the financial statements. Substantive procedures include inspection, observation, enquiry, confirmation, recalculation, re-performance, analyses of many types, and analytical reviews.

2.

Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures. The combination of inherent risk and control risk determines the level of detection risk the auditor is willing to accept that will still allow them to conclude that the financial statements are not materially misstated. Detection risk is reduced or increased in direct proportion to the amount of substantive testing performed. There are several factors that influence how much substantive testing must be performed, including the nature of the test, the level of assurance necessary, the type of evidence required, and the complexity of the client€s data capturing systems. The timing of substantive procedures is most flexible when controls have been tested and assessed as effective. In that case, the procedures can be performed up to six months before year end. When controls are not tested or are not assessed as effective, the timing of substantive procedures is at or near year end.

3.

Provide examples of different substantive audit procedures. The different types of substantive procedures are key items testing, representative sampling (including representative sampling using audit tables, variables estimation sampling, and attribute or discovery sampling), other tests of transactions/underlying data, and analytical procedures. Different analytical procedures include absolute data comparisons, ratio analysis, trend analysis, common-size financial statements, break-even analysis, and pattern and regression analysis. Substantive analytical procedures are different from those analytical procedures used during the planning phase of the audit.

4.

Explain the different levels of audit evidence obtained when performing substantive procedures. The different levels of audit evidence obtained when performing substantive procedures include persuasive, corroborative, minimal, and general audit evidence.

5.

Describe the documentation of the conclusions reached as a result of performing substantive procedures. Conclusion statements are documented for each significant account (including the execution of the relevant audit program steps), the results, and any significant findings, including any misstatements. The auditor also documents that the financial statements reconcile to the underlying accounting records. Overall conclusions are usually prepared for each audit program step completed, as well as for each significant account and significant assertion.

9–4

Test Bank for Auditing: a practical approach, 1st Canadian Edition

TRUE-FALSE STATEMENTS 1.

A significant account is one that could contain material misstatements based upon their materiality and/or relationship to identified inherent and financial statement risks.

2.

Control risk is assessed to be low when there are no internal controls tested or relied upon by the auditor.

3.

Normally, it is more efficient to carry out substantive procedures than to test and rely on controls.

4.

Key item testing is an example of a technique used when conducting substantive procedures.

5.

The timing of substantive procedures is directly influenced by the level of control risk.

6.

Roll-forward procedures are performed during the period between the end of the financial year and the date of the audit report.

7.

Vouching involves tracking a source document back to the underlying accounting records.

8.

Audit sampling is the application of audit procedures to less than 100 per cent of items within a population.

9.

Analytical procedures may not be useful when they are used on a company with significantly diverse operations and geographical segments.

10.

Analytical procedures that provide persuasive or corroborative evidence contribute minimal support for the audit conclusion.

11.

Comparing the number of days purchases in trade payables with prior years would provide persuasive evidence of accounts payable.

12.

Corroborative evidence confirms audit findings from other procedures.

Execution of the audit – performing substantive procedures

9–5

13.

The lack of significant change in an account balance from one year to the next does not necessarily mean that the auditor can assume the balance is reasonable.

14.

Misstatements can only arise from fraud.

15.

The audit program serves as the instructions for the audit team members to complete the required testing.

9–6

Test Bank for Auditing: a practical approach, 1st Canadian Edition

ANSWERS TO TRUE-FALSE STATEMENTS Item 1. 2. 3.

Ans. T F F

Item 4. 5. 6.

Ans. T T F

Item 7. 8. 9.

Ans. F T T

Item 10. 11. 12.

Ans. F F T

Item 13. 14. 15.

Ans. Item T F T

Ans. Item

Ans.

Execution of the audit – performing substantive procedures

9–7

MULTIPLE CHOICE QUESTIONS 16.

Matilda Papas has been asked to lead her audit team in the audit of the Toronto Raptors basketball team. She performed a review of their risks and found that the team€s risks tend to be driven by the nature of certain significant accounts or business activities that the Raptors pursue. This risk is a. audit risk. b. inherent risk. c. control risk. d. detection risk.

17.

Manny Regimbald is concerned about the audit of a high risk client, the Lewiston Stampeders. He believes that there is a high likelihood that because his audit team is inexperienced that the testing procedures will not detect a material misstatement. This is a(n) a. audit risk. b. control risk. c. detection risk. d. none of the above.

18.

Maury Lions is ready to undertake substantive procedures at an educational institution. Which of the following factors will influence his substantive tests? a. the nature of the test b. the type of evidence required c. the complexity of the client’s data capturing systems d. all of the above

19.

After performing a risk assessment of a food processing company, Sean Spino has come to the conclusion that he will require more evidence to be obtained by his audit team from substantive procedures. Which of the factors below led him to this conclusion? a. the level of assurance necessary b. the type of evidence required c. the nature of the test d. the complexity of the client’s data capturing systems

20.

Ying Ye believes that she will have to employ sophisticated substantive audit procedures for her client. What contributes to this decision? a. the nature of the client€s accounting system b. the nature of the internal controls c. the complexity of the client’s data capturing systems d. none of the above.

9–8

Test Bank for Auditing: a practical approach, 1st Canadian Edition

21.

Umberto Levinson has performed a test of controls of a flower shop. He is trying to determine the timing of substantive procedures at year-end. Which factor will determine the timing of his audit procedures? a. timing of the year-end work b. audit risk c. inherent risk d. control risk

22.

Jocelyne Yu is performing procedures and has decided to vouch the balance in the fixed assets ledger of a furniture manufacturing company back to supporting documentation. She is performing a a. test of details. b. test of controls. c. risk assessment. d. none of the above.

23.

Larry French is trying to determine the extent of testing his team will have to perform in order to determine whether controls are working. How will he decide how much testing to perform? a. He will utilize statistical sampling. b. He will use his professional judgment. c. He will use last year€s results as a basis for this year€s tests. d. None of the above.

24.

Daniel Morency has performed evaluations of financial information and determined whether the fluctuations of his client€s sales figures are consistent with other data he has gathered. He has used this information to predict year-end amounts of sales. This is an example of substantive procedures called a. tests of details. b. computer assisted audit techniques. c. analytical procedures. d. none of these.

25.

Tobias Appel is trying to ensure that he can review controls over purchasing transactions. In addition he would like to substantiate the dollar amounts he is reviewing. What type of procedures can he perform that will provide evidence as to whether a control is effective as well as if an item is being recorded properly? a. statistical sampling b. dual purpose tests c. test of balances d. test of controls

26.

Stella Zhang has been performing analytical procedures techniques as a substantive test. The techniques that can be used to perform analytical procedures are: a. preparation of common sized financial statements. b. breakeven analysis.

Execution of the audit – performing substantive procedures c. d.

9–9

ratio analysis. all of the above.

27.

Jacqueline Martineau was told by her audit senior to ensure that the evidence she provided through analytical procedures was both persuasive and corroborative. Which of the following evidences are persuasive? a. When reviewing accruals for commissions refer to terms of agreements and payment dates. b. When reviewing trade receivables or sales review the volatility of the customer base and compare with expectations. c. When reviewing sales and commissions expense compare sales commissions or bonuses with related sales. d. When reviewing payroll expense compare payroll tax expenses to the annual payroll times the statutory tax rates.

28.

Inherent risk is: a. assessed as high when there are no internal controls tested or relied upon by the auditor. b. assessed as low when there are good internal controls in place. c. the risk of a misstatement occurring irrespective of any internal controls put in place by management. d. the risk that the auditor’s testing procedures will not detect a material misstatement.

29.

Which of the following statements is correct? a. If detection risk is high, significant substantive procedures are necessary to reduce detection risk. b. There is an inverse relation between the auditor’s assessed risk of material misstatement and detection risk. c. There is no relation between the auditor’s assessed risk of material misstatement and detection risk. d. If detection risk is low, only a small number of substantive procedures are necessary to reduce the detection risk.

30.

The purpose of substantive procedures includes obtaining direct evidence as to: a. the reasonableness of the estimates and other information in the financial statements. b. the completeness, accuracy and validity of data. c. both a and b. d. none of the above.

31.

Substantive testing can be conducted using which of the following procedures? a. enquiry b. confirmation c. analytical review d. all of the above

9 – 10

Test Bank for Auditing: a practical approach, 1st Canadian Edition

32.

Which of the following factors should not influence the extent and timing of when substantive procedures are performed? a. the type of audit opinion that the client would like the auditor to issue b. the complexity of the client’s data capturing systems c. the level of assurance necessary d. the type of evidence required

33.

The nature of substantive procedures normally consists of one or a combination of which of the following techniques? a. analytical procedures b. representative sampling c. key item testing d. all of the above

34.

Typically, substantive testing tends to be performed: a. at the start of the financial year. b. at or near year-end. c. half way through the financial year. d. only when the client’s management allows the auditor to conduct the tests.

35.

Roll-forward procedures are performed: a. to update the audit findings from the time of the interim procedures through to year-end. b. to detect fraud in various balance sheet accounts. c. before the end of the financial year. d. none of the above.

36.

Which of the following examples of substantive procedures would often be performed prior to year-end? a. confirming the client’s bank balance b. attending the client’s annual inventory count c. testing additions and disposals to the fixed asset register d. performing confirmations of accounts receivable

37.

Performing substantive procedures prior to year-end, in the absence of specific effective controls, may be acceptable when: a. the auditor is able to conclude overall that the client’s control environment is effective. b. the likelihood of errors or fraud is high. c. the likelihood of errors or fraud is low. d. both a and c.

38.

Vouching involves:

Execution of the audit – performing substantive procedures a. b. c. d.

9 – 11

tracking a source document through to the underlying accounting records. agreeing the details of a transaction to supporting evidence outside of the company’s accounting records. the application of audit procedures to less than 100 per cent of items within a population. none of the above.

39.

Tracing is primarily directed towards verifying which of the following assertions? a. completeness b. existence c. occurrence d. valuation

40.

The primary purpose of vouching is to ensure that: a. the balances or transactions are not understated. b. sufficient information is disclosed in the notes to the financial statements. c. the balances or transactions are not overstated. d. all transactions have been recorded.

41.

Variables estimation sampling is used: a. when the auditor does not expect any errors in an account balance. b. to obtain a level of confidence that key attributes for the sample tested can be inferred to be in existence for the entire population. c. when the auditor conducts tests of controls. d. if the auditor expects more than a few errors in an account balance.

42.

Common examples of substantive procedures related to key items testing and representative sampling include: a. tests of income statement accounts for account classification. b. tests of client prepared schedules. c. tests of underlying data to be used as part of the analytical procedures. d. all of the above.

43.

Analytical procedures may not be used: a. as primary tests of an account balance. b. in testing internal controls. c. to provide at least some minimal level of support for the conclusion. d. as corroborative tests in combination with other procedures.

44.

Which of the following is not a type of analytical procedure? a. confirmation analysis b. ratio analysis c. break-even analysis d. trend analysis

9 – 12

Test Bank for Auditing: a practical approach, 1st Canadian Edition

45.

Which of the following is the first step an auditor performs when performing analytical procedures? a. determine appropriate procedures for investigating the reasons for differences if they are significant b. draw conclusions c. identify the computation, comparison or relationship to be made or investigated d. assess the reliability of any data to be used

46.

Using computer assisted audit techniques (CAATs) makes the audit: a. more comprehensive. b. more expensive. c. more efficient. d. both a and c.

47.

Analytical procedures that provide persuasive evidence include: a. reviewing the cash accounts in the general ledger for unusual items. b. relating average amounts invested to an average interest rate. c. comparing the number of days purchases in trade payables with prior years. d. reviewing the property, plant and equipment account in the general ledger for unusual items.

48.

Comparing sales commissions or bonuses with related sales provides what level of evidence? a. corroborative b. absolute c. minimal d. persuasive

49.

The levels of evidence obtained when performing substantive procedures includes: a. minimal. b. persuasive. c. general....