Deck 13: Overall Audit Strategy and Audit Program

Question 1

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.

Answer 1

B

Question 2

Risk assessment procedures are performed by auditors during an audit in order to

A) determine the risk of material misstatement in the financial statements.
B) determine the amount of testing of internal control.
C) determine the extent of testing of details of balances.
D) determine the extent of testing of transactions.

Answer 2

A

Question 3

Risk assessment procedures are performed by the auditor to assess the risk of material misstatement in the financial statements. Below are four types of further audit procedures the auditor should perform that provide the basis for the auditor's opinion. Which of these are compliance procedures?
1) Tests of controls
2) Tests of details of balances
3) Substantive tests of transactions
4) Substantive analytical procedures

A) 1, 2, and 3
B) 2, 3, and 4
C) 1 only
D) 1 and 2

Answer 3

C

Question 4

Which of the following procedures would most likely be performed in response to the auditor's assessment of the risk of monetary misstatements in the financial statements?

A) ratio analysis
B) tests of controls
C) tests of details of balances
D) risk assessment procedures

Question 5

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.

Question 6

Which of the following is true?

A) Tests of details of balances focus on the ending general ledger balances for both balance sheet and income statement accounts.
B) Tests of details of balances focus on the transactions during the period for both balance sheet and income statement accounts.
C) Tests of details of balances focus on the auditor's understanding of internal controls.
D) Tests of details of balances focus on comparisons of recorded amounts to expectations developed by the auditor.

Question 7

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) are designed to test for dollar misstatements.
D) will increase proportionately with the auditor's reliance on internal control.

Question 8

Tests of controls are directed toward the control's

A) efficiency.
B) effectiveness.
C) cost and effectiveness.
D) cost benefit ratio.

Question 9

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) risk assessment procedures
2) tests of controls
3) substantive tests of transactions
4) substantive 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

Question 10

You are auditing Rodgers and Company. After performing substantive analytical procedures, you conclude that, for the accounts tested, the client's balance appears reasonable. This may indicate that

A) details test of balances can be eliminated for those accounts.
B) certain tests of details of balances may be eliminated for those accounts.
C) control tests may be eliminated for those accounts.
D) control tests may be reduced for those accounts.

Question 11

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.

Question 12

A system walkthrough is primarily used to help the auditor

A) test the ending account balances.
B) test the details of transactions.
C) determine whether internal controls have been properly implemented.
D) determine whether the audit engagement should be accepted.

Question 13

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.
C) test of attributes.
D) monetary unit sampling test.

Question 14

Many auditors perform extensive analytical procedures 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.

Question 15

Which of the following further audit procedures are used to determine whether all six transaction-related audit objectives have been achieved for each class of transactions?

A) tests of controls
B) risk assessment procedures
C) substantive tests of transactions
D) preliminary analytical procedures

Question 16

Which of the following is ordinarily designed to detect material dollar errors on the financial statements?

A) tests of controls
B) analytical review procedures
C) computer controls
D) tests of details of balances

Question 17

Which of the following would not be considered further audit procedures?

A) tests of controls
B) analytical procedures
C) tests of details of balances
D) risk assessment procedures

Question 18

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.

Question 19

The auditor has determined that a key control in the audit of the sales and collection cycle is that recorded sales are supported by authorized shipping documents and approved customer orders. What typical test of controls should be used in this situation?

A) Examine a sample of duplicate sales invoices to determine that each one is supported by an authorized shipping document and approved customer order.
B) Observe whether shipping documents are forwarded daily to billing and observe when they are billed.
C) Examine a sample of sales invoices and agree prices to the authorized computer price list.
D) Use audit software to trace postings from the batch of sales transactions to the subsidiary and general ledgers.

Question 20

Analytical procedures

A) focus on the ending balances for income statement accounts.
B) are only performed during the planning stage of the audit.
C) are required to be performed when auditing an account balance.
D) provide substantive evidence.

Question 21

Auditors use substantive analytical procedures and tests of details of balances to satisfy planned control risk.

Question 22

Auditors must perform tests of controls separately from substantive tests of transactions.

Question 23

Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor's risk assessment procedures.

Question 24

For automated controls, the auditor's procedures to determine whether the automated control has been implemented may also serve as the test of that control.

Question 25

Risk assessment procedures are performed to assess the risk of material misstatement in the financial statements.

Question 26

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.

Question 27

Tests of details of balances emphasize the overall reasonableness of transactions and the general ledger balances.

Question 28

List each of the five types of audit tests.

Question 29

Procedures to obtain an understanding of internal control generally provide sufficient appropriate evidence that a control is operating effectively.

Question 30

Auditors can perform tests of controls separately from all other tests; therefore, it is inefficient to perform tests of controls, separately, from substantive tests of transactions.

Question 31

Tests of controls, either manual or automated, may include the following types of evidence and procedures. Which of these procedures is not the same as those procedures used to obtain an understanding of internal controls?

A) Make inquiries of appropriate client personnel.
B) Examine documents, records, and reports.
C) Observe control-related activities.
D) Reperform client procedures.

Question 32

For automated controls, the auditor's procedures to determine whether the automated control has been implemented cannot also serve as the test of that control.

Question 33

Tests of controls are performed to support a reduced assessment of detection risk.

Question 34

One factor that determines the amount of additional evidence required for tests of controls is the planned reduction in control risk.

Question 35

The amount of additional evidence required for tests of controls depends on two things: the extent of evidence obtained in gaining an understanding of internal controls, and the planned reduction in detection risk.

Question 36

Tests of controls should be performed after substantive tests of transactions.

Question 37

Substantive tests are procedures designed to test for dollar misstatements that directly affect the correctness of financial statements balances and disclosures. Substantive tests are often called monetary misstatements.

Question 38

Substantive tests of transactions affect control risk but do not affect planned detection risk.

Question 39

Assume the beginning balance in cash was audited in the prior year and is considered to be correct. In the current year, the auditor verifies that sales and cash receipts transactions are correctly recorded in the accounting records and posted to the general ledger. Before the auditor can reach a conclusion about the ending balance in the cash account in the current year, cash disbursement transactions will have to be audited.

Question 40

Substantive tests are procedures designed to test for dollar misstatements that directly affect the correctness of financial statement balances.

Question 41

In a computerized environment, the auditor can often perform substantive tests of transactions quickly for a large sample of transactions.

Question 42

Analytical procedures are the least costly type of audit test.

Question 43

The cost of each type of evidence does not vary in different situations.

Question 44

Only tests of details of balances involve physical examination and confirmation.

Question 45

Because of the high cost of tests of details of balances, auditors do not perform this type of testing unless fraud is suspected.

Question 46

If no material differences are found using analytical procedures, and the auditor concludes that misstatements are not likely to have occurred,

A) other substantive 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.

Question 47

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.

Question 48

When auditors must decide which type of test to select for obtaining sufficient appropriate evidence, the cost of obtaining the evidence is an important consideration. Rank the following types of tests in order of increasing cost: 1. Tests of controls
2) Substantive tests of transactions
3) Test of details of balances
4) Risk assessment procedures
5) Substantive analytical procedures

A) 1, 2, 3, 4, and 5
B) 2, 4, 3, 5, and 1
C) 5, 4, 1, 2, and 3
D) 5, 4, 3, 2, and 1

Question 49

When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor usually would

A)
B)
C)
D)

Question 50

In order to promote audit efficiency, the auditor considers cost in selecting audit tests to perform. Which of the following audit tests would be the most costly?

A) substantive analytical procedures
B) risk assessment procedures
C) tests of controls
D) tests of details of balances

Question 51

The reliance the auditor places 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.

Question 52

A deficiency uncovered in the audit of internal control is explained by which of the following in relation to a financial statement misstatement?

A) the amount of the misstatement
B) the likelihood of the misstatement
C) the amount, likelihood, and classification of the misstatement
D) the amount and the classification of the misstatement

Question 53

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

A) substantive analytical procedures
B) tests of controls
C) tests of balances
D) substantive tests of transactions

Question 54

Several factors influence the auditor's choice of the types of tests to select, including

A) the availability of the types of evidence.
B) the relative costs of each type of test.
C) the effectiveness of the internal controls.
D) all of the above.

Question 55

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.

Question 56

If tests of controls support the control risk assessment, then ________ in the audit risk model is increased.

A) planned detection risk
B) planned inherent risk
C) planned fraud risk
D) planned assurance risk

Question 57

Tests of controls are generally costlier to perform than analytical procedures.

Question 58

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.

Question 59

The auditor would design which of the following audit tests to detect possible monetary errors in the financial statements?

A) control tests
B) substantive analytical procedures
C) risk assessment procedures
D) tests of operating effectiveness of controls over revenue and cash

Question 60

An exception or deficiency found in a test of controls

A) indicates a financial statement misstatement.
B) indicates the likelihood of a misstatement.
C) indicates that the financial statements are fairly stated.
D) indicates that an adverse opinion is warranted on the audit of internal control.

Question 61

Which of the following is generally not included in the "evidence mix"?

A) tests of controls
B) substantive tests of transactions
C) risk assessment procedures
D) tests of details of balances

Question 62

For accounts with small balances and minimal potential for material misstatements, auditors often limit their tests to substantive analytical procedures if they conclude the accounts are reasonably stated.

Question 63

There are eight types of audit evidence: physical examination, confirmation, inspection, observation, inquiries of the client, reperformance, analytical procedures, and recalculation. For each of the following types of audit tests, indicate the type(s) of evidence that can be obtained through the test: (1) tests of controls, (2) substantive tests of transactions, (3) analytical procedures, and (4) tests of details of balances.

Question 64

The results of tests of controls and substantive tests of transactions affect the design of tests of details of balances.

Question 65

If the auditor's test of controls supports the control risk assessment, planned detection risk in the audit risk model is decreased, and planned substantive tests should therefore be reduced.

Question 66

A medium-sized, nonpublic company has few effective controls and significant inherent risks. The auditor in this situation should emphasize tests of details and balances and substantive tests of transactions; no substantive analytical procedures should be performed in this situation by the auditor.

Question 67

Auditors follow a four-step approach to reduce assessed control risk. Which of the following is not one of the four?

A) Apply transaction-related audit objectives to a class of transactions.
B) Identify accounts that have high inherent risk.
C) Identify key controls that reduce control risk.
D) For potential misstatements, design appropriate substantive tests of transactions.

Question 68

The choice of which types of tests to use and how extensively they need to be performed must be the same for all audits.

Question 69

The document that details the specific audit procedures for each type of test is the

A) audit strategy.
B) audit program.
C) audit procedure.
D) audit risk model.

Question 70

The evidence mix includes risk assessment procedures.

Question 71

An exception in a test of control provides only an indication of the likelihood of monetary misstatements in the financial statements because tests of controls do not reveal whether monetary misstatements have actually occurred.

Question 72

When designing the audit program and the particular audit tests, the auditor should keep in mind that

A) the audit program is broken down into two parts-the risk assessment procedures and the tests of details of balances.
B) the tests of controls will not vary depending on assessed control risk.
C) analytical procedures performed during substantive testing are generally more focused and more extensive than those done as part of planning.
D) auditing standards require that the tests contained in the audit program must be approved by the PCAOB.

Question 73

Which of the following would most likely not be included in the evidence mix for an integrated audit of a public company's financial statements and internal control over financial reporting?

A) sophisticated internal controls
B) extensive substantive analytical procedures
C) extensive tests of details of balances
D) low inherent risk

Question 74

Like tests of controls, analytical procedures only indicate the likelihood of misstatements affecting the dollar value of the financial statements.

Question 75

Analytical procedures are the most expensive type of audit test to perform because of the expertise and training required to properly use them.

Question 76

Tests of controls provide evidence about the likelihood for misstatements in a client's financial statements.

Question 77

The ________ is the combination of the types of tests to obtain sufficient appropriate evidence for a cycle. There are likely to be variations in the mix from cycle to cycle depending on the circumstances of the audit.

A) testing mix
B) evidence mix
C) audit process mix
D) procedures mix

Question 78

The auditor's understanding of internal control performed as part of risk assessment procedures provides the basis for the auditor's initial assessment of control risk.

Question 79

If internal controls are tested and are considered effective, the auditor generally will increase both substantive tests of transactions and tests of details of balances.

Question 80

If the auditor finds extensive control test deviations and significant misstatements while performing substantive tests of transactions and substantive analytical procedures,

A) the cost of the audit should decrease.
B) the auditor will conclude that internal controls are effective.
C) extensive tests of details of balances will need to be performed.
D) all of the above.