Deck 6: Gaining an Understanding of the Clients System of Internal Controls

Question 1

When conducting substantive testing, an increase in the auditor's assessment of the risk of material misstatement will result in an increase in the size of the sample.

Answer 1

True

Question 2

Stratification is when an auditor selects a sample for testing by dividing the number of population items by the sample size, resulting in the sampling interval.

Answer 2

False

Question 3

Non-statistical sampling involves random selection and probability theory to evaluate the results.

Answer 3

True

Question 4

Michael Fernandez has decided to perform substantive procedures at a major retailer. Which one of the following is not a substantive procedure?

A) re-performing control procedures to test their effectiveness
B) inspecting documents to verify the dates of the transactions
C) bank confirmations regarding interest rates on borrowings by client
D) recalculating an interest expense using confirmed interest rates

Question 5

The risk that the auditor concludes that a material misstatement exists when it does not is likely to result in an increase in audit effort when it is not required.

Question 6

Ricky Alfaro wanted to ensure that all the transactions at his client were recorded. For which assertion was he conducting these detailed substantive procedures?

A) occurrence
B) completeness
C) cut-off
D) none of the above

Question 7

Tolerable error is the minimum error an auditor is willing to accept within the population tested.

Question 8

The timing of audit testing refers to the stage of the audit when procedures are performed and the date that audit evidence relates to.

Question 9

Vita Zitkauskas, the senior on the audit of Magna International, was explaining how audit strategy and audit plans have an impact on tests of controls and substantive procedures. She made two statements: Audit strategy details the audit procedures to be used when testing controls and when conducting detailed substantive audit procedures.
The audit plan provides the basis for developing an audit strategy.
Which statements were true, if any?

A) (i) only
B) (ii) only
C) (i) and (ii)
D) neither (i) or (ii)

Question 10

Sampling is required when an audit procedure is tested on an entire group of transactions or all items within an account balance.

Question 11

Sampling risk is the risk that the sample chosen by the auditor is not representative of the population available for testing.

Question 12

Oliver DiPietro was testing the controls of Blue Coast Wholesale Fish Market. When testing controls, which one of the following evidence gathering procedures is used?

A) vouching of transactions
B) confirmations of accounts receivable
C) tracing of transactions to source documents
D) enquiry of client personnel

Question 13

An audit plan includes the audit procedures to be used when testing controls and when conducting detailed substantive audit procedures.

Question 14

Tests of controls are audit procedures designed to detect material misstatements at the assertion level.

Question 15

An increase in the number of sampling units in the population will result in a decrease in the sample size.

Question 16

Block selection involves the selection of items that are grouped together within the population of items available.

Question 17

Projected error refers to the extrapolation of the errors detected when testing a sample to the population from which the sample was drawn.

Question 18

Helen Lam assessed control risk to be low. What is the appropriate audit strategy she should adopt?

A) predominantly substantive audit approach
B) control testing strategy
C) combined audit strategy
D) substantive year end testing

Question 19

Stratification of the population will result in less efficient sampling and increase the sample size required.

Question 20

When auditors conclude that an internal control is effective, they will rely on the control to prevent and detect a material misstatement and reduce their detailed substantive procedures.

Question 21

Non-sampling risk arises when an auditor:

A) does not use sampling.
B) uses an inappropriate audit procedure.
C) tests all of the items in a population.
D) spends too much time testing the accounts most at risk of material misstatement.

Question 22

Christopher Mikos has been involved in testing controls at Highbridge Falls. Which of these control tests would be deemed ineffective?

A) reading a client's policy manual
B) entering invalid passwords to to see whether access is denied
C) both a and b
D) none of the above are effective controls

Question 23

Which of the following is not an advantage of non-statistical sampling?

A) It allows an auditor to select a sample that they believe is appropriate.
B) It allows an auditor to measure sampling risk.
C) It is lower cost than statistical sampling.
D) It requires less staff training.

Question 24

Control risk is the risk that:

A) an auditor expresses an inappropriate audit opinion when a financial statement is materially misstated.
B) an auditor's substantive procedures will not detect material misstatements.
C) a client's system of internal controls will not prevent or detect a material misstatement.
D) none of the above.

Question 25

Sampling is not required when:

A) it is the first year that the auditor has done the audit for a client.
B) the auditor is conducting tests of controls.
C) an audit procedure is conducted on an entire group of transactions.
D) the client requests the auditor not to collect samples of certain transactions.

Question 26

When control risk is high, the audit strategy is to:

A) do little or no tests of controls and increase reliance on substantive testing of transactions and account balances.
B) assume the client's management is dishonest and immediately report them to the CRA.
C) increase reliance on tests of controls and reduce reliance on substantive testing of transactions and account balances..
D) refuse to continue with the remainder of the audit due to the high risk of fraud.

Question 27

When testing controls, sampling risk is the risk that the auditor:

A) concludes that their client's internal controls are ineffective when they are effective.
B)
B) concludes that their client's internal controls are effective when they are ineffective.
C) both a and
D) none of the above.

Question 28

Lucy Pelletier was training a team of new auditors and delivered some interesting rules of thumb about control risk and detection risk: "The required level of confidence is a function of control risk when testing controls and detection risk when conducting substantive tests."
"When detection risk is determined to be low, an auditor will require a low level of confidence that the transactions and accounts are not materially misstated.
Which of the above two statements are true?

A) (i) only
B) (ii) only
C) both (i) and (ii)
D) neither (i) or (ii)

Question 29

Random selection involves:

A) dividing a population into groups of sampling units with similar characteristics.
B) the selection of a sample without the use of a methodical technique.
C) the selection of a sample that is free from bias and where each item in a population has an equal chance of selection.
D) the selection of items that an auditor believes should be included in their sample for testing.

Question 30

When conducting detailed substantive procedures, auditors search for evidence that:

A) the client's internal control system is operating effectively.
B) all transactions have been recorded in the correct accounts.
C) no fraud has occurred during the year.
D) they have remained independent of their clients.

Question 31

Milushka Icaza, who was representing her CGA firm at a conference, made the following statement about assertions: When our auditors conduct substantive procedures, we search for evidence that recorded accounts exist and that all accounts that should have been recorded, indeed have been recorded. Which assertions was she talking about?

A) rights and obligations and recording
B) valuation and allocation and recording
C) occurrence and completeness
D) none of the above

Question 32

George Melkonian wanted to determine whether his auditing class knew how different factors influence sample size. He made two statements: (i) "An increase in the expected rate of deviation of the population to be tested will decrease sample size."
(ii) "An increase in the tolerable rate of deviation will decrease sample size."
George asked his class to indicate which of the statements, if any, were false.

A) (i)
B) (ii)
C) (i) and (ii) are false
D) neither of the two statements is false

Question 33

Which of the following statements regarding statistical sampling is correct?

A) It is easier to use than non-statistical sampling.
B) It involves haphazard selection.
C) It is generally used for low risk accounts.
D) It involves random selection.

Question 34

Richard Nucci used analytical procedures at his client, Ultimate Vacations. Which one of these is not an analytical procedure?

A) Send confirmations to major customers.
B) Estimate revenue for Ultimate Vacations by multiplying trips sold by average price of vacation packages.
C) Discuss unusual fluctuations with client personnel.
D) Compare wages month by month for this year and last year.

Question 35

When testing controls, non-sampling risk is the risk that an auditor:

A) designs tests that are ineffective.
B)
B) does not select a sample.
C) both a and
D) none of the above.

Question 36

Substantive audit procedures include:

A) detailed tests of balances.
B) analytical procedures.
C) detailed tests of transactions.
D) all of the above.

Question 37

For high-risk accounts, the timing of most audit procedures will be:

A) whenever the client says it is most convenient for them to be conducted.
B) at, or after, year-end.
C) before year end.
D) during the interim audit testing stage.

Question 38

Tests of controls are conducted to establish that:

A) controls operate consistently throughout the period.
B) there are no material misstatements in the financial statements.
C)
C) controls operate effectively.
D) both a and

Question 39

Walter Polonia was explaining to his junior staff the implications of sampling risk when conducting substantive testing. He made the following two statements: "If we conclude that a material misstatement does not exist when it does, then we have an increased control risk."
"If we conclude that a material misstatement exists when it does not we have an inefficient audit."
Which statements, if any, were true?

A) (i)
B) (ii)
C) (i) and (ii)
D) neither (i) or (ii)

Question 40

Daniel Beauchamp did not perform a true sample when he went to his client to examine sales invoices. He did not use any specific method for choosing the invoices. He let his eye catch the items he thought might make up his sample. What technique did he use?

A) random selection
B) block selection
C) haphazard selection
D) stratified sample selection

Question 41

Which of the following statements is incorrect?

A) When detection risk is set as high, an auditor will require a high level of confidence that the transactions and accounts are not materially misstated.
B) An auditor may decide to stratify the population before selecting a sample .from it.
C) An auditor will use professional judgment to determine the tolerable error and required level of confidence.
D) An auditor will use professional judgment when considering what would be considered an error within the population tested.

Question 42

When conducting substantive testing, which of the following is not a factor that influences the sample size?

A) an increase in the tolerable rate of deviation
B) an increase in the auditor's assessment of the risk of material misstatement
C) stratification of the population when appropriate
D) an increase in tolerable misstatement

Question 43

What impact will there be on sample size when there is an increase in the number of sampling units in the population?

A) increase
B) decrease
C) negligible
D) none of the above

Question 44

Explain sampling risk as it relates to both tests of controls and substantive procedures.

Question 45

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Karen Elliott was explaining to her group partner that the completeness assertion implies that transactions and events that have been recorded have occurred and pertain to the entity.
b) Joseph Cabana was explaining to Carl Metz how sampling risk works for the audit team: "Sampling risk is the risk that as auditors we will arrive at a conclusion that has nothing to do with sampling issues."
c) Robert Scardera was vehemently arguing about the benefits of using non-statistical versus statistical sampling methods for a client in the excavation business. Here is what he had to say about non-statistical sampling: "Non-statistical sampling is easier to use than statistical sampling, it requires less staff training, it has lower cost, and it allows an auditor to make a sample choice that they believe is appropriate."
d) Elaine Mathers has started her sample selection of sales transactions for a gemstone conglomerate. She believes that she can improve audit efficiency by stratifying the sample.

Question 46

Which of the following is a factor that influences the sample size when testing controls?

A) an increase in the auditor's assessment of the risk of material misstatement
B) an increase in the tolerable rate of deviation
C) stratification of the population when appropriate
D) an increase in tolerable misstatement

Question 47

Describe the major types of sampling techniques available to auditors.

Question 48

When testing controls, the tolerable error is:

A) the tolerable rate of deviation that an auditor will accept before concluding that a control is effective.
B) the minimum rate of deviation that an auditor will accept.
C) the tolerable rate of deviation that an auditor will accept before concluding that a control is ineffective.
D) the maximum amount of error in an account balance that an auditor will accept before concluding that an account is materially misstated.

Question 49

Explain the differences between the main objectives of tests of controls and substantive procedures.

Question 50

When evaluating sample test results, which of the following statements is incorrect?

A) If an auditor discovers errors when testing transactions or account balances, they will need to project the error to the population being tested.
B) An auditor will not consider whether the population was stratified before being sampled.
C) If an error is considered to be unique it will be removed before projecting remaining errors to the population.
D) If the rate of deviation exceeds the tolerable rate the auditor will extend their testing.

Question 51

Which sampling method involves the selection of items that are grouped together within the population of items available?

A) systematic selection
B) haphazard selection
C) random selection
D) block selection

Question 52

Before selecting a sample, an auditor will use professional judgment to:

A) set the required level of confidence.
B) set the tolerable error rate.
C) select an appropriate population for testing.
D) all of the above.

Question 53

If the total projected error in an account balance was $3,248 and the tolerable error was set at $10,000, the auditor would:

A) conclude that the errors uncovered are material.
B) decide that further audit work was required.
C) conclude that the errors detected are not material.
D) conduct other tests aimed at the assertion being tested.

Question 54

Identify and explain the factors that influence the sample size for tests of controls.

Question 55

What impact will there be on sample size for substantive testing when there is an increase in the tolerable misstatement?

A) decrease
B) negligible
C) increase
D) none of the above

Question 56

Explain how auditors evaluate the results of tests of controls conducted on a sample.

Question 57

Barry Menzies walked out of the Old Country Bakery operation and chewed on a Cheese Danish. He had chosen random selection to test for proper authorization of purchasing transactions. He had just completed the initial audit testing of the purchasing transactions and had evaluated the results. His conclusion was that the deviation rate of 12 exceptions in a sample of 80 transactions was relatively high.
In addition, Barry was preparing to start the audit of another client, Rohr Industries, an airplane component manufacturer. He had discussed sampling methodology with his audit team and it had been determined that the Rohr Industries systems did not lend themselves easily to statistical sampling techniques. The audit team would have to employ non-statistical sampling.
Required:
a) What is the procedure that Barry Menzies would follow when his initial testing showed a relatively high deviation rate for the Old Country Bakery transactions?
b) What is non-statistical sampling?
c) Describe the non-statistical sampling methods that were open to Barry and his team for the Rohr Industries audit.
d) Which of Barry's two clients' systems would lend themselves to stratification?

Question 58

An account is at a higher risk of misstatement when it requires:

A) complex calculations.
B)
B) estimation.
C) both a and
D) simple valuation techniques.

Question 59

When testing controls, a decrease in the sample size will occur when there is:

A) an increase in the tolerable rate of deviation.
B) a decrease in the tolerable rate of deviation.
C) an increase in the extent to which the auditor's risk assessment takes into account relevant controls.
D) an increase in the number of sampling units in the population.