Question 1

Which of the following is an example of a substantive test that could be used for the audit of the accuracy of sales prices?

Accepted Answer

Calculating the gross margin for each product that is sold by the company would be a substantive test that could be used to audit the accuracy of sales prices. This test would involve comparing the sales price of each product to its cost of goods sold in order to confirm that the sales price was accurate. Inspecting sales price master authorization forms (choice A) would be a test of authorization, not accuracy. Observing that the point-of-sale system pulls sales prices from the master file (choice B) would be a test of processing, not accuracy. Inquiring about the process used to update sales prices in the sales price master file (choice C) would be a test of control, not accuracy.

Question 2

The auditor has completed analyzing the results of tests of details of the accounts receivable ending balance.Errors totaling $25 000 were found.These exceptions are

Accepted Answer

The answer of The auditor has completed analyzing the results...

Question 3

Symco Inc.has a policy that all cash disbursements of $2000 or more must be approved by the treasurer.While performing a test of controls on a sample of disbursements,Craig discovered that the assistant controller had authorized a cash disbursement of $3500 while the treasurer was on vacation.This control deviation is significant only if

Accepted Answer

This deviation is significant if it happened often enough to suggest there might be material misstatements in the financial statements. The frequency of such deviations could indicate a systemic issue with the control environment, potentially affecting the reliability of the financial statements.

Question 4

There will be heavy emphasis on tests of controls when

Accepted Answer

When controls are effective and the assessed control risk is low, auditors place heavy emphasis on tests of controls to gain assurance that the controls are operating effectively throughout the period under audit. This approach allows the auditor to potentially reduce the extent of substantive testing.

Question 5

Samru has been assigned the sales cycle as part of an audit team.He will be evaluating several key controls in the sales cycle and conducting tests of detail for accounts receivable.Samru has been told to look at 15 customers with respect to the credit limit approval process (a test of control).Then,he has been told to use dual purpose tests for the rest of his testing.
Required:
Explain the relationship between tests of controls,dual purpose tests,and tests of details.

Accepted Answer

The answer of Samru has been assigned the sales cycle...

Question 6

The highest-cost audit will be incurred when the auditor expects that the internal control system would

Accepted Answer

When the auditor expects effective controls but finds extensive deviations, additional substantive testing is required, increasing audit costs.

Question 7

When considering the relationships between types of audit tests and evidence,which of the following procedures is used only for tests of details of balances?

Accepted Answer

External confirmation is specifically used for tests of details of balances, where auditors seek validation of account balances, transactions, or other financial information directly from third parties.

Question 8

The auditor has conducted tests of controls of the write-off of accounts receivable and found two exceptions.These exceptions are

Accepted Answer

The exceptions found in the tests of controls indicate a higher likelihood of errors or fraud and other irregularities occurring in the write-off of accounts receivable. This requires further investigation and potentially additional audit procedures to assess the extent and potential impact of these exceptions on the financial statements.

Question 9

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

Accepted Answer

Analytical procedures involve the review of financial information using comparisons and relationships between financial and nonfinancial data. They are often simple to perform and typically require minimal, if any, additional resources beyond those already available to the auditor. Therefore, they are usually the least costly to perform.

Question 10

If no material fluctuations are found using analytical procedures and the auditor concludes that differences should not have occurred,

Accepted Answer

If no material fluctuations are found using analytical procedures and the auditor concludes that differences should not have occurred, it is reasonable to reduce other tests. However, it is still necessary to perform some tests of details of balances to ensure the financial statements are free from material misstatement. Therefore, choice B is the best option.

Question 11

The auditor is deciding upon audit procedures to be used in the audit for a particular cycle (i.e. ,the combination of the four types of tests needed to obtain sufficient appropriate audit evidence).This type of decision is called

Accepted Answer

The decision regarding the combination of the four types of tests to obtain sufficient appropriate audit evidence is referred to as the "evidence mix."

Question 12

When considering the relationships between types of audit tests and evidence,which of the following procedures is suitable for use for all types of audit tests (procedures to obtain an understanding of internal control,tests of controls,analytical procedures,and tests of details of balances)?

Accepted Answer

Inquiries of the client are suitable for all types of audit tests as they help auditors gather information and understand the client's processes, controls, and financial details.

Question 13

Materiality is used to help decide the scope of testing,determine the sample size,and

Accepted Answer

Materiality is used to evaluate the results of testing to determine if the financial statements are free of material misstatement.

Question 14

When considering the relationships between types of audit tests and evidence,which of the following procedures are used for both obtaining an understanding of internal control and for conducting tests of controls?

Accepted Answer

The procedures of inspection, observation, inquiry, recalculation, and reperformance are used for both obtaining an understanding of internal control and for conducting tests of controls. These procedures help auditors to obtain evidence that can support their audit findings and opinions.

Question 15

A substantive procedure is used to

Accepted Answer

The answer of A substantive procedure is used to
...

Question 16

Donna sees a large variation in the gross margin percentage as a result of analytical procedures she performed.This means that

Accepted Answer

Donna should perform more tests to investigate the cause of the large variation in the gross margin percentage, as it may indicate potential errors or issues that need further examination.

Question 17

The auditor has decided that there is a risk of material misstatement with respect to sales revenue.Which of the following audit tests should the auditor use to quantify the potential error?

Accepted Answer

Sending external confirmations to customers with accounts receivable balances would provide direct evidence of the accuracy of sales revenue, as the customers would confirm the amounts they owe. The other options would not necessarily provide sufficient evidence to quantify potential errors in sales revenue. A discussion with the sales manager and controller about credit limits may inform the auditor's understanding of the company's credit policies, but would not necessarily provide evidence of the accuracy of sales revenue. Checking for supporting customer purchase orders and matching bill of ladings would provide evidence of the completeness of sales, but not necessarily the accuracy.

Question 18

A)There are seven types of audit evidence: inspection,observation,inquiries of the client,external confirmation,recalculation,reperformance,and analytical procedures.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)analytical procedures,and (3)substantive tests of balances.B)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.C)Types of audit tests include tests of controls,analytical procedures,and tests of details of balances.Rank these types of tests from least costly to most costly.

Accepted Answer

The answer of A)There are seven types of audit evidence:...

Question 19

A PA is conducting the audit of Middi Furniture Company,a medium-sized company with few effective controls and significant inherent risks.Management has decided that it is not cost-effective to implement better internal controls.What audit strategy will the PA likely select for this client?

Accepted Answer

Given the lack of effective controls and significant inherent risks, the PA will likely choose a substantive audit approach for all transaction cycles and accounts. This approach involves testing the accuracy and completeness of transaction data through substantive procedures, such as analytical procedures and test of details. This approach is appropriate when internal controls are weak or non-existent, and the risk of material misstatements is high.

Question 20

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

Accepted Answer

Tests of details of balances usually involve extensive testing of account balances, transactions, and supporting documentation, which can be time-consuming and costly. Analytical procedures, tests of controls, and procedures to obtain an understanding of internal control may also require significant effort, but they are typically less expensive than conducting tests of details of balances.

Quiz 10: Develop Risk Response: Audit Strategy and Audit Program