Question 1

There are three stages of the audit in which analytical procedures are performed.Please identify each of these three stages, and for each stage, discuss the purpose of performing analytical procedures in that stage.

Accepted Answer

The answer of There are three stages of the audit...

Question 2

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

Accepted Answer

The results of tests of controls and substantive tests of transactions help in evaluating the risk of material misstatement in the account balance. It also assists in determining the nature, timing, and extent of the substantive tests of details of balances. Therefore, the design of the tests of details of balances is affected by the results of tests of controls and substantive tests of transactions.

Question 3

Which of the following tests determine whether accounting transactions have been properly authorised, correctly recorded and summarised in the journals, and correctly posted to subsidiary ledgers and the general ledgers?
A) substantive tests of balances
B) substantive tests of transactions
C) tests of controls
D) analytical procedures

Accepted Answer

Substantive tests of transactions are designed to verify the accuracy and completeness of transactions, ensuring they are properly authorised, recorded, summarised, and posted to the ledgers.

Question 4

Only when testing details of balances will audit procedures include confirmation and physical examination.

Accepted Answer

Confirmation and physical examination are specific audit procedures used to test details of balances. They are typically performed to gather sufficient and appropriate audit evidence to support the financial statements. Therefore, the statement is true.

Question 5

Where is the primary emphasis in most tests of details of balances?
A) income statement accounts
B) cash flow statement account
C) balance sheet accounts
D) all of the above

Accepted Answer

Most tests of details of balances focus on balance sheet accounts, as they provide information about the company's assets, liabilities, and equity. While income statement and cash flow statement accounts are also important, they are typically covered in other types of audit procedures.

Question 6

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.

Accepted Answer

The answer of Discuss the purposes of (1)substantive tests of...

Question 7

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

Accepted Answer

Substantive tests of transactions are designed to detect monetary misstatements in the transactions that have been recorded, thus they can reveal whether monetary misstatements have actually occurred in the financial statements.

Question 8

Which one of the following is ordinarily designed to detect possible material dollar errors in the financial statements?
A) computer controls
B) analytical review
C) tests of controls
D) post-audit working paper review

Accepted Answer

Analytical review is a procedure that involves the evaluation of financial information through analysis of plausible relationships among financial and non-financial data. It helps detect possible material dollar errors in the financial statements. Computer controls focus on preventing errors rather than detecting them, while tests of controls and post-audit working paper review are procedures focused on assessing the effectiveness of the internal control system and the auditor's work, respectively.

Question 9

If tests of controls reveal that controls are sufficiently effective to justify reducing control risk, the auditor is justified in reducing substantive audit tests.

Accepted Answer

If tests of controls show that the controls are working effectively, then the auditor can rely on those controls and reduce the extent of substantive testing. This helps to save time and cost in the audit process. However, the auditor needs to exercise professional judgment to determine whether the controls are sufficiently effective and whether reducing substantive testing is appropriate in the circumstances.

Question 10

Material dollar misstatements are more likely to exist in the financial statements when control test deviations are considered to be insignificant deficiencies.

Accepted Answer

Insignificant deficiencies in control tests suggest that the internal controls are functioning well, reducing the likelihood of material misstatements in the financial statements.

Question 11

Professional auditing standards recognise that in instances where a significant amount of audit evidence is in electronic form, it may not be possible to reduce detection risk to an acceptable level by performing only substantive tests.

Accepted Answer

This statement is true according to professional auditing standards. When a significant amount of audit evidence is in electronic form, relying solely on substantive tests may not be enough to reduce detection risk to an acceptable level. Other procedures such as testing IT controls or using computer-assisted audit techniques may also be necessary to obtain sufficient audit evidence.

Question 12

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 reveal whether monetary misstatements have actually occurred.

Accepted Answer

An exception in a test of control indicates that there is a potential for monetary misstatements in the financial statements. It does not necessarily mean that monetary misstatements have actually occurred. Tests of controls are designed to assess the operating effectiveness of controls and determine if they are being applied as intended. It is possible for a control to fail and for there to be no monetary misstatements, or for a control to appear effective when in reality there are monetary misstatements. Therefore, while an exception in a test of control is a significant finding that requires further investigation, it does not definitively reveal whether monetary misstatements have occurred.

Question 13

Type(s)of evidence collected during substantive tests of transactions are:
A) inquiries of the client.
B) re-performance.
C) documentation.
D) all of the above

Accepted Answer

Substantive tests of transactions may involve various procedures, including inquiries of the client to gain an understanding of the transaction processing system, re-performance to test whether the controls are operating effectively, and documentation such as invoices, receipts, and other supporting records to provide evidence of the occurrence, completeness, accuracy, and validity of transactions. Therefore, all of the above choices could be types of evidence collected during substantive tests of transactions.

Question 14

Describe the five types of audit tests used to determine whether financial statements are stated fairly.Identify which of the five types are substantive tests and which are used to reduce assessed control risk.

Accepted Answer

The answer of Describe the five types of audit tests...

Question 15

Which of the following is correct when controls are effective and assessed control risk is low?
A) There will be heavy emphasis on tests of controls.
B) Some substantive tests of transactions will still be performed.
C) Only substantive tests of transactions will be used.
D) both A and B

Accepted Answer

When controls are effective and assessed control risk is low, auditors may place more emphasis on tests of controls to ensure that the controls are operating effectively. However, they will still perform some substantive tests of transactions to directly test for material misstatements in the financial statements.

Question 16

There is a trade-off between tests of controls and substantive tests.

Accepted Answer

There is a trade-off between tests of controls and substantive tests. Tests of controls focus on the effectiveness of internal controls, and substantive tests focus on the accuracy and completeness of the underlying transactions and account balances. Conducting more tests of controls may result in fewer substantive tests, and vice versa, depending on the auditor's risk assessment and materiality considerations.

Question 17

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.

Accepted Answer

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Question 18

If no material differences are found using analytical procedures, and the auditor concludes that misstatements are not likely to have occurred, then:
A) the number or extent of tests of details of balances may be reduced.
B) it will be necessary to increase the tests of transactions.
C) it will be necessary to increase the tests of balances.
D) it will not be necessary to perform tests of balances.

Accepted Answer

If material differences are not found using analytical procedures and the auditor concludes that misstatements are not likely to have occurred, then the auditor can rely on the analytical procedures and reduce the number or extent of tests of details of balances. This is because the results of the analytical procedures provide sufficient evidence to support the conclusion that the financial statements are not materially misstated.

Question 19

ASA 520 states that analytical procedures can be used as:
A) compliance tests.
B) tests of controls.
C) substantive tests.
D) helpful procedures not possessing the validity of other tests available to the auditor.

Accepted Answer

Analytical procedures can be used as substantive tests, which are tests that provide evidence about the completeness, accuracy, and validity of account balances, transactions, and disclosures in the financial statements. This is generally done by comparing recorded amounts to expectations based on prior periods or other sources of information. While analytical procedures can also be used for other purposes, such as as risk assessment procedures or as a means to obtain a general understanding of the client's operations, they are most commonly used as substantive tests.

Question 20

If the auditor's preliminary assessment of control risk is decreased from high to medium, tests of controls can be reduced.

Accepted Answer

The answer of If the auditor's preliminary assessment of control...

Quiz 11: Overall audit plan and audit program

There are three stages of the audit in which analytical procedures are performed.Please identify each of these three stages, and for each stage, discuss the purpose of performing analytical procedures in that stage.

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

Which of the following tests determine whether accounting transactions have been properly authorised, correctly recorded and summarised in the journals, and correctly posted to subsidiary ledgers and the general ledgers?

Only when testing details of balances will audit procedures include confirmation and physical examination.

Where is the primary emphasis in most tests of details of balances?

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.

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

Which one of the following is ordinarily designed to detect possible material dollar errors in the financial statements?

If tests of controls reveal that controls are sufficiently effective to justify reducing control risk, the auditor is justified in reducing substantive audit tests.

Material dollar misstatements are more likely to exist in the financial statements when control test deviations are considered to be insignificant deficiencies.

Professional auditing standards recognise that in instances where a significant amount of audit evidence is in electronic form, it may not be possible to reduce detection risk to an acceptable level by performing only substantive tests.

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 reveal whether monetary misstatements have actually occurred.

Type(s) of evidence collected during substantive tests of transactions are:

Describe the five types of audit tests used to determine whether financial statements are stated fairly.Identify which of the five types are substantive tests and which are used to reduce assessed control risk.

Which of the following is correct when controls are effective and assessed control risk is low?

There is a trade-off between tests of controls and substantive tests.

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.

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

ASA 520 states that analytical procedures can be used as:

If the auditor's preliminary assessment of control risk is decreased from high to medium, tests of controls can be reduced.