Question 1

An account is at a higher risk of misstatement when it requires
A) complex calculations.
B) estimation.
C) both a and b
D) simple valuation techniques.

Accepted Answer

Complex calculations and estimation both require a higher level of judgment and subjectivity, which increases the risk of misstatement. Simple valuation techniques are less likely to result in errors or misstatements.

Question 2

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

Accepted Answer

Re-performing control procedures to test their effectiveness is considered a test of controls, not a substantive procedure. Substantive procedures are designed to detect material misstatements in the financial statements, whereas tests of controls assess the effectiveness of the entity's internal control over financial reporting.

Question 3

Olivia Peralta was training a team of new auditors and delivered some interesting rules of thumb about control risk and detection risk:
Which of the above two statements are true?
A) (i) only
B) (ii) only
C) both (i) and (ii)
D) neither (i) nor (ii)

Accepted Answer

The answer of Olivia Peralta was training a team of...

Question 4

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

Accepted Answer

Control risk is the risk that a client's system of internal controls will not prevent or detect a material misstatement. It is one of the components of audit risk, alongside inherent risk and detection risk. Inherent risk refers to the risk that a material misstatement exists in the financial statements, while detection risk is the risk that auditors will fail to detect a material misstatement. Control risk can be mitigated by assessing the effectiveness of a client's internal controls and performing tests of controls to determine their reliability.

Question 5

Henrietta Lombardi assessed control risk to be low. What is the appropriate audit strategy to adopt?
A) substantive audit approach
B) control testing strategy
C) combined audit strategy
D) substantive year end testing

Accepted Answer

A combined audit strategy involves both tests of controls (when control risk is assessed as low, indicating reliance on the controls) and substantive procedures. This approach is appropriate when the auditor believes the entity's controls are effective and plans to rely on them to reduce the extent of substantive testing.

Question 6

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.

Accepted Answer

The purpose of detailed substantive procedures is to gather evidence that all transactions have been recorded in the correct accounts, ensuring the completeness and accuracy of financial statements. The other options are not the primary focus of substantive procedures.

Question 7

Milushka Icaza, who was representing her CPA 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
B) accuracy, valuation, and allocation
C) occurrence and completeness
D) none of the above

Accepted Answer

Milushka Icaza is referring to the assertions of occurrence and completeness. The occurrence assertion refers to whether transactions and events that have been recorded actually occurred, while the completeness assertion refers to whether all transactions and events that should have been recorded have been recorded.

Question 8

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) controls operate effectively.
D) both a and c

Accepted Answer

Tests of controls are conducted to establish that controls operate consistently throughout the period and operate effectively in preventing or detecting material misstatements in the financial statements. Therefore, both options A and C are correct.

Question 9

Where an auditor concludes that the audit client's systems of internal controls are ineffective, he/she will
A) conclude that the client's system of internal controls can be relied upon to detect potential material misstatements.
B) conclude that the client's system of internal controls cannot be relied upon to detect potential material misstatements.
C) reduce the amount of reliance to be placed on substantive tests.
D) project the misstatements to the entire population.

Accepted Answer

When an auditor concludes that the audit client's systems of internal controls are ineffective, they cannot rely on them to detect potential material misstatements. Therefore, the auditor must increase the amount of reliance to be placed on substantive tests as a result of the ineffective internal controls.

Question 10

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.

Accepted Answer

Since the tolerable error set by the auditor is $10,000 and the total projected error is only $3,248, it can be concluded that the errors detected are not material and do not require further audit work or additional tests.

Question 11

Corey Hill 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.

Accepted Answer

Sending confirmations to major customers is a substantive procedure, not an analytical procedure. Analytical procedures involve analyzing relationships between financial and non-financial data to identify fluctuations or unusual patterns that may indicate potential risks or errors. The other options listed all involve analyzing data to identify unusual fluctuations or patterns.

Question 12

Tests of controls are conducted to
A) make an assessment of detection risk.
B) assess if controls are operating effectively and efficiently throughout the year.
C) determine how the internal controls operate.
D) gain knowledge of the methods and procedures the entity uses to record transactions.

Accepted Answer

Tests of controls are conducted to assess if controls are operating effectively and efficiently throughout the year. This helps the auditor gain an understanding of the internal control system and determine the level of risk associated with each control. This information is used to plan the audit and assess the risk of material misstatement.

Question 13

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:
Which statements were true, if any?
A) (i) only
B) (ii) only
C) both (i) and (ii)
D) neither (i) or (ii)

Accepted Answer

The question does not provide the actual statements made by Vita Zitkauskas, so it is not possible to determine which, if any, are true.

Question 14

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

Accepted Answer

Substantive audit procedures include both detailed tests of balances (testing the ending balance of an account) and detailed tests of transactions (testing the individual transactions that make up the account balance), as well as analytical procedures (comparing account balances to prior years or industry benchmarks, for example). Therefore, all options (A, B, and C) are correct.

Question 15

David Killbear 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 see whether access is denied
C) both a and b
D) none of the above are effective controls

Accepted Answer

Reading a client's policy manual is not an active test of controls; it is a passive review and does not verify the effectiveness of the controls in practice.

Question 16

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.

Accepted Answer

An auditor should consider whether the population was stratified before being sampled because stratification may affect the sample size calculation and the sampling method used. The other statements are correct. If errors are found in the sample, the auditor will project the error to the population being tested. Unique errors may be excluded from the projection if they are not indicative of a larger problem. If the deviation rate exceeds the tolerable rate, the auditor will need to extend their testing to ensure the accuracy of the financial statements.

Question 17

Kenneth Beach 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

Accepted Answer

Kenneth Beach was conducting detailed substantive procedures to ensure the completeness assertion. The completeness assertion ensures that all transactions that should be recorded are actually recorded in the financial statements. By conducting detailed procedures, Beach was trying to ensure that no transactions had been left unrecorded or omitted.

Question 18

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

Accepted Answer

Enquiry of client personnel is a common evidence gathering procedure used when testing controls to understand how controls are applied and to assess their effectiveness.

Question 19

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 Canada Revenue Agency (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.

Accepted Answer

When control risk is high, it means that the client's internal controls are not effective in preventing or detecting material misstatements. In such a situation, it is better to reduce reliance on tests of controls and increase reliance on substantive testing of transactions and account balances. This is because substantive procedures are performed on the sources of information themselves, whereas tests of controls provide evidence only that controls are in place and operating effectively. Therefore, choice A is the best strategy. Choice B is not a valid strategy as it assumes dishonesty without sufficient evidence. Choice C is not appropriate because the controls are not effective and cannot be relied upon. Choice D is not a viable option as the auditor has a responsibility to complete the audit and provide an opinion on the financial statements.

Question 20

When errors are discovered upon testing transactions or account balances, the auditor will
A) project the error to the entire population, if possible.
B) assess if the errors constitute an isolated event.
C) consider the impact of the errors.
D) all of the above

Accepted Answer

When errors are discovered upon testing transactions or account balances, the auditor should project the error to the entire population (if possible), assess if the errors constitute an isolated event, and consider the impact of the errors. Therefore, all of the above options (A, B, and C) are the best choices.

Quiz 6: Sampling and Overview of the Risk Response Phase of the Audit

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

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

Olivia Peralta was training a team of new auditors and delivered some interesting rules of thumb about control risk and detection risk: Which of the above two statements are true?

Control risk is the risk that:

Henrietta Lombardi assessed control risk to be low. What is the appropriate audit strategy to adopt?

When conducting detailed substantive procedures, auditors search for evidence that

Tests of controls are conducted to establish that

Where an auditor concludes that the audit client's systems of internal controls are ineffective, he/she will

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

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

Tests of controls are conducted to

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: Which statements were true, if any?

Substantive audit procedures include

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

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

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

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?

When control risk is high, the audit strategy is to

When errors are discovered upon testing transactions or account balances, the auditor will