Question 1

The purpose of prevent controls is to discover fraud or errors that may have occurred during transaction processing and to rectify those errors.

Accepted Answer

Preventive controls are designed to stop errors or fraud from occurring in the first place, rather than discovering them after they have occurred.

Question 2

To improve efficiency, auditors test only those controls that they believe are critical to their opinion.

Accepted Answer

This statement is true. Auditors use a risk-based approach to determine which controls to test, focusing on those that are most critical to achieving the audit objective. This helps to optimize the use of resources and improve efficiency in the audit process.

Question 3

The more complex the client's operations and its internal controls, the less experienced the auditor who performs the work needs to be.

Accepted Answer

The more complex the client's operations and internal controls, the more experienced the auditor who performs the work needs to be. This is because complex operations require a higher level of knowledge and skills from the auditor in order to properly assess and evaluate the risks and controls in place.

Question 4

Attribute sampling is a sampling technique used to reach a conclusion about the total dollar amount of misstatement in an account balance.

Accepted Answer

Attribute sampling is used to test the rate of occurrence of a specific characteristic within a population, not to determine the dollar amount of misstatement in an account balance.

Question 5

An example of a purely manual control is a locked stock cage for high dollar-value items.

Accepted Answer

A locked stock cage requires manual intervention to control access to high dollar-value items.

Question 6

A computer program that will not allow a sale to be processed if a customer has exceeded their credit limit is an example of a:
A) prevent control.
B) test of controls.
C) detect control.
D) substantive procedure.

Accepted Answer

The computer program that prevents a sale from being processed if a customer has exceeded their credit limit is an example of a preventive control, as it is designed to stop potential errors or fraud from occurring before they happen. Test of controls, detect controls, and substantive procedures are all types of auditing procedures and do not relate to the design and implementation of internal controls.

Question 7

The greater the degree of reliance on an internal control, the less they test the control to provide the required assurance.

Accepted Answer

The greater the degree of reliance on an internal control, the more they test the control to provide the required assurance. This is because the higher the reliance, the greater the risk of material misstatements, and thus, the more extensive testing is needed to ensure the effectiveness of the control.

Question 8

Which of the following is an example of a detect control?
A) Account coding on purchase orders being checked by the computer to a table of valid account numbers.
B) Quarterly reviews of credit balances in accounts receivable to determine their causes.
C) Amounts are not able to be paid to employees without first matching a valid tax file number to the employee master file.
D) None of the above.

Accepted Answer

Detect controls are designed to identify errors or irregularities after they have occurred. Quarterly reviews of credit balances in accounts receivable to determine their causes is an example of a detect control, as it involves reviewing and identifying issues after transactions have been recorded.

Question 9

Controls can be classified as:
A) information technology general controls.
B) automated controls.
C) manual controls.
D) All of the above.

Accepted Answer

Controls can be classified into three categories: information technology general controls, automated controls, and manual controls. Therefore, the correct answer is D - all of the above.

Question 10

Re-performance involves the auditor re-performing the control to test its effectiveness.

Accepted Answer

Re-performance involves the auditor performing the control test again to verify if it is functioning effectively. This test is done to gather evidence on whether the control is operating as intended or not.

Question 11

If the tests of controls confirm the auditor's preliminary evaluation of controls, the planned substantive audit procedures are not modified.

Accepted Answer

When the tests of controls confirm the auditor's preliminary evaluation of controls, it means that the auditor's initial understanding of the client's internal control system was accurate. Therefore, there is no need to modify the planned substantive audit procedures as the auditor can rely on the controls to support the financial statements. However, if the tests of controls reveal weaknesses in the internal control system, the auditor may need to revise the planned substantive audit procedures to compensate for the lack of reliance on the internal controls.

Question 12

Transaction-level controls are implemented by businesses to reduce the risk of misstatements due to error or fraud and to ensure that processes are operating effectively.

Accepted Answer

Transaction-level controls are indeed implemented by businesses to reduce risks and ensure effective processes.

Question 13

Tests of account balances can often provide evidence about the continued functioning of controls.

Accepted Answer

Tests of account balances can provide evidence about the continued functioning of controls because the accuracy and completeness of account balances rely on the effective operation of internal controls. If account balances are found to be accurate and complete, it can indicate that the controls in place are still functioning as intended. However, it is important to note that tests of account balances alone may not be sufficient to provide assurance of the effectiveness of controls, and additional testing may be necessary.

Question 14

Enquiry involves the auditor observing the actual control being performed.

Accepted Answer

Enquiry involves the auditor asking questions to gain knowledge about a control, rather than observing it being performed. Observing controls being performed is part of the testing process.

Question 15

IT general controls are driven by the particular software application being used.

Accepted Answer

IT general controls are independent of the particular software application being used. They are focused on the overall infrastructure and environment in which the application operates.

Question 16

Benchmarking is an audit strategy that can be used to carry forward the benefit of certain application controls testing into future audit periods.

Accepted Answer

Benchmarking involves establishing a baseline of expected results and comparing future results with that baseline. By using benchmarking, auditors can determine if previously tested application controls are still effective and can carry forward that knowledge into future audit periods for more efficient testing.

Question 17

An example of a program change control is:
A) the accounts receivable clerk does not have access to the cash payments application.
B) regular and timely back-ups of data.
C) program change forms must be authorised by the IT manager.
D) All of the above.

Accepted Answer

Program change control involves ensuring that any changes to software programs or systems are carefully controlled and documented. This helps to prevent errors or unintended consequences that could negatively impact the organization. Requiring program change forms to be authorized by the IT manager is a key component of program change control, as it ensures that all changes are reviewed and approved before they are implemented. The other options (A and B) are important controls as well, but they are not specifically related to program change control.

Question 18

Tracing certain amounts on the bank reconciliation to the accounting records is an example of inspection of physical evidence.

Accepted Answer

Tracing certain amounts on the bank reconciliation to the accounting records involves looking at physical documentation such as bank statements and company records, making it an example of inspection of physical evidence.

Question 19

Manual controls:
A) generally rely on the client's IT applications in some way.
B) support the ongoing functioning of the programmed aspects of prevent and detect controls.
C) can be classified as program change controls or logical access controls.
D) do not rely on the client's IT environment for their operation.

Accepted Answer

Manual controls do not rely on the client's IT environment for their operation, as they are performed manually by individuals. Choices A, B, and C refer to controls that are automated and thus are not manual controls.

Question 20

Which of the following is an example of a prevent control?
A) Management level reviews of actual performance versus budgets.
B) Credit manager following up on an exception report showing sales made to a customer who has exceeded their credit limit.
C) Sales invoices are automatically priced using the information in the price master file.
D) A bank reconciliation.

Accepted Answer

Preventive controls are designed to prevent errors or irregularities from occurring. Automatically pricing sales invoices using information in the price master file is a preventive control because it ensures that pricing errors are minimized by using pre-approved pricing data.

Quiz 8: Execution of the Audit Testing of Controls