Deck 9: Risk Responseperforming Substantive Procedures

Question 1

What are substantive procedures?

A)Audit procedures designed to detect material misstatements at the assertion level
B)Audit procedures designed to aid testing controls
C)Audit procedures that are applied when internal controls are not functioning as designed
D)Audit procedures applied to gather appropriate relevant and reliable data

Answer 1

Audit procedures designed to detect material misstatements at the assertion level

Question 2

Determining fair value of a transaction or financial statement item for inclusion in the financial statements is a type of accounting estimate.

Answer 2

True

Question 3

After auditors have completed testing controls and drawn a conclusion about control risk, _______.

A)they make decisions about the nature and timing of substantive testing
B)they are ready to issue the audit opinion
C)they make decisions about the nature, timing, and extent of substantive testing
D)they should withdraw if control risk is assessed as high

Answer 3

they make decisions about the nature, timing, and extent of substantive testing

Question 4

When internal controls are strong, _______.

A)the auditor should plan to conduct more substantive testing
B)the auditor may be able to conduct less substantive testing
C)there is no need to test the internal controls
D)the auditor is ready to issue an unmodified opinion

Question 5

Finding an appropriate combination of audit procedures to minimize an engagement's audit risk _______.

A)can be challenging
B)is generally fairly straightforward
C)is the responsibility of the internal audit function
D)is the responsibility of management

Question 6

If the auditor determines that internal controls are not functioning as designed, and a compensating control does not exist, the auditor will assess control risk and the risk of material misstatement (RMM) as_______.

A)high and set detection risk as low
B)low and set detection risk as low
C)high and set detection risk as high
D)low and set detection risk as high

Question 7

An audit strategy is developed _______.

A)in response to the risk assessment for each significant account and assertion using the formula for audit risk
B)in response to the risk assessment for each insignificant account and assertion using the formula for audit risk
C)by the auditor, but must be reviewed and approved by management
D)by the auditor, but must be reviewed and approved by the internal audit function

Question 8

Assertions about account balances at year-end typically include _______.

A)existence, completeness, and allocation
B)existence, completeness, and rights and obligations
C)existence, occurrence, and cutoff
D)accuracy, valuation, and occurrence

Question 9

Assertions about classes of transactions and events typically include _______.

A)occurrence, cutoff, and completeness
B)existence, rights, and obligations
C)existence, rights, and cutoff
D)completeness, accuracy, and valuation

Question 10

If internal controls are strong, _______.

A)the auditor can usually assess control risk as low
B)the auditor can usually assess control risk as high
C)the auditor does not need to test the controls
D)the auditor should allow the internal audit function to conduct any testing

Question 11

When the entity's control environment has been assessed as effective, limited roll-forward procedures such as substantive analytical procedures are necessary.

Question 12

When evidence is collected at an interim date, substantive tests are more effective.

Question 13

The term "substantive" comes from _______.

A)"substantiate," which means auditors gather evidence to verify the transactions, account balances, and disclosures provided by management in the financial statements
B)"insubstantial," which means auditors gather evidence to support the transactions, account balances, and disclosures provided by management in the financial statements
C)"insubstantial," which means auditors gather evidence to support only insubstantial transactions, account balances, and disclosures provided by management in the financial statements
D)the fact that the audit report is designed to assist stockholders with substantial stock holdings in the client

Question 14

An auditor mailing positive confirmations is an example of _______.

A)a compilation engagement
B)a review engagement
C)a substantive procedure
D)a test of internal control

Question 15

Assertions about presentation and disclosure typically include _______.

A)completeness, accuracy and valuation, and classification and understandability
B)existence, rights and obligations, and cutoff
C)cutoff, presentation, and disclosure
D)cutoff, accuracy, and valuation

Question 16

The types of substantive procedures discussed in this chapter include _______.

A)analytical procedures
B)substantive tests to follow-up on notable items identified when performing audit data analytics
C)tests of details of transactions and balances including audit data analytics (ADA) used as a substantive test
D)All of these answer choices are correct.

Question 17

The more judgment that is involved in conducting the substantive procedures and evaluating the results, the less documentation is needed.

Question 18

If the assessed risk of material misstatement for an assertion is high, auditors need to gather more persuasive audit evidence.

Question 19

An audit strategy can take _______.

A)a reliance on procedures approach, a substantive approach, or a combination of both
B)a reliance on controls approach, a substantive approach, or a combination of both
C)neither a reliance on controls approach, nor a substantive approach
D)an approach whereby only internal control is audited

Question 20

The objective of auditors is to obtain _______.

A)sufficient appropriate audit evidence regarding the assessed risks of immaterial misstatement
B)insufficient appropriate audit evidence regarding the assessed risks of material misstatement
C)sufficient appropriate audit evidence regarding the assessed risks of material misstatement
D)sufficient appropriate audit evidence from internal control only regarding the assessed risks of material misstatement

Question 21

When analytical procedures are used to obtain audit evidence during the risk response phase, _______.

A)they are referred to as "substantive analytical procedures."
B)they are referred to as tests of internal control
C)the audit report is ready to be issued
D)management should be allowed to select the procedures and tests

Question 22

Management may feel pressure to maintain debt covenants _______.

A)if a client is relying heavily on debt financing and struggling to make debt payments
B)if a client is relying heavily on equity financing and struggling to make equity payments
C)both the liquidity and solvency positions have improved
D)the accounts receivable turnover ratio has increased

Question 23

Which of the following is an audit procedure in response to assessed risks?

A)Making changes to the nature, timing, or extent of audit procedures to obtain more persuasive evidence
B)Developing an understanding of the entity's control environment
C)Designing and implementing appropriate responses to financial statements
D)Changing the recalculating procedures applied in financial statements

Question 24

Which of the following factors is used by the audit team to assess the risk of fraud?

A)Pressure and opportunities for management to commit forgery
B)Inclusion of elements of unpredictability
C)Misappropriation of assets
D)Modification of planned audit procedures

Question 25

If the control environment is assessed to be weak, _______.

A)the auditors should immediately consider withdrawal from the engagement
B)the auditors should address this by changing the audit plan to include more audit procedures and expanding the scope of the audit to include more of the client's locations
C)the auditors should plan to increase their reliance on the evidence generated by the system
D)the auditors should plan to increase their reliance on the internal audit function

Question 26

In order to obtain more reliable evidence, _______.

A)the auditors should request the internal audit function generate it
B)auditors must exercise professional skepticism and be prepared to modify the planned audit procedures as needed
C)the auditors should request that management generate it
D)auditors should only rely on internally generated evidence

Question 27

An effective control environment suggests that _______.

A)internal control risk should be assessed at the maximum
B)management and those charged with the audit demonstrate a commitment to ethical values and strong internal control
C)management and those charged with governance demonstrate a commitment to ethical values and strong internal control
D)the system of internal control is ineffective

Question 28

Risk response at the financial statement level is affected by _______.

A)the auditor's understanding of the auditor's control environment and the assessed risk of material misstatement due to fraud
B)the auditor's understanding of the entity's control environment and the assessed risk of material misstatement due to fraud
C)the internal auditor's system of internal control
D)the prior auditor's current assessment of audit risk

Question 29

After auditors have assessed control risk, _______.

A)they are in a good position to evaluate the risk of fraud
B)the audit is ready to be finalized and the audit opinion issued
C)the findings should be submitted to management for review and approval
D)the findings should be referred to the internal audit function for investigation

Question 30

AU-C 330 Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained and AS 2301 The Auditor's Responses to the Risks of Material Misstatement state that auditors _______.

A)are required to perform substantive procedures for all relevant assertions that have been identified after issuance of the audit opinion
B)are required to perform substantive procedures for all relevant assertions that have been identified during the risk assessment phase
C)are required to perform tests of controls for all relevant assertions that have been identified during the risk assessment phase
D)should notify the client immediately of a change in fee structure pertaining to the audit

Question 31

The nature of an audit procedure refers to _______.

A)its purpose (test of controls or substantive procedure) and its type
B)its extent (test of controls or substantive procedure) and its type
C)its timing (test of controls or substantive procedure) and its type
D)its timing (test of controls only) and its type

Question 32

AU-C 330 Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained and AS 2301 The Auditor's Responses to the Risks of Material Misstatement state that _______.

A)auditors are required to perform substantive procedures for all relevant assertions that have been identified during the report issuance phase
B)auditors are required to perform substantive procedures for all relevant assertions that have been identified during the risk assessment phase
C)the auditors must always confer with the prior auditor before issuance of any audit report
D)the accounting qualities of faithful representation and comparability are immaterial to the audit

Question 33

AU-C 330 Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained and AS 2301 The Auditor's Responses to the Risks of Material Misstatement provide which of the following examples of responding to risk at the financial statement level?

A)Emphasize that audit team members should not attempt to maintain professional skepticism
B)Assign less experienced staff to areas of higher risk of material misstatement
C)Provide less supervision
D)Include more elements of unpredictability in the selection of audit procedures

Question 34

For clients with multiple locations, the auditors_______.

A)could vary which locations are tested each year and the type of audit procedures that are performed at the different locations
B)could vary which locations are tested each year and not change the type of audit procedures that are performed at the different locations
C)could not vary which locations are tested each year, but instead vary the type of audit procedures that are performed at the different locations
D)should always hire another auditor to check other locations, and not attempt to do this themselves

Question 35

If the control environment is assessed to be weak, _______.

A)auditors may respond by altering the audit plan to include more audit procedures and expanding the scope of the audit to include more of the client's locations
B)auditors may respond by altering the audit plan to include less audit procedures and expanding the scope of the audit to include more of the client's locations
C)the auditor will likely consider withdrawing from the engagement
D)the auditor will likely be able to perform the audit at a lower cost

Question 36

Auditors will have more confidence in internal controls and audit evidence generated internally _______.

A)with a client that maintains an effective control environment
B)with a client that maintains a poor control environment
C)if the controls are centralized and controlled by one department
D)if the audit evidence is received from one department of function only

Question 37

Auditors will assess the risk of fraud by considering _______.

A)fraud risk factors that may not be present, such as pressure and opportunities for management to commit fraud
B)fraud risk factors that may be present, such as pressure and opportunities for management to commit fraud
C)fraud risk factors that may be present, such as a lack of pressure and opportunities for management to commit fraud
D)management's opinion and statements on whether fraud is occurring or not

Question 38

The most important factor when responding to assessed risks is _______.

A)consideration of the nature of the audit procedure
B)consideration of the nature of the associated internal control
C)the opinion of management regarding the assessed risk
D)the opinion of the internal auditor regarding the assessed risk

Question 39

Examples of substantive procedures include _______.

A)observation
B)inquiry
C)confirmation
D)All of these answer choices are correct.

Question 40

If significant fraud risk exists, the auditors should _______.

A)respond by including elements of predictability in their audit plan
B)respond by including elements of unpredictability in their audit plan
C)plan to place greater reliance on the internal audit function
D)be able to place greater reliance on management assertions

Question 41

If the assessed risk of material misstatement for an assertion is high, _______.

A)the auditors should avoid auditing the assertion in question
B)auditors need to gather less persuasive audit evidence
C)auditors need to gather more persuasive audit evidence
D)the auditors should consider withdrawing from the engagement

Question 42

Testing of internal controls is typically conducted _______.

A)during an interim period
B)at the balance sheet date
C)after the balance sheet date
D)upon issuance of the audit report

Question 43

Examples of initial procedures that an auditor may perform include _______.

A)trace beginning balances to working papers from the prior year's audit
B)scan the transactions in the account for unusual items
C)obtain a trial balance or other detailed report for the account
D)All of these answer choices are correct.

Question 44

The use of analytical procedures _______.

A)is optional during risk assessment
B)is prohibited during risk assessment
C)is required during risk assessment
D)is most effective as part of the testing of the system of internal control

Question 45

Roll-forward procedures relate to _______.

A)auditors updating their audit findings from an interim period through year-end
B)auditors updating their audit findings from year-end through an interim period
C)any substantive procedure performed after the balance sheet date
D)any procedure carried out by the auditor to update their audit findings through the date of the audit report

Question 46

Before auditors can use substantive analytical procedures, _______.

A)they must be ready to issue the preliminary audit opinion
B)they must consider the availability and reliability of data to be used to develop their expectation
C)they must consider the availability and reliability of data to be used to develop their audit opinion
D)they must be approved by the internal auditors beforehand

Question 47

Examples of analytical procedures include _______.

A)ratio analysis
B)trend analysis
C)complex statistical techniques
D)All of these answer choices are correct.

Question 48

Analytical procedures _______.

A)are evaluations of financial information through analysis of plausible relationships among both financial and non-financial data
B)are evaluations of financial information through analysis of plausible relationships using financial data only
C)are evaluations of financial information through analysis of plausible relationships using non-financial data only
D)are optional, and generally unnecessary if the system of internal control is strong

Question 49

A dual-purpose test _______.

A)involves the auditors designing a test of controls and a substantive test of details to be performed at the same time on different transactions
B)involves the auditors designing a test of controls and a substantive test of details to be performed at the same time on the same transaction
C)involves satisfying informational requests from management and the client's legal counsel simultaneously
D)involves the auditor being able to bill the client for two tests when only one was performed

Question 50

If during risk assessment auditors have identified risks of material misstatement due to fraud, _______.

A)they may consider not changing the timing of audit procedures
B)they may consider changing the timing of audit procedures
C)the auditors should confront the employee(s) in question
D)the auditors should immediately report this to the SEC

Question 51

Some substantive procedures can only be performed at year-end _______.

A)due to management not allowing the auditors access beforehand
B)because there have been no transactions occurring in these accounts during the year
C)due to the nature of the assertion or the timing of the transactions
D)once the internal audit function has completed its preliminary testing of the account

Question 52

The cutoff assertion for sales means _______.

A)that transactions have been recorded in the proper accounting period
B)that the auditor should check to make sure sales are being shipped to the correct client customers
C)that transactions are being recorded in the correct accounts
D)that sales should be limited to certain clients who may not have the ability to pay

Question 53

When conducting a substantive analytical procedure, _______.

A)auditors develop an expectation, or estimate, using data in the auditor's records or data from reliable outside sources, and then compare the expectation with the client's recorded amount
B)auditors develop an expectation, or estimate, using data in the client's records or data from reliable outside sources, and then compare the expectation with the client's recorded amount.
C)auditors develop an expectation, or estimate, using data in the client's records or data from reliable internal sources, and then compare the expectation with the client's recorded amount.
D)the procedure should be approved by management beforehand

Question 54

A factor that auditors consider when determining the type of substantive procedure to use is _______.

A)the assessed level of risk for the assertion
B)the assessed level of risk for the control
C)the cost of the procedure, and if management will be able to afford it
D)the recommendations of management

Question 55

Which of the following factors impact the effectiveness and efficiency of using a substantive analytical procedure to respond to risk?

A)Nature of the assertion
B)Assessed risk of the material misstatement
C)Control over the data
D)Persuasiveness of the evidence

Question 56

When the risk of material misstatement for an assertion is high, the auditors_______.

A)must gather less reliable and persuasive evidence
B)must gather more reliable and persuasive evidence
C)should not attempt to audit this assertion
D)should consider allowing the internal audit function to audit this assertion

Question 57

The use of a substantive analytical procedure may be more appropriate and provide more persuasive audit evidence depending on _______.

A)the nature of the assertion
B)whether management agrees with its use
C)the nature of the control
D)whether the internal auditors are able to confirm the evidence

Question 58

A significant risk is _______.

A)a risk that the auditor should not attempt to address
B)an identified and assessed risk of immaterial misstatement that, in the auditor's judgment, requires special audit consideration
C)an identified and assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration
D)a risk for which the auditor should immediately notify the SEC

Question 59

Every audit will involve _______.

A)conflicts with management pertaining to estimates
B)relying on the internal audit function for production of evidentiary matter
C)some amount of substantive testing because audit standards require it for relevant assertions
D)no substantive testing because audit standards require it not to be conducted for relevant assertions

Question 60

A reliance on controls strategy would involve _______.

A)the auditor performing primarily tests of controls
B)the auditor performing primarily substantive procedures
C)obtaining written assertions and representations from management
D)the external auditor relying on the internal audit function

Question 61

Which of the following procedures aim to provide sufficient appropriate audit evidence on which to base conclusions at year-end when substantive procedures were performed at an interim date?

A)Roll-forward procedures
B)Analytical procedures
C)Auditing procedures
D)Interim procedures

Question 62

When the audit population can efficiently be tested using traditional audit tests, the auditor is more likely to use _______.

A)audit sampling
B)audit data analytics
C)substantive procedures
D)none of the above is correct

Question 63

An accounting estimate is _______.

A)an exact monetary amount when a precise means of measurement is available
B)an approximation of a monetary amount when a precise means of measurement is not available
C)prohibited by GAAP and should be questioned by the auditor
D)a figure that should be left to the external auditor to determine at the end of the year

Question 64

An example of a qualitative factor auditors will consider when determining sample size is _______.

A)the accounts receivable turnover ratio
B)the days in receivables ratio
C)the percentage of bad debt expense
D)significant turnover in the accounts receivable department

Question 65

The amount of estimation uncertainty is affected by _______.

A)the nature of the accounting estimate
B)the subjectivity of the assumptions used to make the estimate
C)the extent to which a generally accepted method or model is available to aid in developing the estimate
D)All of these answer choices are correct.

Question 66

One method of selecting specific items from a population when testing for overstatement is to _______.

A)select items that are over a certain dollar amount
B)select items that are identical dollar amounts
C)allow the internal auditors to select them
D)allow management to select them

Question 67

If the risk of material misstatement is low and detection risk is high _______.

A)then a smaller sample size should be selected
B)then a larger sample size should be selected
C)then control risk should be assessed as high
D)the auditor should consider outsourcing the audit work to the internal audit function

Question 68

Accounting estimates, by their nature _______.

A)involve objective decision making on the part of management
B)involve subjective decision making on the part of management
C)should cause little or no variance at the end of the period
D)should not be estimated by management, but rather by the auditor at the end of the period

Question 69

The auditor is more likely to use audit sampling when _______.

A)professional standards expect the auditor to perform certain audit procedures
B)evidence to support the audit test is not available in electronic form
C)the audit population is relatively small and can efficiently be tested using traditional audit tests
D)All of these answer choices are correct.

Question 70

Once the final outcome of a transaction or event occurs _______.

A)it is expected that there will be a difference between the outcome of the accounting estimate and the amount originally recognized or disclosed in the financial statements
B)it is expected that there will be no difference between the outcome of the accounting estimate and the amount originally recognized or disclosed in the financial statements
C)the amount should be adjusted to match the estimated balance
D)the auditor should not concern themselves with investigating abnormally large variances

Question 71

Statistical sampling _______.

A)should generally not be used for auditing engagements
B)is typically less complicated than non-statistical sampling
C)can be used in addition to testing specific items from a population
D)can be used instead of testing specific items from a population

Question 72

The auditor is likely to use audit sampling in which of the following cases?

A)Evidence to support the audit test is not available in electronic form.
B)The audit population is relatively large.
C)Relevant data is not reliable.
D)Relevant data is in different formats.

Question 73

Auditors can use statistical audit sampling _______.

A)to determine which clients to accept
B)to select a sample of items to test
C)as a means of testing the system of internal control
D)to determine which accounts should not be audited

Question 74

AU-C 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures states _______.

A)the objective of the auditor is to obtain sufficient appropriate evidence that accounting estimates are reasonable and disclosures are adequate
B)the objective of the internal auditor is to obtain sufficient appropriate evidence that accounting estimates are reasonable and disclosures are adequate
C)the objective of the auditor is to obtain sufficient appropriate evidence that accounting estimates are reasonable only
D)the objective of the auditor is to obtain sufficient appropriate evidence that disclosures are adequate only

Question 75

Financial statements include _______.

A)a variety of items that cannot be measured precisely and must be estimated by client management
B)a variety of items that can be measured precisely and must be estimated by client management
C)a variety of items that cannot be measured precisely and must be estimated by the internal auditors
D)a variety of items that can be measured precisely and should not be estimated by client management

Question 76

In general, accounting estimates with a high degree of estimation _______.

A)uncertainty pose a greater risk of material misstatement
B)uncertainty pose a smaller risk of material misstatement
C)uncertainty pose no risk of material misstatement
D)serve to lower inherent risk

Question 77

In general, an auditor is more likely to use audit data analytics (ADA) when which of the following conditions exist?

A)Evidence to support the audit test is available in electronic form.
B)Relevant data is reliable and internal controls over the reliability of data are strong.
C)Relevant data is clean or can be cleaned up easily.
D)All of these answer choices are correct.

Question 78

The extent of substantive procedures refers to _______.

A)how much testing will be performed outside of a class of transactions or account balance
B)how much testing will be performed within a class of transactions or account balance
C)the extent of the cost associated with performing a particular audit procedure
D)the extent to which management agree with the procedures performed

Question 79

Estimation uncertainty is defined as _______.

A)the susceptibility of an accounting estimate and related disclosures to be accurate
B)the susceptibility of an accounting estimate and related disclosures due to an inherent lack of precision in its measurement
C)the uncertainty surrounding the ultimate cost of the audit
D)the uncertainty surrounding which staff members to assign to a particular audit

Question 80

AU-C 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures states the objective of the auditor is to obtain sufficient appropriate evidence that _______.

A)the accounting estimates are reasonable
B)accounting estimates are reasonable, but disclosures are not adequate
C)accounting estimates are reasonable, and disclosures are adequate
D)disclosures are adequate