Question 1

Audit evidence concerning segregation of duties ordinarily is best obtained by:

Accepted Answer

Choice "B" is correct. Audit evidence concerning segregation of duties ordinarily is best obtained by the auditor observing the employees as they apply control procedures. Generally, the auditor's direct, personal knowledge obtained through observation, inspection and physical examination is more persuasive than indirect information. Choice "A" is incorrect. Performing tests of transactions that corroborate management's financial statement assertions would provide little audit evidence concerning segregation of duties. Choice "C" is incorrect. Obtaining a flowchart of activities performed by available personnel may assist the auditor in understanding the design of the internal control system, but it provides no audit evidence regarding whether the segregation of duties is actually functioning as designed. Choice "D" is incorrect. Developing audit objectives that reduce control risk provides no audit evidence regarding the segregation of duties.

Question 2

An auditor generally tests the segregation of duties related to inventory by:

Accepted Answer

Choice "A" is correct. Tests of controls that do not provide documentary evidence (such as those controls related to segregation of duties) are generally tested by personal inquiry and observation by the auditor. Choice "B" is incorrect. Test counts and cut-off procedures are effective substantive tests of inventory (existence assertion). Choice "C" is incorrect. Analytical procedures and invoice recomputation are substantive tests performed by the auditor to gather evidence regarding management's assertion of valuation of the inventory. Choice "D" is incorrect. Document inspection and reconciliation generally is not helpful in testing segregation of duties, since even appropriate segregation often does not provide documentary evidence.

Question 3

Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of internal control?

Accepted Answer

Choice "C" is correct. Observation of client personnel provides an auditor with the most assurance about the effectiveness of the operation of an internal control. Choice "A" is incorrect. Observation by the auditor provides more assurance than mere inquiry. Inquiry alone generally will not support a conclusion for a lower assessed level of control risk. Choices "B" and "D" are incorrect. Recomputation of account balance amounts and confirmation with outside parties are substantive tests of account balances, not tests of controls.

Question 4

Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of internal control?

Accepted Answer

Choice "D" is correct. Observation of client personnel is the audit technique most likely to provide an auditor with the most assurance about the effectiveness of the operation of an internal control. This technique is especially effective for controls that leave little or no audit trail. Choice "A" is incorrect. Confirmation with outside parties is a common substantive test (direct test of an account balance), not a procedure used to test controls. Choice "B" is incorrect. While inquiry of client personnel can provide some evidence about the effectiveness of the operation of internal control, the auditor's direct observation generally provides greater assurance than does inquiry. Choice "C" is incorrect. Recomputation of account balance amounts is a substantive test, not a test of controls.

Question 5

What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of controls?

Accepted Answer

Choice "C" is correct. If it would take less time to perform substantive tests than it would to perform tests of controls, and if there is no other reason to test controls (i.e., if there is not a high degree of electronic processing), the auditor would not be likely to test controls. Choice "A" is incorrect. In order to assess control risk at a low level, tests of controls would need to be performed. However, if it is more efficient to perform substantive tests, the auditor would not be likely to test controls. Choice "B" is incorrect. If it would take less time to perform substantive tests than it would to perform tests of controls, and if there is no other reason to test controls (i.e., if there is not a high degree of electronic processing), the auditor would not be likely to test controls. Choice "D" is incorrect. Substantive procedures are always be necessary for all assertions relevant to material transaction classes, account balances, and disclosures. Assuming inventory is material, tests of controls alone would not be sufficient.

Question 6

Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls?

Accepted Answer

Choice "A" is correct. The extent of the auditor's consideration of the client's internal controls is affected by a variety of factors, with the primary goal being to obtain a sufficient understanding the entity and its environment, including its internal control. The amount of time budgeted to complete the audit should not be a primary factor in determining the extent of consideration of the client's internal controls--if more time is needed to adequately consider internal control, then the budget should be revised. Choice "B" is incorrect. How frequently the control is performed would affect the extent of the auditor's consideration of the client's internal controls. Choice "C" is incorrect. The expected deviation rate would affect the extent of the auditor's consideration of the client's internal controls. Choice "D" is incorrect. The extent to which other tests provide evidence about the same assertion would affect the extent of the auditor's consideration of the client's internal controls.

Question 7

To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including:

Accepted Answer

Choice "A" is correct. Tests of controls include such procedures as inspecting documentation, inquiry, observation, and reperformance. Choice "B" is incorrect. Analytical procedures are used for planning purposes, as substantive tests, and as an overall final review, but they do not provide evidence about control risk. Choice "C" is incorrect. Calculation is used as a substantive test rather than as a test of controls. Choice "D" is incorrect. Confirmation represents a substantive test rather than a test of controls.

Question 8

For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the controls by:

Accepted Answer

Choice "B" is correct. Controls for which documentary evidence does not exist, such as segregation of duties, would most likely be tested through observation and inquiry. Choice "A" is incorrect. Corroboration is a substantive test, which generally relies on documentary evidence. Choice "C" is incorrect. Vouching is a substantive test, which generally requires documentary evidence. Choice "D" is incorrect. Confirmation and recomputation are substantive tests, which generally depend on documentation.

Question 9

After obtaining an understanding of the entity and its environment, including its internal control, an auditor decided to perform tests of controls. This is likely because:

Accepted Answer

Choice "A" is correct. After obtaining an understanding the entity and its environment, including its internal control, the auditor may make a risk assessment that assumes controls are operating effectively. In such cases, the auditor performs tests of controls to obtain evidence supporting this assessment. Choice "B" is incorrect. If evidence to support a reduction in control risk is not available, tests of controls would, by definition, not be possible. Choice "C" is incorrect. When auditors decide to perform tests of controls, they have made a preliminary assessment that controls are operating effectively. Accordingly, the performance of tests of controls is not indicative of an increase in the assessed level of control risk. Choice "D" is incorrect. When many internal control weaknesses are identified, the auditor would not be likely to perform tests of controls. The assessed level of control risk is increased, and more reliance would be placed on substantive tests as opposed to tests of controls.

Question 10

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?

Accepted Answer

Choice "C" is correct. When auditing procedures are performed before year-end, additional procedures should be performed to extend the interim conclusions to year-end. Large balances would be tested by reviewing supporting evidence, and significant changes in the balance would also be investigated. Choice "A" is incorrect. The auditor would not send confirmations for all new customer balances, but instead would focus on those that appear material. Choice "B" is incorrect. The purpose of performing tests at interim is to minimize the amount of work that needs to be performed at year end, to improve efficiency. If confirmations were sent at interim, and the auditor was satisfied with the results of that testing, there would be no reason to send additional confirmations. Rather, interim conclusions would be extended by focusing on any material changes in the account, including new, large balances. Choice "D" is incorrect. Review of subsequent cash collections is a means of supporting a receivables balance when no confirmation response has been received. This procedure generally would not be performed as a means of extending interim conclusions to year-end.

Question 11

Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?

Accepted Answer

Choice "D" is correct. Preparation of system flowcharts may aid in the auditor's understanding of internal control, but would not indicate whether controls were actually operating as designed. Choices "A", "B", and "C" are incorrect. Inquiry, inspection, observation (and reperformance) are all tests that may be used to evaluate the operating effectiveness of a control.

Question 12

Which of the following is not part of obtaining an understanding of internal control?

Accepted Answer

Choice "B" is correct. The auditor is not required to obtain knowledge about operating effectiveness as part of the understanding of internal control. This knowledge is obtained later, for specific controls on which the auditor plans to rely. Choices "A", "C", and "D" are incorrect. During the planning phase of the audit, the auditor obtains an understanding of the internal control system by considering: - The types of misstatements that may occur. - The risk that misstatements may occur. - Factors that influence the design of tests of controls and substantive tests. - The assessment of inherent risk. - Judgments about materiality. - The complexity and sophistication of the entity's operations and systems. - The use of manual vs. computerized control procedures. Such knowledge may be obtained by appropriate inquiry, inspection, or observation. Knowledge may also be obtained based on previous experience with the client and/or an understanding of the industry in which the entity operates.

Question 13

After obtaining an understanding of internal control and performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely concluded that the:

Accepted Answer

Choice "A" is correct. When an auditor decides not to perform tests of controls, the auditor most likely concluded that the additional evidence to support a reduction in control risk was not cost-beneficial to obtain. In other words, the additional costs that would be incurred to support a lower assessed level of control risk would not be offset by the anticipated cost savings resulting from a lower level of substantive tests. Choice "B" is incorrect. The assessed level of inherent risk (which is the susceptibility of an assertion to a material misstatement based upon the nature of the account balance or transaction class) exists independently from and bears no direct relationship to control risk. Choice "C" is incorrect. Even if internal control is properly designed, it cannot justifiably be relied upon unless tests of controls are performed. Choice "D" is incorrect. When performing additional tests of controls, an auditor is attempting to support a lower level of control risk, not higher.

Question 14

Which of the following statements is correct concerning an auditor's assessment of control risk?

Accepted Answer

Choice "A" is correct. Some risk assessment procedures performed to obtain an understanding of internal control may provide evidence about operating effectiveness, even if they were not intended for that purpose. This is possible because the procedures performed to achieve one objective may also provide evidence regarding the other. Choice "B" is incorrect. Audit evidence that was obtained in prior audits about the effective design or operation of internal controls may be considered by the auditor in assessing control risk in the current audit. Choice "C" is incorrect. The auditor is always required to document the assessment of risk and the basis for the assessment. Choice "D" is incorrect. The lower the assessed level of control risk (that is, the greater the reliance placed on the control), the more assurance the auditor must gather that the controls are operating effectively.

Question 15

Which of the following are considered control environment factors?

Accepted Answer

Choice "c" is correct. Control environment factors include: 1. Communication and enforcement of integrity and ethical values. 2. Commitment to competence. 3. Participation of those charged with governance. 4. Management's philosophy and operating style. 5. Organizational structure. 6. Assignment of authority, responsibility, and accountability. 7. Human resource policies and practices. Choice "A" is incorrect. Detection risk is the risk that an auditor's procedures will lead to the conclusion that a material error does not exist in an account balance when, in fact, such error does exist. Choices "B" and "D" are incorrect, per the above.

Question 16

An auditor's primary consideration in evaluating controls is whether specific controls:

Accepted Answer

Choice "A" is correct. An auditor's primary consideration in evaluating controls is whether specific controls affect financial statement assertions, since ultimately the auditor must render an opinion on whether those assertions are fairly stated. Choice "B" is incorrect. The five components of internal control provide a useful framework for the auditor to evaluate the impact of such controls on an audit, but such classification is not the auditor's primary consideration. Choice "C" is incorrect. Although a proper system of internal control may improve the client's operational efficiency, it is not a primary consideration for the auditor. Choice "D" is incorrect. The auditor controls detection risk by varying the nature, timing, and extent of substantive tests. Whether or not a proper system of controls is in place affects control risk, not detection risk.

Question 17

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:

Accepted Answer

Choice "B" is correct. Tests of controls used in assessing control risk ordinarily include procedures such as inquiry of appropriate entity personnel, inspection of documents and reports indicating performance of the policy or procedure, observation of the application of the policy or procedure, and reperformance of the application of the policy or procedure by the auditor. Choice "A" is incorrect. Analytical procedures are used in planning the audit, as a form of substantive testing, and as a final review. They are not useful in assessing control risk. Choice "C" is incorrect. Confirmation is a form of substantive testing, not a test of controls for assessing control risk. Choice "D" is incorrect. Verification is a form of substantive testing, not a test of controls for assessing control risk.

Question 18

An auditor may decide not to test controls related to certain assertions because the auditor believes:

Accepted Answer

Choice "B" is correct. An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believes evaluating the effectiveness of controls is inefficient (i.e., it would be more efficient to test the assertions substantively). Choice "A" is incorrect. Whether there is sufficient appropriate evidence to support the assertions relates to the auditability of the financial statements, whereas the decision whether or not to test controls relates to the audit strategy to be used (i.e., the balance between tests of controls and substantive testing). Choice "C" is incorrect. The auditor will need to test controls if more emphasis on tests of controls than substantive tests is warranted. Choice "D" is incorrect. The auditor will generally consider the relationship of assertions to specific account balances whether or not tests of controls are performed.

Question 19

Which of the following statements concerning control risk is correct?

Accepted Answer

Choice "A" is correct. Assessing control risk and obtaining an understanding of an entity's internal control may be performed concurrently. Choices "B" and "C" are incorrect. Substantive testing can never be entirely eliminated for significant transaction classes. Choice "D" is incorrect. A standard procedure in assessing control risk is to consider evidence obtained in prior audits about the operation of control activities.

Question 20

Audit evidence concerning proper segregation of duties ordinarily is best obtained by:

Accepted Answer

Choice "D" is correct. Audit evidence concerning proper segregation of duties ordinarily is best obtained by direct personal observation of the employees who apply control activities, especially if the control activities do not leave an audit trail. Choices "A" and "C" are incorrect. Preparation of a flowchart of duties performed by available personnel and reviewing job descriptions would assist the auditor in understanding internal control, but would provide no audit evidence regarding whether such procedures are actually functioning as documented. Choice "B" is incorrect. Inquiring whether control activities operated consistently throughout the period would provide a good source of information, but inquiry alone is not as persuasive as direct personal observation.

Exam 1: CPA Auditing and Attestation Exam

Audit evidence concerning segregation of duties ordinarily is best obtained by:

An auditor generally tests the segregation of duties related to inventory by:

Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of internal control?

Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of internal control?

What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of controls?

Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls?

To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including:

For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the controls by:

After obtaining an understanding of the entity and its environment, including its internal control, an auditor decided to perform tests of controls. This is likely because:

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?

Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?

Which of the following is not part of obtaining an understanding of internal control?

After obtaining an understanding of internal control and performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely concluded that the:

Which of the following statements is correct concerning an auditor's assessment of control risk?

Which of the following are considered control environment factors?

An auditor's primary consideration in evaluating controls is whether specific controls:

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:

An auditor may decide not to test controls related to certain assertions because the auditor believes:

Which of the following statements concerning control risk is correct?

Audit evidence concerning proper segregation of duties ordinarily is best obtained by: