Question 1

Auditors use substantive analytical procedures and tests of details of balances to satisfy planned control risk.

Accepted Answer

Substantive analytical procedures are used to obtain evidence about the completeness, accuracy and validity of account balances or transactions. Tests of details of balances are used to test specific account balances or transactions. These procedures are used by auditors to obtain evidence about the accuracy and completeness of financial statements, not to satisfy planned control risk. Control risk is managed through the testing of controls and assessing the effectiveness of the systems and processes in place.

Question 2

Auditors must perform tests of controls separately from substantive tests of transactions.

Accepted Answer

Auditors often perform tests of controls and substantive tests of transactions simultaneously, as the two are not mutually exclusive and can be integrated to assess both the effectiveness of controls and the accuracy of financial transactions.

Question 3

Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor's risk assessment procedures.

Accepted Answer

This statement correctly describes the purpose of risk assessment procedures in an audit.

Question 4

For automated controls, the auditor's procedures to determine whether the automated control has been implemented may also serve as the test of that control.

Accepted Answer

This statement is true. The auditor can evaluate whether an automated control has been implemented by performing procedures such as reviewing documentation, interviewing personnel, and examining system settings. If the auditor determines that the control has been implemented effectively, they can also consider this as evidence of the control's operating effectiveness.

Question 5

Risk assessment procedures are performed to assess the risk of material misstatement in the financial statements.

Accepted Answer

Risk assessment procedures are one of the components of an audit, and they are performed to assess the risk of material misstatement in the financial statements. These procedures help auditors to identify the areas that have a higher risk of misstatement and allocate their audit resources accordingly.

Question 6

Describe the five types of audit tests. 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 7

Tests of details of balances emphasize the overall reasonableness of transactions and the general ledger balances.

Accepted Answer

Tests of details of balances focus on verifying the accuracy, completeness, and validity of the balances reported in the financial statements, rather than assessing the overall reasonableness of transactions and general ledger balances.

Question 8

List each of the five types of audit tests.

Accepted Answer

The answer of List each of the five types of...

Question 9

Procedures to obtain an understanding of internal control generally provide sufficient appropriate evidence that a control is operating effectively.

Accepted Answer

While procedures to obtain an understanding of internal control can provide some evidence about the effectiveness of a control, additional testing and evaluation of the control is necessary to provide sufficient appropriate evidence.

Question 10

Auditors can perform tests of controls separately from all other tests; therefore, it is inefficient to perform tests of controls, separately, from substantive tests of transactions.

Accepted Answer

Auditors can perform tests of controls separately from substantive tests of transactions. In fact, it is often beneficial to test controls first to assess the risk of material misstatement before performing substantive tests. However, it is not inefficient to separate the two types of tests as they serve different purposes in the audit process.

Question 11

Tests of controls, either manual or automated, may include the following types of evidence and procedures. Which of these procedures is not the same as those procedures used to obtain an understanding of internal controls?

Accepted Answer

Reperforming client procedures is not a procedure used to obtain an understanding of internal controls. It is a procedure used in substantive testing to test the effectiveness of controls. The other three procedures are commonly used to obtain an understanding of internal controls.

Question 12

For automated controls, the auditor's procedures to determine whether the automated control has been implemented cannot also serve as the test of that control.

Accepted Answer

The auditor's procedures to determine whether an automated control has been implemented can also serve as the test of that control, because in the process of verifying implementation, the auditor often directly tests the control's effectiveness and functionality.

Question 13

Tests of controls are performed to support a reduced assessment of detection risk.

Accepted Answer

Tests of controls are performed to evaluate the effectiveness of an entity's internal controls, not directly to support a reduced assessment of detection risk. Detection risk relates to the risk that auditors fail to detect material misstatements, and while effective controls can indirectly affect this risk, tests of controls primarily aim to assess control risk.

Question 14

One factor that determines the amount of additional evidence required for tests of controls is the planned reduction in control risk.

Accepted Answer

The planned reduction in control risk affects the acceptable level of detection risk and, therefore, the amount of additional evidence required for tests of controls. If the planned reduction in control risk is greater, more evidence is required to achieve that reduction.

Question 15

The amount of additional evidence required for tests of controls depends on two things: the extent of evidence obtained in gaining an understanding of internal controls, and the planned reduction in detection risk.

Accepted Answer

The answer of The amount of additional evidence required for...

Question 16

Tests of controls should be performed after substantive tests of transactions.

Accepted Answer

Tests of controls should be performed prior to substantive tests of transactions to evaluate the effectiveness of the client's internal controls. This allows auditors to assess the risk of material misstatements and tailor their substantive testing procedures accordingly.

Question 17

Substantive tests are procedures designed to test for dollar misstatements that directly affect the correctness of financial statements balances and disclosures. Substantive tests are often called monetary misstatements.

Accepted Answer

Substantive tests are indeed designed to test for dollar misstatements that directly impact financial statement balances and disclosures. These misstatements are sometimes referred to as monetary misstatements.

Question 18

Substantive tests of transactions affect control risk but do not affect planned detection risk.

Accepted Answer

Substantive tests of transactions are designed to detect material misstatements in the financial statements. They do not directly affect control risk, which is the risk that a misstatement that could occur in an account will not be prevented or detected and corrected on a timely basis by the entity's internal control. Instead, they affect the auditor's assessment of detection risk, which is the risk that the audit procedures will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements. Control risk is assessed independently of the audit procedures and is related to the effectiveness of the entity's internal controls.

Question 19

Assume the beginning balance in cash was audited in the prior year and is considered to be correct. In the current year, the auditor verifies that sales and cash receipts transactions are correctly recorded in the accounting records and posted to the general ledger. Before the auditor can reach a conclusion about the ending balance in the cash account in the current year, cash disbursement transactions will have to be audited.

Accepted Answer

The auditor needs to audit cash disbursement transactions to ensure that the cash balance is correct at the end of the period. Without verifying cash disbursements, the auditor cannot fully assess the accuracy of the ending cash balance.

Question 20

Substantive tests are procedures designed to test for dollar misstatements that directly affect the correctness of financial statement balances.

Accepted Answer

Substantive tests are specifically designed to detect material misstatements that directly impact the financial statement balances. These tests may include examining supporting documentation, verifying the existence of assets and liabilities, testing transactions, and calculating financial ratios. They are performed to provide reasonable assurance that the financial statements are free from material misstatement.

Quiz 13: Overall Audit Strategy and Audit Program