Question 1

An auditor wishes to perform tests of controls on a ABC Ltd's cash disbursements procedures.If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:

Accepted Answer

Observation and enquiry are the most suitable methods for testing controls when there is no audit trail of documentary evidence. Observation allows the auditor to see the control procedures being performed in real-time, while enquiry involves asking knowledgeable individuals about the procedures.

Question 2

An auditor may decide to assess control risk at high for certain assertions because the auditor believes:

Accepted Answer

The auditor may believe that evaluating the effectiveness of control policies and procedures is inefficient, and therefore may decide to assess control risk at high for certain assertions. This means that the auditor believes there is a high risk that material misstatements could occur in the financial statements, and as a result, more substantive testing may be necessary.

Question 3

Which of the following tests of control most likely would help assure an auditor that goods shipped are properly billed? Checking that the client has:

Accepted Answer

Examining shipping documents for matching sales invoices would provide assurance that goods shipped are properly billed as it ensures that sales invoices are properly prepared and billed for goods actually shipped. The other options are also tests of control, but they do not directly relate to the specific control of ensuring proper billing for goods shipped.

Question 4

Tracing shipping documents to pre-numbered sales invoices provides evidence that:

Accepted Answer

Tracing shipping documents to pre-numbered sales invoices helps ensure that shipments to customers were indeed invoiced, indicating that the sales transaction was recorded. This process does not directly address whether there were no duplicates, if all ordered goods were shipped, or if all invoices were accounted for.

Question 5

Assessing control risk at a level below high most likely would involve:

Accepted Answer

Assessing control risk at a level below high would involve identifying internal controls relevant to specific assertions and determining their effectiveness. This may lead to a reduction in the extent and nature of substantive testing, as the reliance on controls increases. Changing the timing of substantive tests, reducing inherent risk, or performing more extensive substantive tests would not necessarily be the best approach for assessing control risk at a lower level.

Question 6

While auditing at Bandana Ltd and undertaking tests of controls which are related to controls built around their integrated sales and purchases system, which assertion would be of least interest to you as auditor?

Accepted Answer

Rights and obligations assertion is least important in the context of an integrated sales and purchases system as it pertains to legal ownership and contractual arrangements, which are not directly related to the system controls. The other three assertions (accuracy, occurrence, completeness) are critical components of system controls and are directly related to the integrity of the transactions processed through the system.

Question 7

To determine whether internal control structure policies and procedures operated effectively to minimise errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the:

Accepted Answer

The bill of lading file includes information about shipments made by the company, including invoice information. Therefore, selecting a sample of transactions from this file would allow the auditor to determine whether internal control structure policies and procedures operated effectively to minimise errors of failure to invoice a shipment. The customer order file, accounts receivable master file, and goods received notes file may not include all the necessary information to evaluate this control.

Question 8

In the examination of which of the following general ledger accounts will tests of controls be particularly appropriate?

Accepted Answer

Tests of controls are particularly appropriate for sales as it is a revenue account which involves significant risks of misstatement, such as overstatement of sales or improper recognition of revenue.

Question 9

Evidence about which aspect(s) of internal control is usually gained when the auditor is assessing control risk?

Accepted Answer

The answer of Evidence about which aspect(s) of internal control...

Question 10

Which of the following procedures most likely would not be included as part of an auditor's tests of controls?

Accepted Answer

Analytical procedures are typically used in substantive testing to evaluate the reasonableness of account balances, rather than as part of tests of controls which are specifically designed to assess the effectiveness of a client's internal controls. Enquiry, inspection, and observation are all common tests of controls that may be used by auditors to evaluate the effectiveness of a client's internal controls.

Question 11

Which of the following audit tests would be regarded as a test of controls?

Accepted Answer

Tests of the signatures on sales orders to a list of approved signatories is a test of controls because it is assessing the effectiveness of the company's internal control system over authorization of sales orders. The other options are substantive tests, where the auditor is testing the accuracy and completeness of the financial statements.

Question 12

Test of controls must be performed:

Accepted Answer

Testing of controls is necessary to ensure that the controls that are to be relied upon are operating effectively and consistently throughout the entire year. This helps in reducing the control risk and achieving the audit objective. Therefore, option A is the correct answer. Options B, C, and D are not necessarily relevant factors for determining the need for testing of controls.

Question 13

For effective internal control, the billing function should be performed by the:

Accepted Answer

The accounting department is responsible for billing as it requires recording and tracking of revenue and accounts receivable. This ensures that a proper system of checks and balances can be established, helping to prevent errors and fraud. The credit and collection department focuses on customer creditworthiness and collecting outstanding balances, while the sales and shipping departments are responsible for generating sales and ensuring that the products are delivered to customers.

Question 14

After obtaining an understanding of internal control and assessing control risk of an entity, an auditor decided not to perform tests of controls.The auditor most likely decided that:

Accepted Answer

The auditor likely concluded that the evidence obtainable from tests of controls would not be sufficient to justify assessing control risk as anything lower than high, indicating a reliance on substantive testing instead.

Question 15

A procedure that would most likely be used by an auditor in performing tests of controls that involve segregation of functions and that leave no transaction trail is:

Accepted Answer

Observation is the best choice in this situation because it allows the auditor to physically observe the employees performing their duties and to ensure that the separation of functions is being properly maintained. Inspection and reconciliation may not be effective in this situation since there may not be a transaction trail to follow, and re-performance may not be feasible if the transaction has already been completed.

Question 16

When undertaking tests of controls which are related to controls built around a major transaction flow, which assertion would be of least interest to the auditor?

Accepted Answer

Valuation and allocation are more relevant to the assertions related to the financial statement balances rather than to the controls around a major transaction flow. Assertions like occurrence, accuracy, and cut-off directly relate to the transaction level and are thus of interest when testing controls around transaction flows.

Question 17

After obtaining an understanding of an entity's internal control system, an auditor may assess control risk at a high level for some account balances because he or she:

Accepted Answer

If the auditor believes that the internal controls are unlikely to be properly or effectively operating, then they may assess control risk at a high level for some account balances. This means that they believe that there is a higher risk of material misstatements in those account balances due to weaknesses in the internal control system. The other options, such as identifying internal controls that are likely to prevent material misstatements or performing tests of controls to reduce detection risk, would lead the auditor to assess control risk at a lower level. The lack of documentation of internal controls may also indicate weaknesses but is not necessarily a determining factor in the assessment of control risk.

Question 18

While auditing Georgie Ltd you have identified as a risk whether all sales have occurred.The procedure that will be most effective in verifying this assertion is:

Accepted Answer

Selecting a sample of invoices and vouching them to delivery dockets ensures that the sales recorded in the financial statements actually occurred and were properly documented, directly addressing the risk of whether all sales have occurred.

Question 19

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of:

Accepted Answer

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year are concerned with cut-off. Cut-off is the timing of transactions, where transactions are recorded in the appropriate accounting period. By testing the cut-off of credit sales, auditors can ensure that all credit sales made before the end of the year have been properly recorded in the current year's financial statements.

Question 20

Based on a study and evaluation completed at an interim date, the auditor concludes that no significant internal accounting control weaknesses exist.The records and procedures would most likely be tested again at year-end if:

Accepted Answer

The auditor would test the records and procedures again at year-end if enquiries and observations lead the auditor to believe that conditions have changed. This would suggest that there could be new internal control weaknesses or that existing weaknesses have become more significant, requiring further testing. The other options (A, B, and D) do not necessarily require additional testing at year-end, as they do not indicate a change in the conditions or risks related to the internal accounting control system.

Quiz 8: Tests of Controls