Certified Public Accountant CPA Questions + Answers Part 31
Posted: Tue Feb 22, 2022 6:38 pm
QUESTION 452
An auditor would most likely be concerned with internal controls that provide reasonable assurance about the:
A. Efficiencyofmanagement'sdecision-makingprocess.
B. Appropriatepricestheentityshouldchargeforitsproducts. C. Methods of assigning production tasks to employees.
D. Entity's ability to process and summarize financial data.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. An auditor would most likely be concerned with internal controls that provide reasonable assurance about the entity's ability to process and summarize financial data. Choice "a" is incorrect. The auditor is primarily concerned with the fair presentation of the financial statements, and would not particularly care about the efficiency of management's decision-making process.
Choice "b" is incorrect. The auditor is primarily concerned with the fair presentation of the financial statements. Pricing decisions made by management would not be of much concern, as long as the related transactions were appropriately valued and recorded. Choice "c" is incorrect. The auditor is primarily concerned with the fair presentation of the financial statements. How the client assigns tasks to its employees generally is of little concern to the auditor.
QUESTION 453
An auditor's primary consideration regarding an entity's internal control is whether the controls:
A. Affectthefinancialstatementassertions.
B. Preventmanagementoverride.
C. Relate to the control environment.
D. Reflect management's philosophy and operating style.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. An auditor's primary consideration regarding an entity's internal control is whether the controls affect the financial statement assertions (to evaluate the risk that a material misstatement may exist in the financial statements). Choice "b" is incorrect. An inherent limitation of an entity's internal control is that its effectiveness can be reduced by management override, but whether this occurs or not is not the auditor's primary consideration.
Choice "c" is incorrect. The control environment is a component of internal control, and the auditor needs to understand it, but it is not the auditor's primary consideration. Choice "d" is incorrect. An auditor needs to determine how management's philosophy and operating style affect internal control, but it is not the auditor's primary consideration.
QUESTION 454
The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the: A. Factorsthatraisedoubtsabouttheauditabilityofthefinancialstatements.
B. Operatingeffectivenessofinternalcontrolactivities.
C. Risk that material misstatements exist in the financial statements.
D. Possibility that the nature and extent of substantive tests may be reduced.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that material misstatements exist in the financial statements. Choice "a" is incorrect. Sometimes risk assessment procedures may raise doubts about the auditability of the financial statements, but this is not the ultimate purpose of assessing control risk.
Choice "b" is incorrect. The auditor is required to obtain knowledge about the operating effectiveness of internal controls, if his or her risk assessment is based on the effective operation of controls. Obtaining such knowledge, however, is not the ultimate purpose of assessing control risk.
Choice "d" is incorrect. Although the nature and extent of substantive tests may be reduced based on the results of the control risk assessment, this is not the ultimate purpose of assessing control risk.
QUESTION 455
In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C)
Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. No - Yes. In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the design of controls and whether they have been implemented.
The auditor is not required to obtain knowledge about the "operating effectiveness of controls" as part of obtaining an understanding of internal control. Choices "a", "c", and "d" are incorrect, per the above explanation.
QUESTION 456
Internal control includes which of the following components:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Yes - Yes - Yes - Yes. In addition, "control activities" rounds out the five components of internal control. Choices "a", "b", and "d" are incorrect, per the above.
QUESTION 457
Which of the following statements about internal control is correct?
A. Thereisnorelationshipbetweenanentity'sobjectivesandthecomponentsofinternalcontrol.
B. Internalcontrolisrelevanttotheentireentity,ortoanyofitsoperatingunitsorbusinessfunctions.
C. All of the entity's objectives and related internal controls are relevant to an audit of the entity's financial statements.
D. An understanding of internal control relevant to each of the entity's operating units and business functions is necessary.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. Internal control is relevant to the entire entity, or to any of its operating units or business functions.
Choice "a" is incorrect. There is a direct relationship between:
1. An entity's objectives, which are what the entity strives to achieve, and
2. The components of internal control, which represent what is needed to achieve the objectives. Choice "c" is incorrect. Not all of the entity's objectives and related controls are relevant to an audit of the entity's financial statements.
Choice "d" is incorrect. Although internal control is relevant to each of the entity's operating units and business functions, an understanding of internal control relevant to each operating unit and business function may not be necessary to plan and perform an efficient audit.
QUESTION 458
Objectives of an entity include:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C)
Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. No - Yes - Yes. An entity's objectives consist of financial reporting, operations, and compliance. Information and communication is a component of internal control, not an objective.
Choices "a", "b", and "c" are incorrect, per the above.
QUESTION 459
Internal control over safeguarding of assets may include controls relating to:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. Yes - Yes - No.
Internal control over safeguarding of assets may relate to both financial reporting and operations objectives. For example, controls related to financial reporting might include:
1. Use of a lockbox system for collecting cash, or
2. Passwords for limiting access to accounts receivable data files. Controls related to operations might include controls to prevent the excess use of materials in production. Internal control over safeguarding of assets generally would not relate to compliance objectives. (Note that the auditor generally would only be concerned with the controls relevant to financial reporting, but this question does not ask which controls are important to the auditor.) Choices "b", "c", and "d" are
incorrect, based on the above explanation.
QUESTION 460
The responsibility to establish, maintain and monitor internal controls is that of the entity's:
A. Accountingdepartment. B. Internalauditor.
C. Management.
D. External auditor.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. The entity's management is responsible for establishing, maintaining, and monitoring the entity's internal controls, considering whether those controls are operating as intended, and modifying controls as conditions change. Choice "a" is incorrect. The accounting department is not responsible for establishing, maintaining, and monitoring internal controls.
Choice "b" is incorrect. The internal auditors contribute to the monitoring of the entity's activities, but are not responsible for establishing or maintaining them. Choice "d" is incorrect. The (external) auditor is required to obtain sufficient knowledge of internal control, but is not responsible for establishing, maintaining, and/or monitoring internal control.
QUESTION 461
Internal control is relevant to:
A. Anentireentity.
B. Anentity'soperatingunits.
C. An entity's business functions. D. All of the above.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Internal control is relevant to the entity, its operating units, and its business functions.
Choices "a", "b", and "c" are incorrect. Internal control is relevant to all parts of the entity, although not all controls may be relevant to a financial statement audit.
QUESTION 462
Which of the following is necessary in a financial statement audit?
A. Anunderstandingofinternalcontrolrelevanttoeachofanentity'soperatingunits.
B. Anunderstandingofinternalcontrolrelevanttoeachofanentity'sbusinessfunctions. C. An understanding of internal control relevant to an entity's financial reporting objective. D. An understanding of internal control relevant to an entity's compliance objective.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. An understanding of internal control relevant to an entity's financial reporting objective is necessary as part of audit planning. Choices "a" and "b" are incorrect. An understanding of internal control relevant to each of an entity's operating units and business functions may not always be necessary. Choice "d" is incorrect. Not all compliance objectives are relevant to an audit, since some are not related to financial reporting.
QUESTION 463
Which of the following controls is least likely to be relevant to a financial statement audit?
A. Proceduresthatpreventtheexcessuseofmaterialsinproduction. B. Policiesthatrelatetocompliancewithincometaxregulations.
C. Use of computer passwords to limit access to data files.
D. Generation of production statistics used to evaluate variances.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. Procedures to reduce inefficiency on the production line relate to operational objectives, and not necessarily to financial reporting objectives. Choices "b", "c", and "d" are incorrect. Compliance with income tax regulations, use of passwords to limit data access, and generation of reports to facilitate variance analysis are all important controls related to financial reporting.
QUESTION 464
If a budgetary reporting system provides adequate reports, but the reports are not analyzed and acted upon:
A. Thecontrolhasbeenimplementedandisoperatingeffectively.
B. Thecontrolhasbeenimplementedbutisnotoperatingeffectively.
C. The control has not been implemented and is not operating effectively. D. The control has not been implemented but is operating effectively.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. The fact that budgetary reports are being generated indicates that the control has been implemented. The control, however, does not provide any assurance regarding achievement of the entity's objectives, since the report is not being analyzed or acted upon. Accordingly, the control is not operating effectively. Choices "a", "c", and "d" are incorrect. The control has been implemented but is not operating effectively per the explanation above.
QUESTION 465
In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would:
A. Reviewtheentity'sdescriptionsofinventorycontrols.
B. Performtestcountsofinventoryduringtheentity'sphysicalcount.
C. Analyzeinventoryturnoverstatisticstoidentifyslow-movingandobsoleteitems. D. Analyzemonthlyproductionreportstoidentifyvariancesandunusualtransactions.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor would most likely review the entity's descriptions of inventory controls.
Choice "b" is incorrect. Performing test counts of inventory during the entity's physical count is a substantive procedure performed after obtaining an understanding of internal control. Choice "c" is incorrect. Analyzing inventory turnover statistics to identify slow-moving and obsolete items is a substantive procedure performed after obtaining an understanding of internal control.
Choice "d" is incorrect. Analyzing monthly production reports to identify variances and unusual transactions is a substantive procedure performed after obtaining an
understanding of internal control.
QUESTION 466
Which of the following services performed by another entity would not be considered to be part of the client's information system?
A. Processingoftheclient'saccountingtransactionsbyanelectronicdataprocessingservicecenter. B. Preparationoftheclient'sfinancialstatementsbyanoutsideaccountingorganization.
C. Initiation of the client's weekly payroll transactions by a payroll processing organization.
D. Sale (specifically authorized by the client) of investment securities by an external broker.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Services performed by another organization are not considered to be part of the client's information system if the services provided are limited to executing transactions that are specifically authorized by the client.
Choice "a" is incorrect. A service organization's services are part of an entity's information system if they affect any of the following: How the entity's transactions are initiated; the accounting records, supporting information, and specific accounts in the financial statements involved in the processing and reporting of the entity's transactions; the accounting processing involved from the initiation of transactions to their inclusion in the financial statements, including electronic means used to transmit, process, maintain, and access information; and the financial reporting process used to prepare the entity's financial statements, including significant accounting estimates and disclosures.
Choice "b" is incorrect. As described more fully above, a service organization's services are part of an entity's information system if they affect the initiation, processing, or reporting of the entity's transactions.
Choice "c" is incorrect. As described more fully above, a service organization's services are part of an entity's information system if they affect the initiation, processing, or reporting of the entity's transactions.
QUESTION 467
Which of the following is an inherent limitation in internal control?
A. Incompatibleduties.
B. Lackofsegregationofduties. C. Faultyhumanjudgment.
D. Lack of an audit committee.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C)
Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Inherent limitations in internal control are limitations that exist despite implementation of appropriate controls. For example, faulty human judgment may result in errors in the design or use of internal controls.
Choice "a" is incorrect. Assigning incompatible duties to a particular individual indicates a missing control, rather than an inherent limitation in internal control. Choice "b" is incorrect. Lack of segregation of duties indicates a missing control, rather than an inherent limitation in internal control.
Choice "d" is incorrect. Lack of an audit committee indicates a missing control, rather than an inherent limitation in internal control.
QUESTION 468
Quick Service Center processes the payroll for a variety of clients, including James Industries. Adams, CPA, is Quick's auditor, while Robinson, CPA, is the auditor for James Industries.
Which of the following is not required of Adams?
A. Issuingareportthatdescribesthescopeandnatureoftheproceduresperformed.
B. MakinginquiriesregardingtheprofessionalreputationofRobinson,CPA.
C. Inquiring of management regarding subsequent events that might significantly affect user organizations such as James Industries. D. Obtaining a letter of representation from the management of Quick Service Center.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. The user auditor (Robinson) would make inquiries regarding the professional reputation of the service auditor (Adams), not vice versa. Choice "a" is incorrect. The service auditor is required to describe the scope and nature of the procedures performed.
Choice "c" is incorrect. The service auditor is required to inquire of management regarding subsequent events that would have a significant effect on user organizations. Choice "d" is incorrect. The service auditor is required to obtain a management representation letter.
QUESTION 469
The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:
A. Specificinternalcontrolactivitiesarenotoperatingasdesigned.
B. Thecollectiveeffectofthecontrolenvironmentmaynotachievethecontrolobjectives. C. Tests of controls may fail to identify activities relevant to assertions.
D. Material misstatements may exist in the financial statements.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The auditor's ultimate purpose of assessing control risk is to evaluate the risk of financial statement misstatement.
Choice "a" is incorrect. The auditor's evaluation of whether or not specific internal control activities are operating as designed is part of his/her assessment of control risk; however, the ultimate purpose of making this assessment is to evaluate the risk of financial statement misstatement.
Choice "b" is incorrect. The auditor's evaluation of the collective effect of the control environment is part of his/her assessment of control risk; however, the ultimate purpose of making this assessment is to evaluate the risk of financial statement misstatement. Choice "c" is incorrect. Tests of controls are not used to identify activities relevant to assertions. Tests of controls are used to evaluate the operating effectiveness of internal control in preventing or detecting material misstatements.
QUESTION 470
An auditor's primary consideration in evaluating controls is whether specific controls:
A. Affectfinancialstatementassertions.
B. Canbeclassifiedintooneofthefiveinternalcontrolcomponents. C. Improve the efficiency of the client's operations.
D. Reduce detection risk to a sufficiently low level.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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.
Responding to Assessed Risk
QUESTION 471
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?
A. Sendconfirmationsforallnewcustomerbalancesincurredfromtheinterimdatetoyear-end.
B. Resendconfirmationsforanysignificantcustomerbalancesremainingatyear-end.
C. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end. D. Review cash collections subsequent to the interim date and the year-end.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 472
In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:
A. Inquiryandanalyticalprocedures. B. Reperformanceandobservation. C. Comparison and confirmation.
D. Inspection and verification.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 473
Which of the following statements is correct concerning an auditor's assessment of control risk?
A. Assessingcontrolriskmaybeperformedconcurrentlyduringanauditwithobtaininganunderstandingoftheentity'sinternalcontrol.
B. Evidenceabouttheoperationofcontrolsinpriorauditsmaynotbeconsideredduringthecurrentyear'sassessmentofcontrolrisk.
C. The basis for an auditor's conclusions about the assessed level of control risk need not be documented unless the auditor's risk assessment is based on the effective operation of controls.
D. The lower the assessed level of control risk, the less assurance the evidence must provide that the controls are operating effectively.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 474
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:
A. Testsofcontrolsandextensivetestsofpropertyandequipmentbalancesattheendoftheyear. B. Analyticalproceduresforcurrentyearpropertyandequipmenttransactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C)
Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Since control risk is assessed at a low level, tests of controls would be required to evaluate the effectiveness of the internal controls to support that assessed level. However, the need for some substantive tests of transactions is never eliminated. Choice "a" is incorrect. Extensive tests of property and equipment balances would not typically be required when control risk is assessed at a low level. Choice "b" is incorrect. Since control risk is to be assessed at a low level, tests of controls would be required. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion. Choice "d" is incorrect. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion. Year-end balances may therefore be unpredictable.
QUESTION 475
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:
A. Theauditor'sriskassessmentisbasedontheeffectiveoperationofcontrols.
B. Evidencetosupportareductionincontrolriskisnotavailable.
C. An increase in the assessed level of control risk is justified for certain financial statement assertions. D. There were many internal control weaknesses that could allow errors to enter the accounting system.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 476
To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including: A. Inquiry.
B. Analyticalprocedures. C. Calculation.
D. Confirmation.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 477
The objective of tests of details of transactions performed as tests of controls is to:
A. Monitorthedesignanduseofentitydocumentssuchasprenumberedshippingforms. B. Determinewhetherinternalcontrolshavebeenimplemented.
C. Detect material misstatements in the account balances of the financial statements.
D. Evaluate whether internal controls operated effectively.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The objective of tests of details used as tests of controls is to evaluate whether an internal control operated effectively.
Choice "a" is incorrect. Tests of details of transactions would not typically be used to monitor the design and use of entity documents.
Choice "b" is incorrect. Tests of details of transactions would not typically be used to determine whether internal controls have been implemented. Choice "c" is incorrect. The objective of tests of details of transactions performed as substantive tests is to detect material misstatements in the financial statements.
QUESTION 478
An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:
A. Confirmationandobservation.
B. Observationandinquiry.
C. Analytical procedures and confirmation. D. Inquiry and analytical procedures.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. For internal controls which leave no audit trail of documentary evidence (e.g., segregation of duties), the auditor must use inquiry and observation to test the procedures. Choice "a" is incorrect. Confirmation is a substantive audit procedure not appropriate for tests of controls.
Choice "c" is incorrect. Analytical procedures and confirmation are substantive audit procedures not appropriate for tests of controls.
Choice "d" is incorrect. Analytical procedures are substantive audit procedures not appropriate for tests of controls.
QUESTION 479
Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?
A. Inquiryofclientpersonnel.
B. Inspectionofdocumentsandreports. C. Observation of client personnel.
D. Preparation of system flowcharts.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 480
Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls?
A. Theamountoftimebudgetedtocompletetheengagement.
B. Howfrequentlythecontrolisperformed.
C. The expected deviation rate from the control.
D. The extent to which other tests provide evidence about the same assertion.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 481
Which of the following statements about performing tests of controls to support a lower level of control risk is not true?
A. Observationbytheauditorprovidesmoreassurancethaninquiryalone.
B. Inquiryalonegenerallywillsupportaconclusionforalowerassessedlevelofcontrolrisk. C. Prior audits may be considered by the auditor in assessing control risk in the current audit. D. An audit of financial statements is a cumulative process.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. Inquiry alone generally will not support a conclusion for a lower assessed level of control risk.
Choices "a", "c", and "d" are incorrect, as the following are true:
A. Observation by the auditor provides more assurance than audit evidence obtained by inquiry alone.
C. Prior audits may be considered by the auditor in assessing control risk in the current audit. D. An audit of financial statements is a cumulative process.
QUESTION 482
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?
A. Inquiryofclientpersonnel.
B. Recomputationofaccountbalanceamounts. C. Observation of client personnel.
D. Confirmation with outside parties.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 483
To obtain audit evidence about control risk, an auditor ordinarily selects tests from a variety of techniques, including:
A. Analysis.
B. Confirmation. C. Reperformance. D. Comparison.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Reperforming the application of relevant controls provides evidence regarding their operating effectiveness.
Choices "a", "b", and "d" are incorrect. Analysis, confirmation, and comparison are substantive tests of account balances, not tests of controls.
QUESTION 484
An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:
A. Inquiryandanalyticalprocedures.
B. Confirmationandobservation.
C. Observation and inquiry.
D. Analytical procedures and confirmation.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. If an auditor wishes to perform a test of controls over a procedure that leaves no audit trail, then the auditor must use observation and inquiry to test the control. Choices "a", "b", and "d" are incorrect. Analytical procedures and confirmation are both substantive tests of balances, not tests of controls.
QUESTION 485
Audit evidence concerning proper segregation of duties ordinarily is best obtained by:
A. Preparationofaflowchartofdutiesperformedbyavailablepersonnel.
B. Inquiringwhethercontrolactivitiesoperatedconsistentlythroughouttheperiod. C. Reviewing job descriptions prepared by the personnel department.
D. Direct personal observation of the employees who apply control activities.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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.
QUESTION 486
An auditor may decide not to test controls related to certain assertions because the auditor believes:
A. Sufficientappropriateevidencetosupporttheassertionsislikelytobeavailable.
B. Evaluatingtheeffectivenessofcontrolsisinefficient.
C. More emphasis on tests of controls than substantive tests is warranted.
D. Considering the relationship of assertions to specific account balances is more efficient.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 487
After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that:
A. Theavailableevidenceobtainedthroughtestsofcontrolswouldnotsupportanincreasedlevelofcontrolrisk. B. Areductionintheassessedlevelofcontrolriskisjustifiedforcertainfinancialstatementassertions.
C. It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests. D. The assessed level of inherent risk exceeded the assessed level of control risk.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. After performing risk assessment procedures, an auditor might decide not to perform tests of controls because it would be inefficient. In other words, the time required to perform tests of controls would be greater than the reduction in time spent on substantive testing. Choice "a" is incorrect. The auditor
might decide not to perform tests of controls if the available audit evidence obtained through those tests would not support a decrease (not increase) in the level of control risk.
Choice "b" is incorrect. A reduction in the assessed level of control risk can only be justified based on tests of controls. If the auditor decides not to perform tests of controls, the assessed level of control risk may not be reduced.
Choice "d" is incorrect. The relationship of inherent risk to control risk does not determine the level of control testing to be performed.
QUESTION 488
For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the controls by:
A. Reperformanceandcorroboration. B. Observationandinquiry.
C. Inspection and vouching.
D. Confirmation and recomputation.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 489
As part of understanding internal control, an auditor is not required to:
A. Considerfactorsthataffecttheriskofmaterialmisstatement.
B. Ascertainwhetherinternalcontrolshavebeenimplemented.
C. Identify the types of potential misstatements that can occur.
D. Obtain knowledge about the operating effectiveness of internal control.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. As part of understanding internal control, an auditor is not required to obtain knowledge about the operating effectiveness of controls. Operating effectiveness is evaluated later, and only for those controls on which the auditor plans to rely. Choice "a" is incorrect. Considering factors that affect the risk of material misstatement is a part of understanding internal control.
Choice "b" is incorrect. Ascertaining whether internal controls have been implemented is required as part of obtaining an understanding of internal control. Choice "c" is incorrect. Identifying the types of potential misstatements that can occur is part of understanding internal control.
QUESTION 490
Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed?
A. Confirmationsofreceivablesverifyingaccountbalances. B. Lettersofrepresentationcorroboratinginventorypricing. C. Attorneys' responses to the auditor's inquiries.
D. Client records documenting the use of EDP programs.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The examination of client records documenting the use of EDP programs is a test of controls.
Choice "a" is incorrect. Confirmations of receivables verifying account balances is a substantive test, not a test of controls.
Choice "b" is incorrect. Obtaining letters of representation corroborating inventory pricing is a substantive test, not a test of controls. Choice "c" is incorrect. Attorneys' responses to the auditor's inquiries are part of a substantive test, not a test of controls.
QUESTION 491
Which of the following statements concerning control risk is correct?
A. Assessingcontrolriskandobtaininganunderstandingofanentity'sinternalcontrolmaybeperformedconcurrently.
B. Controlriskmaybeassessedsufficientlyhightoeliminatesubstantivetestingforsignificanttransactionclasses.
C. Control risk may be assessed sufficiently low to eliminate substantive testing for significant transaction classes.
D. When assessing control risk an auditor should not consider evidence obtained in prior audits about the operation of control activities.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 492
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?
A. Confirmationwithoutsideparties.
B. Inquiryofclientpersonnel.
C. Recomputation of account balance amounts. D. Observation of client personnel.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 493
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:
A. Additionalevidencetosupportareductionincontrolriskwasnotcost-beneficialtoobtain.
B. Assessedlevelofinherentriskexceededtheassessedlevelofcontrolrisk.
C. Internal control was properly designed and justifiably may be relied on.
D. Evidence obtainable through tests of controls would not support an increased level of control risk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 494
An auditor generally tests the segregation of duties related to inventory by:
A. Personalinquiryandobservation.
B. T est counts and cutoff procedures.
C. Analytical procedures and invoice recomputation.
D. Document inspection and reconciliation.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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.
An auditor would most likely be concerned with internal controls that provide reasonable assurance about the:
A. Efficiencyofmanagement'sdecision-makingprocess.
B. Appropriatepricestheentityshouldchargeforitsproducts. C. Methods of assigning production tasks to employees.
D. Entity's ability to process and summarize financial data.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. An auditor would most likely be concerned with internal controls that provide reasonable assurance about the entity's ability to process and summarize financial data. Choice "a" is incorrect. The auditor is primarily concerned with the fair presentation of the financial statements, and would not particularly care about the efficiency of management's decision-making process.
Choice "b" is incorrect. The auditor is primarily concerned with the fair presentation of the financial statements. Pricing decisions made by management would not be of much concern, as long as the related transactions were appropriately valued and recorded. Choice "c" is incorrect. The auditor is primarily concerned with the fair presentation of the financial statements. How the client assigns tasks to its employees generally is of little concern to the auditor.
QUESTION 453
An auditor's primary consideration regarding an entity's internal control is whether the controls:
A. Affectthefinancialstatementassertions.
B. Preventmanagementoverride.
C. Relate to the control environment.
D. Reflect management's philosophy and operating style.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. An auditor's primary consideration regarding an entity's internal control is whether the controls affect the financial statement assertions (to evaluate the risk that a material misstatement may exist in the financial statements). Choice "b" is incorrect. An inherent limitation of an entity's internal control is that its effectiveness can be reduced by management override, but whether this occurs or not is not the auditor's primary consideration.
Choice "c" is incorrect. The control environment is a component of internal control, and the auditor needs to understand it, but it is not the auditor's primary consideration. Choice "d" is incorrect. An auditor needs to determine how management's philosophy and operating style affect internal control, but it is not the auditor's primary consideration.
QUESTION 454
The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the: A. Factorsthatraisedoubtsabouttheauditabilityofthefinancialstatements.
B. Operatingeffectivenessofinternalcontrolactivities.
C. Risk that material misstatements exist in the financial statements.
D. Possibility that the nature and extent of substantive tests may be reduced.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that material misstatements exist in the financial statements. Choice "a" is incorrect. Sometimes risk assessment procedures may raise doubts about the auditability of the financial statements, but this is not the ultimate purpose of assessing control risk.
Choice "b" is incorrect. The auditor is required to obtain knowledge about the operating effectiveness of internal controls, if his or her risk assessment is based on the effective operation of controls. Obtaining such knowledge, however, is not the ultimate purpose of assessing control risk.
Choice "d" is incorrect. Although the nature and extent of substantive tests may be reduced based on the results of the control risk assessment, this is not the ultimate purpose of assessing control risk.
QUESTION 455
In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C)
Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. No - Yes. In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the design of controls and whether they have been implemented.
The auditor is not required to obtain knowledge about the "operating effectiveness of controls" as part of obtaining an understanding of internal control. Choices "a", "c", and "d" are incorrect, per the above explanation.
QUESTION 456
Internal control includes which of the following components:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Yes - Yes - Yes - Yes. In addition, "control activities" rounds out the five components of internal control. Choices "a", "b", and "d" are incorrect, per the above.
QUESTION 457
Which of the following statements about internal control is correct?
A. Thereisnorelationshipbetweenanentity'sobjectivesandthecomponentsofinternalcontrol.
B. Internalcontrolisrelevanttotheentireentity,ortoanyofitsoperatingunitsorbusinessfunctions.
C. All of the entity's objectives and related internal controls are relevant to an audit of the entity's financial statements.
D. An understanding of internal control relevant to each of the entity's operating units and business functions is necessary.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. Internal control is relevant to the entire entity, or to any of its operating units or business functions.
Choice "a" is incorrect. There is a direct relationship between:
1. An entity's objectives, which are what the entity strives to achieve, and
2. The components of internal control, which represent what is needed to achieve the objectives. Choice "c" is incorrect. Not all of the entity's objectives and related controls are relevant to an audit of the entity's financial statements.
Choice "d" is incorrect. Although internal control is relevant to each of the entity's operating units and business functions, an understanding of internal control relevant to each operating unit and business function may not be necessary to plan and perform an efficient audit.
QUESTION 458
Objectives of an entity include:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C)
Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. No - Yes - Yes. An entity's objectives consist of financial reporting, operations, and compliance. Information and communication is a component of internal control, not an objective.
Choices "a", "b", and "c" are incorrect, per the above.
QUESTION 459
Internal control over safeguarding of assets may include controls relating to:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. Yes - Yes - No.
Internal control over safeguarding of assets may relate to both financial reporting and operations objectives. For example, controls related to financial reporting might include:
1. Use of a lockbox system for collecting cash, or
2. Passwords for limiting access to accounts receivable data files. Controls related to operations might include controls to prevent the excess use of materials in production. Internal control over safeguarding of assets generally would not relate to compliance objectives. (Note that the auditor generally would only be concerned with the controls relevant to financial reporting, but this question does not ask which controls are important to the auditor.) Choices "b", "c", and "d" are
incorrect, based on the above explanation.
QUESTION 460
The responsibility to establish, maintain and monitor internal controls is that of the entity's:
A. Accountingdepartment. B. Internalauditor.
C. Management.
D. External auditor.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. The entity's management is responsible for establishing, maintaining, and monitoring the entity's internal controls, considering whether those controls are operating as intended, and modifying controls as conditions change. Choice "a" is incorrect. The accounting department is not responsible for establishing, maintaining, and monitoring internal controls.
Choice "b" is incorrect. The internal auditors contribute to the monitoring of the entity's activities, but are not responsible for establishing or maintaining them. Choice "d" is incorrect. The (external) auditor is required to obtain sufficient knowledge of internal control, but is not responsible for establishing, maintaining, and/or monitoring internal control.
QUESTION 461
Internal control is relevant to:
A. Anentireentity.
B. Anentity'soperatingunits.
C. An entity's business functions. D. All of the above.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Internal control is relevant to the entity, its operating units, and its business functions.
Choices "a", "b", and "c" are incorrect. Internal control is relevant to all parts of the entity, although not all controls may be relevant to a financial statement audit.
QUESTION 462
Which of the following is necessary in a financial statement audit?
A. Anunderstandingofinternalcontrolrelevanttoeachofanentity'soperatingunits.
B. Anunderstandingofinternalcontrolrelevanttoeachofanentity'sbusinessfunctions. C. An understanding of internal control relevant to an entity's financial reporting objective. D. An understanding of internal control relevant to an entity's compliance objective.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. An understanding of internal control relevant to an entity's financial reporting objective is necessary as part of audit planning. Choices "a" and "b" are incorrect. An understanding of internal control relevant to each of an entity's operating units and business functions may not always be necessary. Choice "d" is incorrect. Not all compliance objectives are relevant to an audit, since some are not related to financial reporting.
QUESTION 463
Which of the following controls is least likely to be relevant to a financial statement audit?
A. Proceduresthatpreventtheexcessuseofmaterialsinproduction. B. Policiesthatrelatetocompliancewithincometaxregulations.
C. Use of computer passwords to limit access to data files.
D. Generation of production statistics used to evaluate variances.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. Procedures to reduce inefficiency on the production line relate to operational objectives, and not necessarily to financial reporting objectives. Choices "b", "c", and "d" are incorrect. Compliance with income tax regulations, use of passwords to limit data access, and generation of reports to facilitate variance analysis are all important controls related to financial reporting.
QUESTION 464
If a budgetary reporting system provides adequate reports, but the reports are not analyzed and acted upon:
A. Thecontrolhasbeenimplementedandisoperatingeffectively.
B. Thecontrolhasbeenimplementedbutisnotoperatingeffectively.
C. The control has not been implemented and is not operating effectively. D. The control has not been implemented but is operating effectively.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. The fact that budgetary reports are being generated indicates that the control has been implemented. The control, however, does not provide any assurance regarding achievement of the entity's objectives, since the report is not being analyzed or acted upon. Accordingly, the control is not operating effectively. Choices "a", "c", and "d" are incorrect. The control has been implemented but is not operating effectively per the explanation above.
QUESTION 465
In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would:
A. Reviewtheentity'sdescriptionsofinventorycontrols.
B. Performtestcountsofinventoryduringtheentity'sphysicalcount.
C. Analyzeinventoryturnoverstatisticstoidentifyslow-movingandobsoleteitems. D. Analyzemonthlyproductionreportstoidentifyvariancesandunusualtransactions.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor would most likely review the entity's descriptions of inventory controls.
Choice "b" is incorrect. Performing test counts of inventory during the entity's physical count is a substantive procedure performed after obtaining an understanding of internal control. Choice "c" is incorrect. Analyzing inventory turnover statistics to identify slow-moving and obsolete items is a substantive procedure performed after obtaining an understanding of internal control.
Choice "d" is incorrect. Analyzing monthly production reports to identify variances and unusual transactions is a substantive procedure performed after obtaining an
understanding of internal control.
QUESTION 466
Which of the following services performed by another entity would not be considered to be part of the client's information system?
A. Processingoftheclient'saccountingtransactionsbyanelectronicdataprocessingservicecenter. B. Preparationoftheclient'sfinancialstatementsbyanoutsideaccountingorganization.
C. Initiation of the client's weekly payroll transactions by a payroll processing organization.
D. Sale (specifically authorized by the client) of investment securities by an external broker.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Services performed by another organization are not considered to be part of the client's information system if the services provided are limited to executing transactions that are specifically authorized by the client.
Choice "a" is incorrect. A service organization's services are part of an entity's information system if they affect any of the following: How the entity's transactions are initiated; the accounting records, supporting information, and specific accounts in the financial statements involved in the processing and reporting of the entity's transactions; the accounting processing involved from the initiation of transactions to their inclusion in the financial statements, including electronic means used to transmit, process, maintain, and access information; and the financial reporting process used to prepare the entity's financial statements, including significant accounting estimates and disclosures.
Choice "b" is incorrect. As described more fully above, a service organization's services are part of an entity's information system if they affect the initiation, processing, or reporting of the entity's transactions.
Choice "c" is incorrect. As described more fully above, a service organization's services are part of an entity's information system if they affect the initiation, processing, or reporting of the entity's transactions.
QUESTION 467
Which of the following is an inherent limitation in internal control?
A. Incompatibleduties.
B. Lackofsegregationofduties. C. Faultyhumanjudgment.
D. Lack of an audit committee.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C)
Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Inherent limitations in internal control are limitations that exist despite implementation of appropriate controls. For example, faulty human judgment may result in errors in the design or use of internal controls.
Choice "a" is incorrect. Assigning incompatible duties to a particular individual indicates a missing control, rather than an inherent limitation in internal control. Choice "b" is incorrect. Lack of segregation of duties indicates a missing control, rather than an inherent limitation in internal control.
Choice "d" is incorrect. Lack of an audit committee indicates a missing control, rather than an inherent limitation in internal control.
QUESTION 468
Quick Service Center processes the payroll for a variety of clients, including James Industries. Adams, CPA, is Quick's auditor, while Robinson, CPA, is the auditor for James Industries.
Which of the following is not required of Adams?
A. Issuingareportthatdescribesthescopeandnatureoftheproceduresperformed.
B. MakinginquiriesregardingtheprofessionalreputationofRobinson,CPA.
C. Inquiring of management regarding subsequent events that might significantly affect user organizations such as James Industries. D. Obtaining a letter of representation from the management of Quick Service Center.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. The user auditor (Robinson) would make inquiries regarding the professional reputation of the service auditor (Adams), not vice versa. Choice "a" is incorrect. The service auditor is required to describe the scope and nature of the procedures performed.
Choice "c" is incorrect. The service auditor is required to inquire of management regarding subsequent events that would have a significant effect on user organizations. Choice "d" is incorrect. The service auditor is required to obtain a management representation letter.
QUESTION 469
The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:
A. Specificinternalcontrolactivitiesarenotoperatingasdesigned.
B. Thecollectiveeffectofthecontrolenvironmentmaynotachievethecontrolobjectives. C. Tests of controls may fail to identify activities relevant to assertions.
D. Material misstatements may exist in the financial statements.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The auditor's ultimate purpose of assessing control risk is to evaluate the risk of financial statement misstatement.
Choice "a" is incorrect. The auditor's evaluation of whether or not specific internal control activities are operating as designed is part of his/her assessment of control risk; however, the ultimate purpose of making this assessment is to evaluate the risk of financial statement misstatement.
Choice "b" is incorrect. The auditor's evaluation of the collective effect of the control environment is part of his/her assessment of control risk; however, the ultimate purpose of making this assessment is to evaluate the risk of financial statement misstatement. Choice "c" is incorrect. Tests of controls are not used to identify activities relevant to assertions. Tests of controls are used to evaluate the operating effectiveness of internal control in preventing or detecting material misstatements.
QUESTION 470
An auditor's primary consideration in evaluating controls is whether specific controls:
A. Affectfinancialstatementassertions.
B. Canbeclassifiedintooneofthefiveinternalcontrolcomponents. C. Improve the efficiency of the client's operations.
D. Reduce detection risk to a sufficiently low level.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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.
Responding to Assessed Risk
QUESTION 471
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?
A. Sendconfirmationsforallnewcustomerbalancesincurredfromtheinterimdatetoyear-end.
B. Resendconfirmationsforanysignificantcustomerbalancesremainingatyear-end.
C. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end. D. Review cash collections subsequent to the interim date and the year-end.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 472
In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:
A. Inquiryandanalyticalprocedures. B. Reperformanceandobservation. C. Comparison and confirmation.
D. Inspection and verification.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 473
Which of the following statements is correct concerning an auditor's assessment of control risk?
A. Assessingcontrolriskmaybeperformedconcurrentlyduringanauditwithobtaininganunderstandingoftheentity'sinternalcontrol.
B. Evidenceabouttheoperationofcontrolsinpriorauditsmaynotbeconsideredduringthecurrentyear'sassessmentofcontrolrisk.
C. The basis for an auditor's conclusions about the assessed level of control risk need not be documented unless the auditor's risk assessment is based on the effective operation of controls.
D. The lower the assessed level of control risk, the less assurance the evidence must provide that the controls are operating effectively.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 474
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:
A. Testsofcontrolsandextensivetestsofpropertyandequipmentbalancesattheendoftheyear. B. Analyticalproceduresforcurrentyearpropertyandequipmenttransactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C)
Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Since control risk is assessed at a low level, tests of controls would be required to evaluate the effectiveness of the internal controls to support that assessed level. However, the need for some substantive tests of transactions is never eliminated. Choice "a" is incorrect. Extensive tests of property and equipment balances would not typically be required when control risk is assessed at a low level. Choice "b" is incorrect. Since control risk is to be assessed at a low level, tests of controls would be required. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion. Choice "d" is incorrect. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion. Year-end balances may therefore be unpredictable.
QUESTION 475
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:
A. Theauditor'sriskassessmentisbasedontheeffectiveoperationofcontrols.
B. Evidencetosupportareductionincontrolriskisnotavailable.
C. An increase in the assessed level of control risk is justified for certain financial statement assertions. D. There were many internal control weaknesses that could allow errors to enter the accounting system.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 476
To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including: A. Inquiry.
B. Analyticalprocedures. C. Calculation.
D. Confirmation.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 477
The objective of tests of details of transactions performed as tests of controls is to:
A. Monitorthedesignanduseofentitydocumentssuchasprenumberedshippingforms. B. Determinewhetherinternalcontrolshavebeenimplemented.
C. Detect material misstatements in the account balances of the financial statements.
D. Evaluate whether internal controls operated effectively.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The objective of tests of details used as tests of controls is to evaluate whether an internal control operated effectively.
Choice "a" is incorrect. Tests of details of transactions would not typically be used to monitor the design and use of entity documents.
Choice "b" is incorrect. Tests of details of transactions would not typically be used to determine whether internal controls have been implemented. Choice "c" is incorrect. The objective of tests of details of transactions performed as substantive tests is to detect material misstatements in the financial statements.
QUESTION 478
An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:
A. Confirmationandobservation.
B. Observationandinquiry.
C. Analytical procedures and confirmation. D. Inquiry and analytical procedures.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. For internal controls which leave no audit trail of documentary evidence (e.g., segregation of duties), the auditor must use inquiry and observation to test the procedures. Choice "a" is incorrect. Confirmation is a substantive audit procedure not appropriate for tests of controls.
Choice "c" is incorrect. Analytical procedures and confirmation are substantive audit procedures not appropriate for tests of controls.
Choice "d" is incorrect. Analytical procedures are substantive audit procedures not appropriate for tests of controls.
QUESTION 479
Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?
A. Inquiryofclientpersonnel.
B. Inspectionofdocumentsandreports. C. Observation of client personnel.
D. Preparation of system flowcharts.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 480
Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls?
A. Theamountoftimebudgetedtocompletetheengagement.
B. Howfrequentlythecontrolisperformed.
C. The expected deviation rate from the control.
D. The extent to which other tests provide evidence about the same assertion.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 481
Which of the following statements about performing tests of controls to support a lower level of control risk is not true?
A. Observationbytheauditorprovidesmoreassurancethaninquiryalone.
B. Inquiryalonegenerallywillsupportaconclusionforalowerassessedlevelofcontrolrisk. C. Prior audits may be considered by the auditor in assessing control risk in the current audit. D. An audit of financial statements is a cumulative process.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. Inquiry alone generally will not support a conclusion for a lower assessed level of control risk.
Choices "a", "c", and "d" are incorrect, as the following are true:
A. Observation by the auditor provides more assurance than audit evidence obtained by inquiry alone.
C. Prior audits may be considered by the auditor in assessing control risk in the current audit. D. An audit of financial statements is a cumulative process.
QUESTION 482
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?
A. Inquiryofclientpersonnel.
B. Recomputationofaccountbalanceamounts. C. Observation of client personnel.
D. Confirmation with outside parties.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 483
To obtain audit evidence about control risk, an auditor ordinarily selects tests from a variety of techniques, including:
A. Analysis.
B. Confirmation. C. Reperformance. D. Comparison.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Reperforming the application of relevant controls provides evidence regarding their operating effectiveness.
Choices "a", "b", and "d" are incorrect. Analysis, confirmation, and comparison are substantive tests of account balances, not tests of controls.
QUESTION 484
An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:
A. Inquiryandanalyticalprocedures.
B. Confirmationandobservation.
C. Observation and inquiry.
D. Analytical procedures and confirmation.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. If an auditor wishes to perform a test of controls over a procedure that leaves no audit trail, then the auditor must use observation and inquiry to test the control. Choices "a", "b", and "d" are incorrect. Analytical procedures and confirmation are both substantive tests of balances, not tests of controls.
QUESTION 485
Audit evidence concerning proper segregation of duties ordinarily is best obtained by:
A. Preparationofaflowchartofdutiesperformedbyavailablepersonnel.
B. Inquiringwhethercontrolactivitiesoperatedconsistentlythroughouttheperiod. C. Reviewing job descriptions prepared by the personnel department.
D. Direct personal observation of the employees who apply control activities.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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.
QUESTION 486
An auditor may decide not to test controls related to certain assertions because the auditor believes:
A. Sufficientappropriateevidencetosupporttheassertionsislikelytobeavailable.
B. Evaluatingtheeffectivenessofcontrolsisinefficient.
C. More emphasis on tests of controls than substantive tests is warranted.
D. Considering the relationship of assertions to specific account balances is more efficient.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 487
After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that:
A. Theavailableevidenceobtainedthroughtestsofcontrolswouldnotsupportanincreasedlevelofcontrolrisk. B. Areductionintheassessedlevelofcontrolriskisjustifiedforcertainfinancialstatementassertions.
C. It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests. D. The assessed level of inherent risk exceeded the assessed level of control risk.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. After performing risk assessment procedures, an auditor might decide not to perform tests of controls because it would be inefficient. In other words, the time required to perform tests of controls would be greater than the reduction in time spent on substantive testing. Choice "a" is incorrect. The auditor
might decide not to perform tests of controls if the available audit evidence obtained through those tests would not support a decrease (not increase) in the level of control risk.
Choice "b" is incorrect. A reduction in the assessed level of control risk can only be justified based on tests of controls. If the auditor decides not to perform tests of controls, the assessed level of control risk may not be reduced.
Choice "d" is incorrect. The relationship of inherent risk to control risk does not determine the level of control testing to be performed.
QUESTION 488
For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the controls by:
A. Reperformanceandcorroboration. B. Observationandinquiry.
C. Inspection and vouching.
D. Confirmation and recomputation.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 489
As part of understanding internal control, an auditor is not required to:
A. Considerfactorsthataffecttheriskofmaterialmisstatement.
B. Ascertainwhetherinternalcontrolshavebeenimplemented.
C. Identify the types of potential misstatements that can occur.
D. Obtain knowledge about the operating effectiveness of internal control.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. As part of understanding internal control, an auditor is not required to obtain knowledge about the operating effectiveness of controls. Operating effectiveness is evaluated later, and only for those controls on which the auditor plans to rely. Choice "a" is incorrect. Considering factors that affect the risk of material misstatement is a part of understanding internal control.
Choice "b" is incorrect. Ascertaining whether internal controls have been implemented is required as part of obtaining an understanding of internal control. Choice "c" is incorrect. Identifying the types of potential misstatements that can occur is part of understanding internal control.
QUESTION 490
Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed?
A. Confirmationsofreceivablesverifyingaccountbalances. B. Lettersofrepresentationcorroboratinginventorypricing. C. Attorneys' responses to the auditor's inquiries.
D. Client records documenting the use of EDP programs.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The examination of client records documenting the use of EDP programs is a test of controls.
Choice "a" is incorrect. Confirmations of receivables verifying account balances is a substantive test, not a test of controls.
Choice "b" is incorrect. Obtaining letters of representation corroborating inventory pricing is a substantive test, not a test of controls. Choice "c" is incorrect. Attorneys' responses to the auditor's inquiries are part of a substantive test, not a test of controls.
QUESTION 491
Which of the following statements concerning control risk is correct?
A. Assessingcontrolriskandobtaininganunderstandingofanentity'sinternalcontrolmaybeperformedconcurrently.
B. Controlriskmaybeassessedsufficientlyhightoeliminatesubstantivetestingforsignificanttransactionclasses.
C. Control risk may be assessed sufficiently low to eliminate substantive testing for significant transaction classes.
D. When assessing control risk an auditor should not consider evidence obtained in prior audits about the operation of control activities.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 492
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?
A. Confirmationwithoutsideparties.
B. Inquiryofclientpersonnel.
C. Recomputation of account balance amounts. D. Observation of client personnel.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 493
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:
A. Additionalevidencetosupportareductionincontrolriskwasnotcost-beneficialtoobtain.
B. Assessedlevelofinherentriskexceededtheassessedlevelofcontrolrisk.
C. Internal control was properly designed and justifiably may be relied on.
D. Evidence obtainable through tests of controls would not support an increased level of control risk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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 494
An auditor generally tests the segregation of duties related to inventory by:
A. Personalinquiryandobservation.
B. T est counts and cutoff procedures.
C. Analytical procedures and invoice recomputation.
D. Document inspection and reconciliation.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
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.