Question 1

When the auditor assesses the likelihood of material misstatement in the financial statements, the auditor will use

Accepted Answer

A)  risk assessment procedures. 
B)  procedures to obtain an understanding. 
C)  tests of control. 
D)  assessment of design effectiveness of controls.

Question 2

A procedure designed to test for dollar errors or irregularities directly affecting the correctness of financial statement balances is a(n)

Accepted Answer

A)  substantive test. 
B)  analytical test. 
C)  test of controls. 
D)  definition of dollar-unit sampling.

Question 3

You are conducting the audit of a medium-sized company that has a chief accountant and three employees. Segregation of duties is excellent, with jobs allocated to provide maximum levels of controls. Segregation is supported by accounting software with user identification and passwords that limit functions to the appropriate jobs.
Required:
A) What type of audit approach would you recommend? Why?
B) How would your answer change if the accounting department was organized on a job-sharing basis so that all employees did some of every task to keep the work more interesting? Why?

Accepted Answer

The answer of You are conducting the audit of a...

Question 4

The auditor is deciding upon audit procedures to be used in the audit for a particular cycle (i.e., the combination of the four types of tests needed to obtain sufficient appropriate audit evidence). This type of decision is called

Accepted Answer

A)  audit risk. 
B)  audit strategy. 
C)  evidence mix. 
D)  detection risk.

Question 5

Symco Inc. has a policy that all cash disbursements of $2000 or more must be approved by the treasurer. While performing a test of controls on a sample of disbursements, Craig discovered that the assistant controller had authorized a cash disbursement of $3500 while the treasurer was on vacation. This control deviation is significant only if

Accepted Answer

A)  it is determined that the assistant controller is not qualified to approve cash disbursements of this size. 
B)  it occurred with sufficient frequency to cause the auditor to believe there may be material dollar misstatements in the statements. 
C)  the amount of the deviation identified is larger than the planning materiality. 
D)  the amount of the deviation identified is larger than the planning materiality and no compensating control exists.

Question 6

Samru has been assigned the sales cycle as part of an audit team. He will be evaluating several key controls in the sales cycle and conducting tests of detail for accounts receivable. Samru has been told to look at 15 customers with respect to the credit limit approval process (a test of control). Then, he has been told to use dual purpose tests for the rest of his testing.
Required:
Explain the relationship between tests of controls, dual purpose tests, and tests of details.

Accepted Answer

The answer of Samru has been assigned the sales cycle...

Question 7

Jane is a sole practitioner operating out of a local office. She is part of a regional group of firms and occasionally does small audits with the assistance of one staff person. Using automated working paper software, she runs a standard set of analytical review calculations for each audit, then puts them in the working paper file. She does not look at the analytical review process again.
Since most of her audit clients have no internal controls, she then calculates materiality and conducts a substantive audit. She prefers to do more substantive testing rather than having to do all kinds of work with internal controls.
Required:
What is wrong with Jane's audit approach?

Accepted Answer

The answer of Jane is a sole practitioner operating out...

Question 8

You are a senior at a PA firm and this is your junior's first day. He would like you to explain to him the different types of audit tests that should be performed over the course of an audit to obtain sufficient and appropriate audit evidence. Be sure to indicate which component of audit risk each type of test is linked to.

Accepted Answer

The answer of You are a senior at a PA...

Question 9

The auditor would like to design a test of control to test that shipping documents are issued in numerical order by the computer and are accounted for weekly. Which of the following typical tests of controls would be suitable?

Accepted Answer

A)  Trace sales documents issued to the sales journal and trace the daily total to the general ledger. 
B)  Ask the shipping department about the process they use to issue shipping documents, paying particular attention to continuity of numerical sequence. 
C)  Use computer-assisted audit testing to determine whether there are any numbers missing in the sequence (gap detection). 
D)  Match shipments to the associated sales invoices.

Question 10

Cimco Forest is a client of your PA firm that has requested that the audit of its financial statements be completed 25 days after its year end. Given the time constraint, the auditor

Accepted Answer

A)  should not accept Cimco as a client. 
B)  should increase the size of the audit team. 
C)  can perform audit procedures at an interim date and roll forward the interim balances to year end. 
D)  should change the audit program to include more tests of controls and fewer tests of details, as they are more time consuming.

Question 11

Audit risk is assessed at which level of the audit?

Accepted Answer

A)  account 
B)  cycle 
C)  transaction-related audit objective 
D)  overall audit

Question 12

A PA is conducting the audit of Middi Furniture Company, a medium-sized company with few effective controls and significant inherent risks. Management has decided that it is not cost-effective to implement better internal controls. What audit strategy will the PA likely select for this client?

Accepted Answer

A)  combined audit approach for all transaction cycles and accounts 
B)  substantive audit approach for all transaction cycles and accounts 
C)  combined audit approach for all cycles except cash and inventory 
D)  substantive audit approach for all cycles except sales and payroll

Question 13

If no material fluctuations are found using analytical procedures and the auditor concludes that differences should not have occurred,

Accepted Answer

A)  it will be necessary to increase the tests of details of balances. 
B)  other tests may be reduced. 
C)  it will be necessary to increase the tests of controls. 
D)  it will not be necessary to perform tests of details of balances.

Question 14

When does the auditor normally conduct tests of controls?

Accepted Answer

A)  prior to the completion of the tests of details 
B)  after the completion of all analytical review 
C)  prior to the preparation of the client risk analysis 
D)  prior to the finalization of the audit risk model

Question 15

The auditor would like to design a test of control to test that statements are mailed to all customers each month. Which of the following typical tests of controls would be suitable?

Accepted Answer

A)  Inquire about who is responsible for mailing the statements. 
B)  Find out whether customers pay by statement or by invoice. 
C)  Reconcile subsequent payments to particular invoices. 
D)  Match remittance advices from customers to customer statements.

Question 16

Donna sees a large variation in the gross margin percentage as a result of analytical procedures she performed. This means that

Accepted Answer

A)  Donna should perform more tests. 
B)  the financial statements contain an error. 
C)  Donna cannot rely on the company's internal controls. 
D)  Donna should document this difference.

Question 17

A standard audit program can dramatically increase

Accepted Answer

A)  audit efficiency. 
B)  quality of audit evidence. 
C)  communication among the audit team. 
D)  the amount of work that can be delegated to more junior staff members.

Question 18

The auditor would like to design a test of control to test that unit selling prices are obtained from the price list master file of approved prices. Which of the following typical tests of controls would be suitable?

Accepted Answer

A)  Compare prices used on sales invoices to the authorized customer purchase order. 
B)  Review changes to the price file throughout the year for proper authorizations and trace prices to copies of sales invoices. 
C)  Use analytical review to compare total sales last year to total sales this year. 
D)  Discuss the process used to authorize sales prices with the sales manager and the controller.

Question 19

During a change to an entire IT system, if conversion controls are poor or are not documented, the auditor will need to

Accepted Answer

A)  conduct an implementation audit. 
B)  conduct a legacy system audit. 
C)  conduct an audit of the new system. 
D)  conduct a conversion audit.

Question 20

Risks of fraud are assessed at which level(s) of the audit?

Accepted Answer

A)  overall audit, transaction-related audit objectives 
B)  balance-related audit objectives only 
C)  overall audit, cycle, and account 
D)  cycle, account, and transaction-related audit objectives

Exam 10: Audit Strategy and Audit Program