Chapter 13

Multiple-Choice Questions

1.easy

A listing of all the things which the auditor will do to gather sufficient, competent evidence is the:

b a. audit strategy.b. audit program.c. audit procedure.d. audit risk model.

2.easy

Shown below (1 through 5) are the five types of tests which auditors use to determine whether financial statements are fairly stated. Which three are substantive tests?

b 1. procedures to obtain an understanding of internal control2. tests of controls3. tests of transactions4. analytical procedures5. tests of details of balances

a. 1, 2, and 3.b. 3, 4, and 5.c. 2, 3, and 5.d. 2, 3, and 4.

3.easy

Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor’s:

c a. audit strategy.b. tests of controls.c. risk assessment procedures.d. tests of transactions.

4. For efficiency, tests of controls are frequently done at the same time as:easy a. analytical procedures.c b. compliance tests.

c. tests of transactions.d. tests of details of balances.

5.easy

Which of the following procedures are frequently performed in response to the auditor’s assessment of the risk of material misstatement?

c a. Ratio analysisb. Tests of controlsc. Tests of details of balancesd. Risk assessment procedures

6. In which stage(s) of an audit are analytical procedures not performed?easy a. In the planning stage.b b. In the test of controls stage.

c. In the completion stage.d. In conjunction with tests of transactions and tests of details of balances.

7. Tests of controls may include which of the following types of evidence?easya Reperformance Observation

a. Yes Yes

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b. No Noc. Yes Nod. No Yes

8. The purpose of tests of controls is to provide reasonable assurance that the:easy a. accounting treatment of transactions and balances is valid and proper.b b. internal control procedures are functioning as intended.

c. entity has complied with GAAP disclosure requirements.d. entity has complied with requirements of quality control.

9. In the context of an audit of financial statements, substantive tests are audit procedures that:easy a. may be eliminated under certain conditions.c b. are designed to discover significant subsequent events.

c. may be either tests of transactions, tests of balances, or analytical tests.d. will increase proportionately with the auditor’s reliance on internal control.

10. Which of the following is not useful for obtaining an understanding of internal controls?medium a. Make inquiries of the client’s personnel.c b. Examine documents and records.

c. Read industry trade magazines.d. Observe client activities and operations.

11. A system walkthrough is used to:medium a. test balances.c b. test details of transactions.

c. gain an understanding of internal controls.d. determine acceptance of the client.

12. (Public) PCAOB Standard 2 _______ the auditor to perform walkthroughs of significant processes.medium a. encouragesb b. requires

c. does not allowd. permits

13. The most important consideration in developing the audit plan and audit program is the:medium a. client’s size.d b. client’s industry.

c. audit firm’s available personnel.d. the audit risk model used in its planning form.

14. Tests of controls are directed toward the control’s:medium a. efficiency.b b. effectiveness.

c. efficiency and effectiveness.d. cost benefit ratio.

15.medium

When the auditor finds that there are missing controls in an area of the accounting system, the audit program in that area would be modified in such a way as to:

d a. increase the amount of tests of controls.b. increase the reliance on tests of controls.c. cause the issuance of a qualified or adverse opinion.d. eliminate the need for a test of controls.

16.medium

A procedure designed to test for monetary misstatements directly affecting the correctness of financial statement balances is a:

b a. test of controls.

Arens/Elder/Beasley 

b. substantive test.c. test of attributes.d. monetary-unit sampling test.

17. Which of the following is not appropriate for purposes of testing the effectiveness of controls? medium a. Make inquiries of client personnel.b b. Evaluate prior experience with the client.

c. Observe control-related activities.d. Reperform client procedures.

18. Which of the following is not a direct result of performing analytical procedures?medium a. Identify areas of potential misstatements.d b. Reduce detailed audit tests.

c. Understand the client’s business.d. Identify specific errors in the accounts.

19.medium

If no material differences are found using analytical procedures and the auditor concludes that misstatements are not likely to have occurred:

a a. other tests may be reduced.b. it will be necessary to increase the tests of balances.c. it will not be necessary to perform tests of balances.d. it will be necessary to increase the tests of transactions.

20. The primary emphasis in most tests of details of balances is on the:medium a. balance sheet accounts.a b. revenue accounts.

c. cash flow statement accounts.d. expense accounts.

21. Analytical procedures are defined in the auditing standards as:medium a. compliance tests.b b. substantive tests.

c. tests of controls.d. helpful procedures not possessing the validity of other tests available to the auditor.

22. Tests of transactions are used to determine whether ___________ have been satisfied.medium a. compliance test requirements.c b. balance coverage requirements.

c. transaction-related audit objectives.d. existence assertions

23. Which of the following statements is not true?medium a. Analytical procedures emphasize the overall reasonableness of transactions and balances.b b. Tests of controls are concerned with evaluating whether controls are sufficiently effective

to justify reducing control risk and thereby reducing analytical review procedures.c. Substantive tests of transactions emphasize the verification of transactions recorded in the journals and then posted in the general ledger.d. Tests of details of balances emphasize the ending balances in the general ledger.

24. Which of the following audit tests is usually the least costly to perform?medium a. Analytical procedures.a b. Tests of controls.

c. Tests of balances.d. Substantive tests of transactions.

25. Which of the following audit tests is usually the most costly to perform?

Arens/Elder/Beasley 

medium a. Analytical procedures.c b. Tests of controls.

c. Tests of balances.d. Substantive tests of transactions.

26. Analytical procedures must be performed in:medium a. the planning and test of control stages.c b. conjunction with tests of transactions and tests of details of balances.

c. the planning and completion stages.d. the planning, test of control, and completion stages.

27. Which of the following tests commonly occur together?medium a. Substantive tests of transactions and tests of controls.a b. Substantive tests of transactions and obtaining an understanding of internal controls.

c. Analytical procedures and tests of controls.d. Tests of controls and tests of details of balances.

28. Which of the following relationships between types of tests and audit evidence is not correct?medium a. Tests of details and documentation.c b. Tests of controls and observation.

c. Tests of details and observation.d. Substantive tests of transactions and reperformance

29. An increased extent of tests of controls is most likely to occur when:medium a. it is a first-year audit.c b. the auditor is doing a “fraud audit.”

c. controls are effective and the preliminary control risk assessment is low.d. controls are ineffective and the preliminary control risk assessment is high.

30. Many auditors perform extensive analytical procedures on audits because:medium a. they are required by GAAS.c b. they pinpoint errors in accounts.

c. they indicate areas of potential risk and misstatement.d. they are required for tests of controls.

31. (Public)medium

Which of the following types of procedures will be performed in an audit of internal control over financial reporting?

cProcedures to obtain an understanding of internal control Ratio analysis

a. Yes Yesb. No Noc. Yes Nod. No Yes

32. Tests of details of balances focus on:medium a. beginning of the year balances.b b. end of the year balances.

c. transaction details for the period under audit.d. accounting cycles.

33. Auditors who test manual controls that rely on IT-generated reports must consider:medium a. the benefits of relying on IT-generated reports.c b. separation of duties related to the IT-generated reports.

c. the controls related to the accuracy of the information in the report.d. whether the manual controls are approved by the audit committee..

Arens/Elder/Beasley 

34.medium

When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor usually would:

dPerform additional tests of controls Decide to modify tests of details of balances

a. Yes Yesb. No Noc. Yes Nod. No Yes

35.medium

If the results of the tests of controls, substantive tests of transactions, and analytical procedures are not consistent with the predictions, tests of details of balances will be:

d a. eliminated.b. increased.c. unaffected.d. changed.

36.medium

When controls are deemed ineffective and assessed control risk is at the maximum for a private company, there will be ______ emphasis placed on tests of controls.

a a. nob. relatively littlec. moderated. heavy

37. Tests of controls address each of the following questions except:medium a. How were the procedures performed?b b. Why were the procedures performed?

c. Were the necessary procedures performed? d. Who performed the procedures?

38. Which of the following audit tests would be regarded as a test of controls?medium a. Comparison of the inventory pricing to vendors’ invoices.b b. Tests of the signatures on canceled checks to board of directors’ authorizations.

c. Tests of the additions to property, plant, and equipment by physical inspections.d. Review of the specific items making up the balance in a given general ledger account.

39. (Public)medium

Which of the following tests form the basis for an auditor’s report on internal control over financial reporting?

c a. Analytical proceduresb. Tests of transactionsc. Tests of controlsd. Tests of details of balances

40.medium

After finishing the review phase of the study and evaluation of internal control in an audit, the auditor should perform tests of controls on:

a a. those controls that the auditor wants and plans to rely upon.b. those controls in which material weaknesses were identified.c. those controls that have a material effect upon the financial statement balances.d. a random sample of the controls that were reviewed.

41. At what point in the audit are tests of details most appropriately designed?medium a. Engagement evaluation.b b. Planning.

c. Testing.d. Communication of material weaknesses.

42. (Public) Which of the following is/are performed in an audit of internal control over financial reporting?

Arens/Elder/Beasley 

Mediumb Procedures to obtain an

understanding of internal control Test of details of balances Analytical Procedures

a. Yes Yes Nob. Yes No Noc. No Yes Yesd. No No Yes

43.medium

The reliance placed on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily:

b a. parallel.b. inverse.c. direct.d. equal.

44.medium

Which of the following is ordinarily designed to detect possible material dollar errors on the financial statements?

b a. Tests of controls.b. Analytical review procedures.c. Computer controls.d. None of the above.

45. What type of test is used to obtain more types of evidence than any other?challenging a. Substantive tests of transactions.d b. Tests of controls.

c. Analytical procedures.d. Tests of details.

46. Only _______ involve physical examination and confirmation.challenging a. tests of controlsc b. tests of transactions

c. tests of balancesd. analytical procedures

47. Documentation is used in every type of test except ________.challenging a. tests of controlsc b. tests of transactions

c. analytical proceduresd. tests of details

48.challenging

Which of the following types of evidence is not available when using substantive tests of transactions?

b a. Documentation.b. Confirmation.c. Inquiries of the client.d. Reperformance.

49. An exception in a test of control indicates the _______ of misstatements.challenging a. the amountb b. the likelihood

c. the amount, likelihood, and classificationd. the amount and the classification

50. Which of the following is not a valid basis for omitting an audit test?challenging a. the difficulty and expense involved in testing a particular item.

Arens/Elder/Beasley 

a b. the relative risk involved.c. the degree of reliance on the relevant internal controls.d. the relationship between the cost of obtaining evidence and its usefulness.

51.challenging

Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion?

b a. The audit program.b. The auditor’s judgment.c. Generally accepted auditing standards.d. The auditor’s working papers.

Essay Questions

52.easy

Contrast the circumstances in which the auditor would choose not to test controls with those in which he or she would perform tests of controls.

Answer:If the auditor believes that controls have not been operating effectively during the period under audit, or that it would not be cost-effective to test controls, then he or she would choose not to test controls. In contrast, if the auditor believes that controls have been operating effectively during the period under audit, and that it would be cost-effective to test controls, the auditor will perform tests of controls.

53.easy

Three factors the auditor considers when assessing control risk are: the auditor’s belief concerning the effectiveness of internal controls, the results of tests of controls, and the cost-effectiveness of a reduced assessed control risk. Identify the combination of conditions for these three factors that is required before a reduction in substantive testing is permitted.

Answer:A reduction in substantive testing is permitted when (1) the auditor identifies specific controls he or she believes have been operating effectively during the period under audit, (2) the auditor believes it will be cost-effective to test those controls, and (3) the results of tests of controls indicate that the controls have indeed been operating effectively.

54.medium

List each of the five types of audit tests and list at least two types of evidence that may be obtained from each type of test.

Answer: Procedures to obtain an understanding of internal control - documentation,

observation, inquiries of the client, and reperformance. Tests of controls - documentation, observation, inquiries of the client, and

reperformance. Substantive tests of transactions - documentation, inquiries of the client, and

reperformance. Analytical procedures - inquiries of the client and analytical procedures. Tests of details of balances - physical examination, confirmation, documentation,

inquires of the client, and reperformance.

55.medium

Must auditors always perform tests of controls?

Answer:Auditors only need to perform tests of controls in the audit of a private company if they

Arens/Elder/Beasley 

intend to rely on them. Auditors must always perform tests of controls in the audit of a public company.

56.medium

Describe the five types of audit tests. Identify which of the five types are substantive tests, and which are used to reduce assessed control risk.

Answer:The five types of audit tests used to determine whether financial statements are fairly stated are: procedures to obtain an understanding of internal control, tests of controls, substantive tests of transactions, analytical procedures, and tests of details of balances. Substantive tests of transactions, analytical procedures, and tests of details of balances are substantive tests, whereas procedures to obtain an understanding of internal control and tests of controls are used to reduce assessed control risk.

57.medium

Consider the audit risk model and the five types of audit tests. Which tests provide evidence pertinent to the various elements of the audit risk model?

Answer:Evidence can be obtained about control risk via procedures to obtain an understanding of internal controls, tests of controls, and substantive tests of transactions. Evidence can be obtained about planned detection risk via substantive tests of transactions, analytical procedures, and tests of details of balances.

58.medium

Discuss the purposes of (1) substantive tests of transactions, (2) tests of controls, and (3) tests of details of balances. Give an example of each.

Answer:The purpose of substantive tests of transactions is to determine whether all six transaction-related audit objectives have been satisfied for each class of transactions. For example, as part of the auditor’s test of the accuracy objective for sales, the auditor would compare the amount recorded in the sales journal for a sample of sales transactions with the total on the corresponding sales invoices.

The purpose of tests of controls is to determine the effectiveness of both the design and operations of specific internal controls. For example, the auditor might observe for a month whether statements are mailed to all customers.

The purpose of tests of details of balances is to determine the monetary correctness of the accounts to which they relate. The confirmation of accounts receivable is an example.

59.medium

There are three stages of the audit in which analytical procedures are performed. Identify each of these three stages and, for each stage, discuss the purpose of performing analytical procedures in that stage. Also indicate in which stage(s) analytical procedures are required by current professional auditing standards.

Answer:Analytical procedures are performed in the audit planning stage to help the auditor decide the other evidence needed to satisfy sufficient competent evidence requirements. Analytical procedures can also be performed as substantive tests in the testing phase of the audit. Analytical procedures are performed in the audit completion phase as a final test of reasonableness. Auditing standards require that analytical procedures be performed in the planning and completion phases of every audit.

Arens/Elder/Beasley 

Arens/Elder/Beasley 

60.medium

Discuss the major determinants of the extent of tests of details of balances.

Answer:Major determinants of the extent of tests of details of balances include: the results of tests of controls, substantive tests of transactions, and analytical procedures; the amount of tolerable misstatement; and the levels of inherent risk and acceptable audit risk.

61.challenging

What are the four steps auditors follow when they plan to reduce assessed control risk?

Answer:The steps are as follows:1. Apply transaction-related audit objectives to the class of transaction being tested.2. Identify key controls that should reduce control risk for each transaction-related audit

objective.3. Develop appropriate tests of controls for all internal controls used to reduce the

preliminary assessment of control risk below maximum.4. For potential types of misstatements related to each transaction-related audit

objectives, design appropriate substantive tests of transactions, considering deficiencies in internal control and expected results of the tests of controls.

62.challenging

Discuss the relationship of each of the following to the extent of planned tests of details of balances: (1) tolerable misstatement, (2) inherent risk, (3) control risk, and (4) acceptable audit risk.

Answer:Inherent risk and control risk are directly related to the extent of planned tests of details of balances; that is, as inherent risk and/or control risk increase, the extent of planned tests of details of balances also increases. Tolerable misstatement and acceptable audit risk are inversely related to the extent of planned tests of details of balances; that is, as tolerable misstatement and/or acceptable audit risk increase, the extent of planned tests of details of balances decreases.

63.challenging

There are seven types of audit evidence: physical examination, confirmation, documentation, observation, inquiries of the client, reperformance, and analytical procedures. For each of the following types of audit tests, indicate the type(s) of evidence that can be obtained through the test: (1) tests of controls, (2) substantive tests of transactions, (3) analytical procedures, and (4) tests of details of balances.

Answer:1. Tests of controls. Documentation, observation, inquiries of the client, reperformance.

2. Substantive tests of transactions. Documentation, inquiries of the client, reperformance.

3. Analytical procedures. Inquiries of the client, analytical procedures.

4. Tests of details of balances. Physical examination, confirmation, documentation, inquiries of the client, reperformance.

Arens/Elder/Beasley 

64.challenging

Discuss the major activities and procedures performed by the auditor in each of the four phases of an audit.

Answer:The major activities performed in the planning and design phase (Phase I) are: preplan the engagement; obtain background information about the client; obtain information about the client’s legal obligations; perform preliminary analytical procedures; set materiality, and assess acceptable audit risk and inherent risk; obtain an understanding of internal control, and assess control risk; and develop an overall audit plan and audit program.

Phase II involves tests of controls, substantive tests of transactions, and an assessment of the likelihood of misstatements in the financial statements.

Phase III involves analytical procedures and tests of details of balances.

In Phase IV, the auditor performs the review for contingent liabilities, the review for subsequent events, accumulates final evidence, evaluates results, issues the audit report, and communicates with the client’s audit committee and management.

Other Objective Answer Format Questions

65.easya

One difference between procedures used to obtain an understanding of internal control and procedures used to test controls is that tests of controls are more extensive.a. Trueb. False

66.easyb

Tests of controls are generally less expensive to perform than analytical procedures.a. Trueb. False

67.easya

Tests of controls provide evidence about the potential for misstatements in a client’s accounting system.a. Trueb. False

68.easyb

Auditing standards encourage, but do not require, a written audit program.a. Trueb. False

69.easyb

Substantive tests of transactions are the most expensive type of audit test to perform.a. Trueb. False

70.easya

An exception in a test of control provides only an indication of the likelihood of monetary misstatements in the financial statements because tests of controls do not reveal whether monetary misstatements have actually occurred.a. Trueb. False

Arens/Elder/Beasley 

71.easyb

An exception in a substantive test of transactions provides only an indication of the likelihood of monetary misstatements in the financial statements because substantive tests of transactions do not reveal whether monetary misstatements have actually occurred.a. Trueb. False

72.easya

Analytical procedures are the least expensive type of audit test.a. Trueb. False

73.easya

If inherent risk is decreased from medium to low, tests of details of balances can be reduced.a. Trueb. False

74.easya

When designing an audit program for tests of details of balances, the auditor should make assumptions about inherent risk and control risk, and predictions concerning the outcome of tests of controls, substantive tests of transactions, and analytical procedures.a. Trueb. False

75.easya

The extent of tests of details of balances can be reduced when transaction-related audit objectives have been satisfied by tests of controls or substantive tests of transactions.a. Trueb. False

76.easyb

Tests of controls and substantive tests of transactions are rarely, if ever, conducted simultaneously on the same transactions.a. Trueb. False

77.easyb

Under normal circumstances, there should be no variation in the audit evidence mix from cycle to cycle for a given audit engagement.a. Trueb. False

78.mediuma

Auditing standards recognize that in instances where a significant amount of audit evidence is in electronic form, it may not be possible to reduce detection risk to an acceptable level by performing only substantive tests.a. Trueb. False

79.mediuma

When analytical procedures are performed during substantive testing, they are typically more focused and extensive than when performed as part of audit planning.a. Trueb. False

80.mediuma

Tests of controls may be performed prior to substantive tests of transactions.a. Trueb. False

Arens/Elder/Beasley 

81.mediumb

Tests of details of balances focus on beginning and ending of the year balances.a. Trueb. False

82.mediuma

If tests of controls reveal that controls are sufficiently effective to justify reducing control risk, the auditor is justified in reducing substantive audit tests.a. Trueb. False

83.mediumb

Analytical procedures are the most expensive type of audit test to perform because of the expertise and training required to properly use them.a. Trueb. False

84. (Public)mediumb

PCAOB Standard 2 requires auditors to test controls every three years.a. Trueb. False

85.mediumb

The auditor must communicate significant deficiencies in internal control only after the entire audit is complete to ensure the auditor has a sufficient understanding of the circumstances surrounding the deficiency.a. Trueb. False

86.mediumb

The results of tests of controls and tests of details of balances affect the design of substantive tests of transactions.a. Trueb. False

87.mediumb

If the auditor’s preliminary assessment of control risk is decreased from high to medium, tests of controls can be reduced.a. Trueb. False

88.mediumb

When testing details of balances, most audit procedures satisfy only one balance-related objective, but more than one audit procedure should be used to test each objective.a. Trueb. False

89.mediumb

Substantive tests of transactions and substantive tests of details of balances are often conducted simultaneously.a. Trueb. False

90.mediumb

Auditing standards require that tests of controls be performed on every audit engagement.a. Trueb. False

91. (Public)challenginga

In the audit of a public company, computer controls must be tested if they are considered to be key controls for reducing the likelihood of material misstatements in the financial statements.a. Trueb. False

Arens/Elder/Beasley 

92.challenginga

Procedures to obtain an understanding of internal control may suffice for tests of controls when the auditor is assessing automated controls.a. Trueb. False

93.challenginga

Analytical procedures are normally designed at the account level, whereas tests of controls and substantive tests of transactions are normally designed at the transaction-related objective level.a. Trueb. False

94.challengingb

Procedures to obtain an understanding of internal control may suffice for tests of controls when the auditor is assessing control risk in a well defined transaction cycle that has not contained material misstatements in prior audits.a. Trueb. False

95.challenginga

Analytical procedures provide fewer types of evidence than any other type of audit test.a. Trueb. False

Arens/Elder/Beasley