Q&A Hero

Q: After finishing the procedures to obtain an understanding of internal control in an audit engagement, the auditor should perform tests of controls on A) those controls that the auditor 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.

Q: When considering the relationships between types of audit tests and evidence, which of the following procedures is suitable for use for all types of audit tests (procedures to obtain an understanding of internal control, tests of controls, analytical procedures, and tests of details of balances)? A) inspection B) observation C) inquiries of the client D) recalculation

Q: When considering the relationships between types of audit tests and evidence, which of the following procedures is used only for tests of details of balances? A) inspection B) recalculation C) reperformance D) external confirmation

Q: When considering the relationships between types of audit tests and evidence, which of the following procedures are used for both obtaining an understanding of internal control and for conducting tests of controls? A) inspection, recalculation, observation, inquiry, and reperformance B) inspection, recalculation, external confirmation, and reperformance C) recalculation, observation, inquiry, analytical procedures and reperformance D) analytical procedures, inspection, recalculation and reperformance

Q: Which of the following audit tests is usually the most costly to perform? A) analytical procedures B) tests of controls C) tests of details of balances D) procedures to obtain an understanding of internal control

Q: Restaurant Products Company (RPC) has been an audit client of your firm for many years. RPC has a March 31 fiscal year end. The company is a successful distributor of restaurant and food industry products, such as trays, weigh scales, dishes, cooking implements. The company sells to businesses only (i.e. not to end consumers), with clients ranging from small restaurants to large food service chains and hotels. The company does have a perpetual inventory system, but the current inventory system relies upon accurate data entry of receipts, shipments and inventory adjustments from paper documents. RPC is looking to improve inventory management and maintain costs in the face of rising competition and growth. Accordingly, it is implementing RFID (radio frequency identification) technology for its inventory in January 2012. RFID chips will be placed on warehouse shelf locations, boxes of products, and on large cost individual products. At the same time the company will implement a wireless mesh system throughout the warehouse, with wireless tracking of product movement. Effective January 31, 2012 a new inventory management system is being implemented to facilitate better decision making and access to online realtime inventory data. The new inventory management system will include a new database that will include internal records of inventory on hand, receipts and shipments of inventory, purchase order details, and payment details. Required: A. For each phase of the financial statement audit process, describe the phase, and explain how the audit process is affected or changed due to the implementation of the new database management system. B. What is the impact of the implementation of RFID on the financial statement audit process? [Note that these points must be different from those raised in Part A above.]

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

Q: 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.

Q: Greenvale Construction Limited was started by four brothers who lived in the Toronto area. Over time, the brothers have moved to different parts of the country. They decided it was a good idea to keep the company, and organize their work as separate divisions as part of the same company. There are now three divisions, one for each of the brothers who are actively involved in construction. The fourth brother, Ted, is responsible for accounting and record keeping. Ted went back to school and completed an accounting designation, and now has three employees in the accounting area. Each of the brothers has moved on to specialize in a different kind of construction work. In Toronto, it is mainly new home construction. In Edmonton, the work is primarily renovations of large homes and small commercial enterprises, while in Halifax, the work is completely commercial on mid-to-large projects. All of the brothers prefer to subcontract their work rather than hiring full time construction employees, although some of the subcontract relationships have lasted over fifteen years now. Required: Explain what you would do to document your understanding of internal control for Greenvale. Identify potential risk areas where you would need to focus additional attention.

Q: Discuss the purposes of tests of controls and tests of details of balances. Give an example of each.

Q: A) Describe the five types of audit tests used to determine whether financial statements are fairly stated. Identify which of the five types are substantive tests, and which are used to reduce assessed control risk. B) There are several types of audit procedures that relate to the auditor's understanding of internal control. One type of procedure is "Update and evaluate the auditor's previous experience with the entity." Identify the five additional types of procedures related to understanding internal control, and four types of procedures that are used to test controls.

Q: The auditor verifies the summarizing, accuracy, and posting of entries by performing A) analytical procedures. B) tests of controls. C) dual-purpose tests. D) procedures to gain an understanding of internal control.

Q: Performance of tests of controls provide evidence in support of the specific controls that contribute to the auditor's assessed control risk (where it is reduced below 100%). Also, when dual-purpose tests are used, evidence is also obtained in support of A) the nature of illegal acts that occurred. B) the quantitative effects of fraud risks. C) statistical ratios to assist analytical review. D) monetary correctness of transactions.

Q: In the context of an audit of financial statements, substantive tests are audit procedures that A) may be eliminated under certain conditions. B) are designed to discover significant subsequent events. C) may be either direct tests of financial balances, or analytical tests. D) will increase proportionately with the auditor's reliance on internal control.

Q: The auditor has completed analyzing the results of tests of details of the accounts receivable ending balance. Errors totaling $25,000 were found. These exceptions are A) indications that the credit limit is being incorrectly applied. B) probably cut-off errors that can be explained. C) an indication of potential errors in the ending balance. D) financial statement misstatements.

Q: The auditor has decided that there is a risk of material misstatement with respect to sales revenue. Which of the following audit tests should the auditor use to quantify the potential error? A) discuss the process used to assign credit limits with the sales manager and the controller B) send external confirmations to customers with accounts receivable balances C) determine whether all sales tested have a supporting customer purchase order D) determine whether all sales tested have a matching bill of lading

Q: Which of the following is an example of a substantive test that could be used for the audit of the accuracy of sales prices? A) inspect sales price master authorization forms for the presence of an approval signature B) observe that the point-of-sale system automatically pulls sales prices from the master file C) inquire about the process that is used to update sales prices in the sales price master file D) calculate the gross margin for each product that is sold by the company

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

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

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

Q: The auditor would like to design a test of control to test the following key control: "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? A) compare prices used on sales invoices to the authorized customer purchase order B) review change to price file throughout the year for proper authorizations and trace prices to copy of sales invoice 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

Q: The auditor would like to design a test of control to test the following key control: "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? 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 that 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 in the sequence missing (gap detection) D) match shipments to the associated sales invoice

Q: The auditor would like to design a test of control to test the following key control: "there is a separation of duties between billing, recording sales, and handling of cash receipts." Which of the following typical tests of controls would be suitable? A) match the amounts billed to the amounts recorded B) verify that sales have been recorded in the proper period C) trace cash receipts to the duplicate bank deposit slips D) inquire about the duties of the accounting personnel

Q: The auditor selects several transactions in each functional area and traces them through the entire accounting system, paying special attention to evidence about whether or not the control features are in operation. This is an example of a A) sequence test. B) test of controls. C) substantive test. D) functional test.

Q: Eleonar is inspecting a sample of "Code of Conduct acknowledgement forms" that must be signed by all employees to indicate that they have read and understood the company's code of conduct. Eleonar is ensuring that they have been signed by the employee. Eleonar is performing A) a test of controls. B) an analytical procedure. C) a substantive procedure. D) a procedure to obtain an understanding of internal controls.

Q: The purpose of tests of controls is to provide reasonable assurance that the A) accounting treatment of transactions and balances is valid and proper. B) accounting control procedures are operating effectively. C) entity has complied with disclosure requirements of generally accepted accounting framework. D) entity has complied with requirements of quality control.

Q: An example of an audit procedure that relates to the auditor's understanding of internal control is A) count petty cash at all locations. B) use test data to verify functioning of data entry controls. C) observe entity activities and operations. D) trace all large fixed asset purchases to supporting invoices.

Q: An example of an audit procedure that relates to the auditor's understanding of internal control is A) reperform the counting of physical inventory. B) inspect documents and records. C) recalculate the depreciation expenses. D) trace all legal expenses to supporting invoices.

Q: When the auditor assesses the likelihood of material misstatement in the financial statements, the auditor will use A) risk assessment procedures. B) procedures to obtain an understanding. C) tests of control. D) assessment of design effectiveness of controls.

Q: The auditor of ABC Ltd. has concluded that there are significant risks of misstatement of revenue at the company, with potential overstatement of revenue. Which of the following audit tests should the auditor conduct to address this significant risk? A) control tests of authorization, to ensure that credit limits for sales are all approved by the sales manager B) analytical review of sales, comparing sales trends over the last five years by division and to the industry C) examination of sales after the year end to quantify potential cut-off errors (income from the subsequent period included in the current year) D) risk assessment procedures, looking carefully at inherent risks associated with the handling of cash in the sales cycle

Q: When the auditor has determined that there is a significant risk of misstatement for a particular assertion (for example, completeness of revenue), what type of audit testing does CAS 330 require? A) tests of risk assessment B) tests of understanding of internal control C) control tests D) substantive tests

Q: A procedure designed to test for dollar errors or irregularities directly affecting the correctness of financial statement balances is a A) substantive test. B) analytical test. C) test of controls. D) definition of dollar-unit sampling.

Q: A substantive procedure is used to A) assess the likelihood of material misstatement in the financial statements. B) obtain an understanding of internal controls. C) analyze the account balance to see if there are potential errors. D) quantify the amount of potential error in an account or transaction stream.

Q: CAS 240 requires which of the following to be considered a significant risk? A) revenue recognition B) inventory valuation C) accounts receivable valuation D) calculation of income taxes

Q: Which of the following areas is considered to have a high risk of fraud in the retail industry? A) point-of-sale sales B) customer refunds C) credit sales D) completeness of payroll

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

Q: Materiality is used to help decide the scope of testing, help determine the sample size and to help A) develop the audit report. B) decide which analytical review calculations to use. C) evaluate the results of testing. D) conduct understanding of business tests.

Q: Audit risk is assessed at which level of the audit? A) account B) cycle C) transaction-related audit objective D) overall audit

Q: A planned approach to the conduct of audit testing, taking into account assessed risks, is called an A) audit approach. B) audit plan. C) audit program. D) audit strategy.

Q: 10.1 Explain what an audit strategy is

Q: Identify important risks and controls in small businesses1)A)B)C)D)

Q: You have just finished documenting your understanding of cycle controls at an audit engagement. Required: A) Explain how you will identify the controls that will be tested. B) What process will you follow for weakness in internal controls?

Q: A) Step one in the auditor's study and evaluation of internal control is obtain understanding of internal control for audit planning purposes. List each of the remaining steps. B) Once the auditor has an understanding of internal control, two assessments are made. List each assessment that must be made prior to testing controls. C) Describe five common procedures an auditor can use to obtain an understanding of internal control design.

Q: After considering a client's internal controls, an auditor has concluded that it is well designed and is functioning as intended. Under these circumstances, the auditor would most likely A) perform tests of controls to the extent outlined in the audit program. B) determine the control procedures that should prevent or detect errors and irregularities. C) use a combined audit approach that includes tests of controls and substantive tests. D) determine whether transactions are recorded to permit preparation of financial statements in accordance with generally accepted accounting principles.

Q: Ideally, tests of controls should be applied to controls A) at the balance sheet date. B) at each quarterly interim period. C) for the entire period under audit. D) at the beginning of the fiscal period.

Q: A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation of functions and that leave no transaction trail is A) inspection. B) observation. C) reperformance. D) reconciliation.

Q: Each key control that the auditor intends to rely on must be supported by sufficient A) tests of details of balances. B) tests of controls. C) analytical review procedures. D) reperformance procedures.

Q: A secondary objective of the auditor's study and evaluation of internal control is that the study and evaluation provide A) a basis for constructive suggestions concerning improvements in internal control. B) a basis for reliance on the accounting system. C) an assurance that the records and documents have been maintained in accordance with existing company policies and procedures. D) an indication that management and employees are trustworthy.

Q: When the auditor identifies opportunities for the client to make operational improvements in the internal control system, it will be communicated to the client's audit committee in the A) management letter. B) reportable conditions letter. C) engagement letter. D) audit report.

Q: When a compensating control exists, a weakness in the system A) is no longer a concern because the potential for misstatement has been sufficiently reduced. B) is reduced but not removed; therefore, it is still of concern to the auditor. C) could cause a material loss, so it must be tested using substantive procedures. D) is magnified and must be removed from the sampling process and examined in its entirety.

Q: Paul is in the process of performing procedures to obtain the necessary understanding of the client's internal controls. As part of this process, Paul received from the client completed narratives, flowcharts and internal control questionnaires. Paul can use this information from the client A) if the entity level controls and tone at the top were found to be effective. B) if there has not been any significant change in the internal controls since the prior year. C) as long as any subsequent reliance on controls is adequately substantiated with testing. D) since it was prepared by management who are unbiased.

Q: Narratives, flowcharts, and internal control questionnaires are three commonly used methods of A) documenting the auditor's understanding of internal controls. B) testing internal controls. C) designing the audit manual and procedures. D) documenting the auditor's understanding of client's organizational structure.

Q: The procedures to test effectiveness of control policies and procedures in support of a reduced assessed control risk are called A) tests of details of balances. B) tests of controls. C) analytical procedures. D) a walk-through.

Q: When planning the audit, the auditor's decision on the appropriate assessed level of control risk to use is A) an economic issue, trading off the costs of testing controls against the cost of testing balances. B) calculated by using the audit risk model. C) calculated by using a standard formula. D) determined by using actuarial tables.

Q: Control risk is a measure of the auditor's expectation that internal controls will A) prevent material misstatements from occurring. B) detect and correct material misstatements. C) either prevent material misstatements or detect and correct them. D) neither prevent material misstatements nor detect and correct them.

Q: Once an understanding of internal controls is obtained that is sufficient for audit planning, then the auditor must first assess A) whether a lower level of control risk could be supported. B) whether the financial statements are auditable. C) the level of control risk supported by the understanding obtained. D) the level of control risk to use.

Q: When the auditor attempts to determine the operation of the accounting system by tracing one or a few transactions through the accounting system, this is referred to as A) tracing. B) vouching. C) tests of controls. D) a walk-through.

Q: Bravo Design had IMB consulting design a custom software to record the job costs and sales in progress. What acquisition process did Bravo design follow? A) In-house development B) Systems acquisition C) Turnkey software development D) Outsourcing

Q: Jenny is the information technology support manager at CMH. Jenny is considered to be a super-user at CMH since she can circumvent normal controls. In order to address the risk of super-users, management should A) remove the super-user. B) establish effective compensating controls. C) update the background check on the super-user on a yearly basis. D) ensure that the super-user is familiar with the code of conduct of the company.

Q: Porterville, Ontario, is the home of the largest leather tanning operation in Canada. Hides from various animals are stretched and treated, then cut into shapes for shipment to wholesalers. Computer assisted operations are important in maintaining temperature, humidity, and proper mix proportions in chemical solutions used for the tanning process. Computer assistance has helped improve the quality of the tanning process, as well as provide a safer environment for employees. Computer operations and backup is supported by the warehouse manager, Joe. Individual hides are tagged with a bar code and tracked for quality control purposes. The HomeTown Tanning Company uses a centralized microcomputer based system for its manufacturing and accounting operations. The two owners of the company are active in the business, and approve all new hardware and software acquisitions. The controller is responsible for network upgrades as well as maintaining passwords and user identification codes on the network. Accounting transactions are entered by accounting staff, although the controller has the ability to review and correct transactions. Required: List the six categories of functions that need to be separated from each other. Does HomeTown Tanning have these functions separated? For any functions that are not separated, indicate the potential impact upon controls and upon the audit.

Q: Dimple Leather is a chain of retail stores that sells leather clothing and accessories across Canada. Each store has point of sale equipment that is linked to a local server. At night, local accounting information is transmitted to the head office computer and any updates to prices or other adjustments are transferred to the local office. Required: Define the control environment. List the components of the control environment. For each component, provide an example of a control that might exist at Dimple Leather.

Q: A) List the three types of general computer control systems. B) Adequate segregation of duties is an important control procedure. Describe the specific functions that should be separated for segregation of duties to prevent both intentional and unintentional misstatements that are of significance to auditors. C) Adequate documents and records are important for effective internal control. Five principles dictate the proper design and use of documents and records. One principle is that documents and records should be prenumbered consecutively to facilitate control over missing documents, and to aid in locating documents when they are needed at a later date. Discuss each of the other four principles of adequate documents and records.

Q: A) Discuss what is meant by the term "control environment" and identify four control environment subcomponents that the auditor should consider. B) List the steps that management follows in assessing risks relevant to the preparation of financial statements in conformity with an applicable financial reporting framework. C) How does the auditor obtain knowledge about management's risk assessment process? D) Explain how management's risk assessment process differs from the auditor's risk assessment process. E) What is the relationship between management's risk assessment process and audit evidence?

Q: A) The COSO internal control framework consists of five components. Describe each of these components. B) Custody of assets and reconciliation should be separated to contribute to strong internal control. List the general categories of activities that should be separated.

Q: Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by A) employment of temporary personnel to aid in the segregation of duties. B) direct participation by the owner of the business in the record-keeping activities of the business. C) engaging a public accountant to perform monthly "write-up" work. D) delegation of full, clear-cut responsibility to each employee for the functions assigned to each.

Q: A major control available in a small company, which might not be feasible in a large company, is A) a wider segregation of duties. B) use of sequentially numbered documents. C) fewer transactions to process. D) the owner-manager's personal interest and close relationship with the personnel.

Q: An essential characteristic of the persons performing internal check procedures is A) independence from the original data preparer. B) a thorough knowledge of accounting. C) an analytical and inquisitive mind. D) competence in data entry skills.

Q: An important type of protective measure for safeguarding assets and records is A) adequate segregation of duties among personnel. B) proper authorization of transactions. C) the use of physical precautions. D) adequate documentation.

Q: The chart of accounts is an important control because it provides the framework for determining the information presented to management and other financial statement users. What type of errors is the chart of accounts helpful in preventing? It helps prevent errors of A) occurrence. B) completeness. C) accuracy. D) classification.

Q: Which one of the following is an example of a specific authorization? A) The computer systems automatically reorder inventory when quantities fall below the economic order quantity. B) The highest credit limit allowed for accounts receivable customers is $100,000. C) Each sales transaction that exceeds the credit limit of a customer must be approved by the controller. D) Grocery sales clerks may approve returns of goods less than ten dollars in value.

Q: Which one of the following is an example of a general authorization? A) The highest credit limit allowed for accounts receivable is $50,000. B) ABC Company has a credit limit of $25,000. C) Each supervisory wage rate must be approved by the executive manager. D) Grocery supervisors approve each transaction reversal over five dollars.

Q: Why is it important to separate systems development (or acquisition) and program maintenance activities from accounting? A) Accounting personnel have the expertise to evaluate program changes that have been implemented. B) Custody of media is important to help ensure ongoing operations. C) This allows accounting to reconcile transaction totals to transaction details. D) Lack of separation could result in unauthorized changes to programs and systems.

Q: The operational responsibility and the recording of transactions are normally kept separate A) to centralize activities in order to be more cost efficient. B) to ensure unbiased information is recorded. C) because operational personnel rarely has the necessary accounting skills to record transactions. D) to avoid confusion of responsibilities and duplication of efforts.

Q: Which of the following duties would indicate a weakness in internal controls? The A) accounting function is under the controller. B) custodianship of cash is the responsibility of the treasurer's function. C) internal auditor reports to the board of directors. D) custodianship of buildings and equipment is the responsibility of the controller's function.

Q: An example of general computer control systems that provide reasonable assurance of authorization of application systems is A) operations and information systems support. B) systems, acquisition, development and maintenance controls. C) organization and management controls. D) application system control procedures.

Q: FiddleWare Limited uses purchased packaged application software to handle the processing of its transactions. An important control that management should implement with respect to information systems is the A) use of a formal systems development methodology. B) evaluation of potential new systems against organizational objectives. C) use of appropriate checkpoints and milestones during development. D) tracking of routine program maintenance changes.

Q: Management assesses risks as a part of designing and operating internal controls to minimize fraud and errors. Auditors assess risks to A) decide the evidence needed in the audit. B) fully implement the audit risk model. C) enable them to assess the completeness of internal controls. D) make sure that the company will continue to operate over the next year.

Q: The first step for management in the risk assessment process is to identify factors that may increase risk, for example failure to meet prior objectives. Then, management will A) assess the likelihood of the risk occurring. B) make sure that procedures are developed to eliminate the risk. C) estimate the significance of that risk. D) develop specific actions to reduce the risk to an acceptable level.

Q: External auditor Mary Smith may not rely on the work of internal auditor Ray Jones unless A) Jones is certified (CA, CGA or CMA). B) Jones is independent of the client. C) Jones is supervised by Smith. D) Smith obtains evidence that supports the competence, integrity, and objectivity of Jones.

Q: The methods that management uses to supervise the entity's activities are called A) personnel practices. B) management control methods. C) methods of assigning authority and responsibility. D) management's operating style.