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:
Answer(s): B
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.
Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?
Answer(s): D
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.
In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:
Answer(s): A
Choice "a" is correct. When an entity transmits, processes, maintains, or accesses significant information electronically, factors unique to electronic processing may make it impractical or impossible to reduce detection risk to an acceptable level through substantive testing alone. In such cases, tests of controls should be performed.Choices "b", "c", and "d" are incorrect. Certain factors unique to electronic processing may make it impractical or impossible to reduce detection risk to an acceptable level through substantive testing alone.In such cases, tests of controls should be performed to address the increased potential for unauthorized access, the risks of insufficient paper-based audit evidence, and the fact that the appropriateness and sufficiency of evidence may be dependent to some extent on computerized controls. Simply expanding the sample size, adjusting materiality levels, or applying analytical procedures will not address these concerns.
Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls?
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.
Which of the following statements about performing tests of controls to support a lower level of control risk is not true?
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.
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