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?
Answer(s): C
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.
To obtain audit evidence about control risk, an auditor ordinarily selects tests from a variety of techniques, including:
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.
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:
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.
Audit evidence concerning proper segregation of duties ordinarily is best obtained by:
Answer(s): D
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.
An auditor may decide not to test controls related to certain assertions because the auditor believes:
Answer(s): B
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.
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