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): D
Choice "d" is correct. Observation of client personnel is the audit technique most likely to provide an auditor with the most assurance about the effectiveness of the operation of an internal control. This technique is especially effective for controls that leave little or no audit trail. Choice "a" is incorrect. Confirmation with outside parties is a common substantive test (direct test of an account balance), not a procedure used to test controls. Choice "b" is incorrect. While inquiry of client personnel can provide some evidence about the effectiveness of the operation of internal control, the auditor's direct observation generally provides greater assurance than does inquiry.Choice "c" is incorrect. Recomputation of account balance amounts is a substantive test, not a test of controls.
After obtaining an understanding of internal control and performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely concluded that the:
Answer(s): A
Choice "a" is correct. When an auditor decides not to perform tests of controls, the auditor most likely concluded that the additional evidence to support a reduction in control risk was not cost- beneficial to obtain. In other words, the additional costs that would be incurred to support a lower assessed level of control risk would not be offset by the anticipated cost savings resulting from a lower level of substantive tests.Choice "b" is incorrect. The assessed level of inherent risk (which is the susceptibility of an assertion to a material misstatement based upon the nature of the account balance or transaction class) exists independently from and bears no direct relationship to control risk. Choice "c" is incorrect. Even if internal control is properly designed, it cannot justifiably be relied upon unless tests of controls are performed.Choice "d" is incorrect. When performing additional tests of controls, an auditor is attempting to support a lower level of control risk, not higher.
An auditor generally tests the segregation of duties related to inventory by:
Choice "a" is correct. Tests of controls that do not provide documentary evidence (such as those controls related to segregation of duties) are generally tested by personal inquiry and observation by the auditor.Choice "b" is incorrect. Test counts and cut-off procedures are effective substantive tests of inventory (existence assertion).Choice "c" is incorrect. Analytical procedures and invoice recomputation are substantive tests performed by the auditor to gather evidence regarding management's assertion of valuation of the inventory.Choice "d" is incorrect. Document inspection and reconciliation generally is not helpful in testing segregation of duties, since even appropriate segregation often does not provide documentary evidence.
Which of the following is not part of obtaining an understanding of internal control?
Answer(s): B
Choice "b" is correct. The auditor is not required to obtain knowledge about operating effectiveness as part of the understanding of internal control. This knowledge is obtained later, for specific controls on which the auditor plans to rely.Choices "a", "c", and "d" are incorrect. During the planning phase of the audit, the auditor obtains an understanding of the internal control system by considering:· The types of misstatements that may occur.· The risk that misstatements may occur.· Factors that influence the design of tests of controls and substantive tests.· The assessment of inherent risk.· Judgments about materiality.· The complexity and sophistication of the entity's operations and systems. · The use of manual vs. computerized control procedures. Such knowledge may be obtained by appropriate inquiry, inspection, or observation. Knowledge may also be obtained based on previous experience with the client and/or an understanding of the industry in which the entity operates.
Audit evidence concerning segregation of duties ordinarily is best obtained by:
Choice "b" is correct. Audit evidence concerning segregation of duties ordinarily is best obtained by the auditor observing the employees as they apply control procedures. Generally the auditor's direct, personal knowledge obtained through observation, inspection and physical examination is more persuasive than indirect information.Choice "a" is incorrect. Performing tests of transactions that corroborate management's financial statement assertions would provide little audit evidence concerning segregation of duties. Choice "c" is incorrect. Obtaining a flowchart of activities performed by available personnel may assist the auditor in understanding the design of the internal control system, but it provides no audit evidence regarding whether the segregation of duties is actually functioning as designed. Choice "d" is incorrect. Developing audit objectives that reduce control risk provides no audit evidence regarding the segregation of duties.
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