Regardless of the assessed level of control risk, an auditor would perform some:
Answer(s): C
Choice "c" is correct. Regardless of the assessed level of control risk, an auditor would perform some level of substantive tests to restrict detection risk for significant transaction classes. Even with the lowest possible assessed level of control risk, substantive testing cannot be entirely eliminated for significant transaction classes or balances.Choice "a" is incorrect. An auditor generally would not perform tests of controls if it would not be efficient to do so.Choice "b" is incorrect. Analytical procedures are substantive audit procedures used by the auditor to test account balances, not to verify the design of internal controls. Choice "d" is incorrect. Dual purpose tests are often performed because they increase audit efficiency, but they are not required to be performed in every case.
In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the:
Answer(s): A
Choice "a" is correct. In assessing the competence of a client's internal auditor, an independent auditor would consider the internal auditor's compliance with professional auditing standards. Such compliance could be evaluated by reviewing the audit plan and auditing procedures used by the internal auditor, as well as by assessing the quality of audit documentation provided.Choice "b" is incorrect. The internal auditor's access to management salary data has no bearing on his or her competency.Choice "c" is incorrect. The external auditor's assessment of control risk might be based in part on the existence and effectiveness of an internal audit group, but such assessment would not provide information regarding the competency of the internal auditor. Choice "d" is incorrect. Ratio analysis might be used to identify unusual transactions or events, but it would not provide information regarding the competency of the internal auditor.
When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:
Choice "c" is correct. As the assessed level of control risk increases, the acceptable level of detection risk for financial statement assertions decreases. To attain a decreased level of detection risk, greater assurance is needed from substantive tests. Increasing the extent of tests will provide greater assurance.Choice "a" is incorrect. Tests of controls are used to assess the level of control risk. Once such assessment is made, there is no need to perform further tests of controls. Choice "b" is incorrect. As the assessed level of control risk increases, the acceptable level of detection risk decreases. In this way, the auditor can keep total audit risk to an acceptable level. Choice "d" is incorrect. Inherent risk is based on the nature of the assertion and cannot be changed.
A successor auditor is required to attempt communication with the predecessor auditor prior to:
Answer(s): D
Choice "d" is correct. A successor auditor is required to attempt communication with the predecessor auditor prior to accepting a new engagement.Choice "a" is incorrect. A successor auditor is required to attempt communication with the predecessor auditor prior to accepting a new engagement. This certainly implies that such attempt will be made before any audit tests are performed; however, the requirement is stated in reference to the date of acceptance.Choice "b" is incorrect. A successor auditor is required to attempt communication with the predecessor auditor prior to accepting a new engagement. This certainly implies that such attempt will be made before any audit tests are performed; however, the requirement is stated in reference to the date of acceptance.Choice "c" is incorrect. A successor auditor is not required to attempt communication with the predecessor auditor prior to making a proposal for the audit engagement (remember that more than one auditor may be bidding for the engagement -- and it wouldn't be reasonable to expect the predecessor auditor to respond to all bidders). However, once a successor has been selected, that auditor must attempt communication with the predecessor auditor before actually accepting the engagement.
An auditor uses the assessed level of control risk to:
Choice "d" is correct. An auditor uses the assessed level of control risk to determine the risk of material misstatement, which in turn determines the acceptable level of detection risk for financial statement assertions. Detection risk should bear an inverse relationship to control risk. For example, the less control risk an auditor believes exists, the greater the level of detection risk he or she can accept.Choice "a" is incorrect. The auditor's evaluation of the effectiveness of the entity's internal control is what the auditor uses to assess control risk, not vice versa. Choice "b" is incorrect. 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. Materiality thresholds for planning and evaluation purposes are based upon measurements of financial criteria, not the assessed level of control risk.
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