5" FloorCMFFIBuil ReSA 613.Cor R PepesndS Loyal St ‘Sampaloc, Manda ‘The ReviewSchool of Accountancy 8735-9807 | 734-3989 (0810) 439-1320 {5 resareview@hotmail com AUDITING THEORY IMI+ FDY + MBN + FCT AT-11FURTHER AUDIT PROCEDURES (TESTS OF CONTROLS) REQUIRED READINGS: ‘+ Chapter 9, Study and Evaluation of Internal Control, Auditing and Assurance Principles, 2017 Exition + PSA315 (Redrafted): Identifying and Assessing The Risks of Material Misstatement Through Understanding The Entity and Its Environment PSA 330 (Redrafted): The Auditor's Responses to Assessed RISKS PSA of Terms 1. The more the planned reliance of the auditor on the operating effectiveness of internal controls, A, The more the reliance of the auditor on information generated by the entity B. The more the extent of the auditor's tests of controls. C. The less the extent of the auditor's tests of controls. D. The less the reliance of the auditor on information generated by the entity. 2. Which of the following is not a test of internal control procedures? ‘A. Examination of signatures on checks. B. Inspection of signatures on authorization forms. C. Recalculation of the net pay of an employee that was automatically computed by the payroll system. D. Obtain or prepare reconciliation statements of bank accounts as of the balance sheet date. Tests of controls are concerned primarily with each of the following questions: I. How were the controls applied? II, Were the necessary controls consistently performed? IIL. By whom were the controls applied? A. 1, Il, and In. C. Mand II. B. Tand il. D. Tand mI. 4. It is most appropriate that tests of controls be applied to transactions and controls: ‘A. At the balance sheet date. C. For the entire period under audit. B. At each quarterly interim period. D. At the beginning of the fiscal period. 5. Gem, CPA is considering reliance on the internal controls of Lime Manufacturing Inc. for the 2018 audit. If Gem obtains audit evidence about the operating effectiveness of controls during the interim period, Grace should: ‘A. Rely on the operating effectiveness of these controls up to period end. B. Determine what additional audit evidence should be obtained for the remaining period. C. Should assess risk as HIGH for the remaining period. D. Should rely on controls for the interim audit, but not for the year-end work. 6. In testing controls, it is best to remember this statement: "The basic components of business operations and the primary subject matter of internal accounting control are: ‘A. Assets.” C. Transactions.” B. Control methods and behavior.” D. Employees.” 7. When controts leave no documentary evidence or trail: ‘A. It is impossible for the auditor to verify them so he/she will have to rely on substantive tests. B. The only thing available as verification of their effectiveness is inquiry of management. C. The auditor generally observes them being applied. D. It is impossible to audit that area of the client's system. 8. Audit evidence concerning segregation of duties ordinarily is best obtained by: ‘A. Performing tests of transactions that corroborate management's financial statement assertions. B. Observing the employees as they apply specific controls. CC. Obtaining a flowchart of activities performed by available personnel. D. Developing audit objectives that reduce control risk. 9. The objective of dual-purpose tests Is to: ‘A. Evaluate whether internal controls are operating effectively. B. Detect material misstatements in the client's financial statements. ReSA - The ReviewSchoo! of Accountancy Page 1 of 4Resa: The Revewsdho0 of Account farting Theory. Farther Aut Preceoues (Tet of Corl) AT-11 C. Identify unusual trends or patterns in cornparative financial statements. D. Test internal controls as well as transactions and balances using the same test procedures. 10.When the auditor identifies an area of the accounting system with missing controls (i.e., 2 material weakness), this would lead to a modification of the audit program in that area that would: A. Increase the amount of tests of controls. B. Increase the reliance on tests of controls. C. Cause the issuance of a qualified or adverse opinion. D. Eliminate the need for a test of controls. 11. If the auditors do NOT perform tests of controls of certain assertions: ‘A. They have performed a substandard audit. B. They are not required to communicate reportable conditions relating to those accounts to management. C. They must issue a qualified opinion. D. They must assess control risk at the MAXIMUM level for those assertions. 12. Tests of controls are least likely to be omitted with regard to ‘A. Accounts believed to be subject to ineffective contro! activities B. Accounts representing few transactions C. Accounts representing many transactions D. Subsequent events 13.A control that reduces the risk that an existing or potential control weakness will result in @ failure to meet a control objective is referred to as a control. ‘A. conditional B. limited C. compensating —D.._ offset 14. 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 is 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 , 15, During the review of a small business client's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effectivein offsetting this weakness? ‘A. The owner reviews errors in billings to customers and postings to the subsidiary ledger. B. The controller receives the monthly bank statement directly and reconciles the checking accounts. C. The controller reconciles the total of the subsidiary ledger to the amount shown in the general ledger. D. The owner reviews credit memos after they are recorded. 16. If evidence was obtained in the prior year’s audit that indicates a key control was operating effectively: ‘A. It will be unnecessary to test that control this year. B. The tests of that control will be reduced this year. CC. The extent of tests of that control may ve reduced this year if the auditor determines that it is still in place. D. The auditor would not test this area again this year. 17. If no changes have occurred since the controls were last tested, a CPA should ‘A. Rely on the prior year audit's assessment of internal controls and use this assessment in the current year. B. Test the operating effectiveness of such controls at least once in every fourth audit. C._ Rely entirely on the performance of substantive audit procedures. D. Test the operating effectiveness of such controls at least once in every third audit. 18. In accordance with PSA 260, matters to be communicated to those charged with governance may include the following, except The auditor's responsibilities in relation to the financial statement audit Planned audit opinion Significant findings from the audit Auditors independence oneP ReSAM 735-9807 / 734-3989 / (0910) 439-1320 Page 2 of 4ReSA: The ReviewSchool of Accountanc Astin Theory: Farther Aut Procedures Tests of Contr) AT-11 19. PSA 265 states that the auditor is to communicate deficiencies in internal control that the auditor has identified during the audit and that in the auditor’s judgment, are of sufficient importance to merit the respective attention of, the following: A. Management only 8. Those charged with governance only C. Management and those charged with governance D. Management, those charged with governance, and the Securities and Exchange Commission 20. Which of the following statements concerning material weaknesses and reportable conditions is correct? ‘A. An auditor should identify and communicate material weaknesses separately from reportable conditions. B. All material weaknesses are reportable conditions. . An auditor should report immediately material weaknesses and reportable conditions discovered during an audit. ©. All reportable conditions are material weaknesses. 21. The auditors who become aware of an internal control reportable condition are required to communicate this to the: A. -Audit committee and client's legal counsel. C. Audit committee. 8. Board of directors and internal auditors. D. Internat auditors. 22. deficiency in internal control exists wher A B c oD ‘+ A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the FS on a timely basis Yes Yes No Yes ‘+ A control necessary to prevent, or detect and correct, misstatements in the FS on a timely basis is missing No Yes Yes Yes 23. deficiency or combination of deficiencies in internal control that, in the auditor's professional judgment, is of sufficient importance to merit the attention of those charged with governance. ‘A. Reportable condition B. Cute deficiency in control C. Significant deficiency in internal control D. Material control deficiency 24, Significant deficiencies in internal control are to be communicated: ‘A. Orally, but may also be in writing C. Orally or in writing B. In writing D. Under no circumstances 25. The development of constructive suggestions to clients for improvements in internal control is ‘A. A requirement of the auditor's consideration of internal control. B. A desirable by-product of an audit engagement. C. Addressed by the auditor only during a special engagement. D. As important as establishing a basis for reliance upon the internal control structure. 26.When reporting on conditions relating to an entity's internal control structure observed during an audit of the financial statements, the auditor should include a ‘A. Description of tests performed to search for material weaknesses. B. Statement of a positive assurance on the structure. - C. Paragraph describing the inherent limitations of the structure. D. Restriction on the distribution of the report. 27.$1: The most important control for petty cash is that two individuals maintain joint custody of the asset. $2: The most important control for petty cash is the use of an imprest fund. A. True, True C. True, False B. False, False D. False, True 28.For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve: ‘A. Employee overtime wages B. Write-offs of customer accounts C. Cash disbursements D. None of the above ReSA735-9807 / 734-3989 / (0910) 439-1320 bre9ee views hotmatl om Page 3 of 4