7 Auditing and Assurance - Questions and Answer

1.
According to PSA 400, which of the following is correct regarding internal control
system?
In the audit of financial statements, the auditor is only concerned with
those policies and procedures within the accounting and internal control systems
that are relevant to the financial statements
2. The primary objective of procedures performed to obtain an understanding of internal
control is to provide an auditor with
c. Knowledge necessary to plan the audit.
3. Which of the following is correct about internal control?
b. One of the inherent limitations of accounting and internal control systems is the
possibility that the procedures may become inadequate due to changes in
conditions, and compliance with procedures may deteriorate.
4. In an audit of financial statements, an auditor’s primary consideration regarding a
control is whether it
b. Affects management’s financial statement assertions.
5. A proper understanding of the client’s internal control is an integral part of the audit
planning process. The results of the understanding
d. May be used as the basis for withdrawing from an audit engagement.
6. Audit evidence concerning segregation of duties ordinarily is best obtained by
b. Observing the employees as they apply specific controls.
7. Which of the following statements about preliminary assessment of control risks is
correct?
d. The auditor ordinarily assesses control risk at high level for some or all
assertions when it is not cost efficient to do tests of controls.
8. Which of the following statements concerning control risk is correct?
d. Assessing control risk and obtaining an understanding of an entity’s internal
control may be performed concurrently.
9. Based on a consideration of internal control completed at an interim date, the auditor
assessed control risk at a low level and performed interim substantive tests. The records
and procedures would most likely be tested again at year-end if
d. Inquiries and observations lead the auditor to believe that conditions have
changed.
10. Although substantive tests may support the accuracy of underlying records, these
tests frequently provide no affirmative evidence of segregation of duties because
a. The records may be accurate even though they are maintained by a person who
performs incompatible functions.
11. After obtaining an understanding of internal control and assessing control risk, an
auditor decided not to perform additional tests of controls. The auditor most likely
concluded that the
a. Additional evidence to support a further reduction in control risk was not cost
beneficial to obtain.
12. 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
c. Observation and inquiry.
13. Which of the following types of evidence would an auditor most likely examine to
determine whether controls are operating as designed?
d. Client records documenting the use of computer programs.
14. Which of the following procedures concerning accounts receivable is an auditor most
likely to perform to obtain evidential matter in support of an assessed level of control risk
below the maximum level?
d. Observing an entity’s employee prepare the schedule of past due accounts
receivable.
15. Which of the following statements is an example of an inherent limitation of internal
control.
a. Errors may arise from mistakes in judgments.
16. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is
c. Documentation of control structure, substantive tests, and tests of controls
17. In obtaining an understanding of an entity’s internal control structure, an auditor is
required to obtain knowledge about the Operating effectiveness of Design of policies
Policies and procedures and procedures
b. No Yes
18. Which of the following is the correct order for performing the auditing procedures A
through C below A = Tests of Controls B = Preparation of a flowchart depicting the client’s
internal control structure C = Substantive tests
b. BAC
19. After considering a client’s internal control, an auditor has concluded that the system
is well designed and is functioning as anticipated. Under these circumstances, the auditor
would most likely
c. Not increase the extent of planned substantive tests
20. After considering internal control, an auditor might decide to
a. Increase the extent of substantive tests in areas where internal control is weak

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