ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination AT-11

AUDITING (Auditing Theory) J. IRENEO  E. ARAÑAS  F. TUGAS  C. ALLAUIGAN

TESTS OF CONTROLS
Tests of Controls (PSA 330)
The auditor shall design and perform a Test of Controls (TOC) to obtain sufficient appropriate audit
evidence as to the operating effectiveness of relevant controls when:
(a) The auditor’s assessment of risks of material misstatement at the assertion level includes an
expectation that the controls are operating effectively; or

(b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion
level.

1. Tests of controls are performed only on those controls that the auditor has determined are suitably
designed to prevent, or detect and correct, a material misstatement in an assertion.

2. Testing the operating effectiveness of controls is different from obtaining an understanding

of and evaluating the design and implementation of controls.

3. The greater the reliance the auditor places on the effectiveness of a control, the more persuasive
audit evidence shall be obtained.

4. Nature and Extent of Tests of Controls

(a) Perform other audit procedures in combination with inquiry to obtain audit evidence about the
operating effectiveness of the controls, including:
a. How the controls were applied at relevant times during the period under audit;
b. The consistency with which they were applied; and
c. By whom or by what means were they applied.

(b) Determine whether the controls to be tested depend upon other controls (indirect controls), and
if so, whether it is necessary to obtain audit evidence supporting the effective operation of those
indirect controls.

(c) Test of controls procedures include:

a. Examination of evidence through inspection and inquiry

b. Reperformance of controls.
c. Observation of the performance of control procedures.

5. Timing of Tests of Controls

The auditor shall test controls for the particular time, or throughout the period, for which the auditor
intends to rely on those controls in order to provide an appropriate basis for the auditor’s intended
reliance.
-The auditor can obtain audit evidence about internal controls in the interim period and at period end.
-The auditor can obtain audit evidence about internal controls from previous audits.

6. Evaluating the Operating Effectiveness of Controls

The auditor shall evaluate whether, on the basis of the audit work performed, the auditor has identified
a material weakness in the operating effectiveness of controls.
a. Check the deviations from controls upon which the auditor intends to rely
b. Evaluate whether misstatements that have been detected by substantive procedures indicate
that controls are not operating effectively
7. Report on Material Weakness in Internal Control
The auditor shall communicate material weaknesses in internal control identified during the audit on
a timely basis to management at an appropriate level of responsibility.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
TESTS of CONTROLS AT-11
MULTIPLE CHOICE QUESTIONS
1. Tests of controls
A. are the procedures used to test the effectiveness of controls in support of a reduced
assessed control risk.
B. are used to support the ending balances in the balance sheet and income statement
accounts.
C. are performed at the end of the audit.
D. are designed to detect fraud.

2. Evaluate the following statements:

I. The purpose of the auditor’s consideration of the effectiveness of internal controls is to
determine the nature, extent, and timing of substantive testing.
II. The internal controls of an organization have no impact on the efficiency of an audit.
III. Internal controls that the auditor expects to rely on to reduce substantive testing must
be tested.

A. False, True, True

B. True, True, True
C. True, False, True
D. True, False, False

3. In designing and performing test of controls, the auditor shall

A. obtain more persuasive audit evidence the greater the reliance the auditor places on the
effectiveness of a control.
B. obtain less persuasive audit evidence the greater the reliance the auditor places on the
effectiveness of a control.
C. obtain more persuasive audit evidence the lesser the reliance the auditor places on the
effectiveness of a control.
D. obtain less persuasive audit evidence notwithstanding the degree of reliance the auditor
places on the effectiveness of a control.

4. Evaluate the following statements:

I. The auditor uses control risk assessment and results of tests of controls to determine
planned detection risk and the related substantive tests for the financial statement audit.
II. Testing of internal controls can only be performed by the auditor at the end of the fiscal
year.

A. Only statement II is true C. Both statements are true

B. Both statements are false D. Only statement I is true

5. Evaluate the following statements:

I. When auditors plan to use evidence about the operating effectiveness of internal control
contained in prior audits, auditing standards require tests of the controls’ effectiveness
at least every other year.
II. The greater the risk, the less audit evidence the auditor should obtain that controls are
operating effectively.

A. Only statement I is true C. Both statements are false

B. Only statement II is true D. Both statements are true

6. An auditor is likely to use four types of procedures to support the operating effectiveness of
internal controls. Which of the following would generally not be used?
A. make inquiries of appropriate client personnel
B. examine documents, records, and reports
C. reperform client procedures
D. inspect design documents

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
TESTS of CONTROLS AT-11
7. Which of the following is true regarding the relationship between tests of controls and procedures
to obtain an understanding?
A. In obtaining an understanding of internal control, the procedures to obtain an
understanding are applied to all controls identified during that phase.
B. Tests of controls are applied only when the assessed control risk has not been satisfied
by the procedures to obtain an understanding.
C. Procedures to obtain an understanding are performed only on one or a few transactions.
D. All of the above are correct.

8. Which of the following is an accurate statement relating to the extent of procedures?

A. If an auditor wants a lower assessed control risk than the preliminary assessed control
risk, the number of controls tested increases while the extent of the tests for each control
decrease.
B. The extent of testing depends on the frequency of the operation of the controls.
C. All controls must be tested only at year-end.
D. The frequency of testing is the same for both manual and computer controls.

9. 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.”

10. What does the effectiveness of internal controls influence?

A. Inherent risk.
B. Control risk.
C. Risk of material misstatement.
D. Both B and C.

11. Which of the following would not affect an auditor's judgment concerning internal controls?
A. The assertion being tested.
B. The design of the control.
C. The operation of the control.
D. The level of inherent risk.

12. When controls 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.

13. 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.
C. Obtaining a flowchart of activities performed by available personnel.
D. Developing audit objectives that reduce control risk.

14. 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.
C. Identify unusual trends or patterns in comparative financial statements.
D. Test internal controls as well as transactions and balances using the same test procedures.

15. With a dual-purpose test, what is an auditor likely to do?

A. Perform a substantive procedure concurrently with a test of a control.
B. Perform a substantive procedure concurrently with a risk assessment test.
C. Perform a risk assessment test concurrently with a test of a control.
D. None of the above.

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TESTS of CONTROLS AT-11
16. 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.

17. Tests of controls are least likely to be omitted with regard to

A. Accounts believed to be subject to ineffective control activities
B. Accounts representing few transactions
C. Accounts representing many transactions
D. Subsequent events

18. S1-A control that reduces the risk that an existing or potential control weakness will result in a
failure to meet a control objective is referred to as a compensating control.
S2-When the auditor identifies an area of the accounting system with missing controls (i.e., a
material weakness), this would lead to a modification of the audit program in that area that
would eliminate the need for a test of controls.

A. Only statement II is true C. Both statements are true

B. Both statements are false D. Only statement I is true

19. 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

20. 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 effective in 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.

21. 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.
C. The extent of tests of that control may be reduced this year if the auditor determines
that it is still in place.
D. The auditor would not test this area again this year.

22. 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.

23. In accordance with PSA 260, matters to be communicated to those charged with governance
may include the following, except
A. The auditor’s responsibilities in relation to the financial statement audit
B. Planned audit opinion
C. Significant findings from the audit
D. Auditors independence

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
TESTS of CONTROLS AT-11
24. 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
B. Those charged with governance only
C. Management and those charged with governance
D. Management, those charged with governance, and the Securities and Exchange
Commission

25. 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.
C. An auditor should report immediately material weaknesses and reportable conditions
discovered during an audit.
D. All reportable conditions are material weaknesses.

26. 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.
B. Board of directors and internal auditors. D. Internal auditors.

27. A deficiency in internal control exists when:

A B C D
• 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

28. A deficiency 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 C. Significant deficiency in internal control
B. Cute deficiency in control D. Material control deficiency

29. How must significant deficiencies and material weaknesses be communicated to those charged
with governance?
A. Either oral or written communication is acceptable.
B. Oral communication is required.
C. Written communication is required.
D. Written communication is required for material weaknesses, but oral communication is
allowed for significant deficiencies.

30. 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.

31. 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.

32. S1: The most important control for petty cash is that two individuals maintain joint custody of
the asset.
S2: 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

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TESTS of CONTROLS AT-11
33. For effective internal control, employees maintaining the accounts receivable subsidiary ledger
should not also approve:
A. Employee overtime wages C. Cash disbursements
B. Write-offs of customer accounts D. None of the above

34. The accounts payable department usually has responsibility for verifying the propriety of
acquisitions by comparing the details on the:
A. Vendor’s invoice and the receiving report.
B. Vendor’s invoice and the purchase requisition.
C. Purchase order, receiving report, and vendor’s invoice.
D. Purchase requisition, purchase order, and receiving report.

35. Auditors are often concerned with three aspects of internal controls related to the sales and
collection cycle. Which of the following is not one of those controls?
A. Controls that detect or prevent embezzlement.
B. Controls over the cutoff.
C. Controls over acquisitions.
D. Controls related to the allowance for doubtful accounts.

36. The following relates to the testing of controls. Which is the true statement?
A. The use of prenumbered sales invoices is the primary control procedure to satisfy the
objective of authorization.
B. If control risk is assessed as high, the auditor may send significantly fewer confirmations for
a sample of accounts receivable than if the control risk is assessed low.
C. An auditor would test controls over the occurrence of sales transactions by sampling recorded
revenues and tracing them back to invoices and shipping documents.
D. Prenumbered shipping and billing documents are examples of controls related to the
existence of sales transactions.

37. Which of the following control objectives pertain to existence of trade receivables?
A. Recorded credit sales transactions are real and not fictitious.
B. Recorded credit sales transactions include the effects of all transactions that have occurred
C. The entity is entitled to trade receivable balances shown at the period-end
D. Recorded cash balances are realizable at the amounts stated

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