cpa audit review ch8 review 1

Card Set Information

cpa audit review ch8 review 1
2014-09-02 07:35:35
cpa audit review ch8

cpa audit review ch8 review 1
Show Answers:

  1. An auditor examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. The purpose is to determine the operating effectiveness of the verification. This audit procedure is an example of a
    Test of controls.

    Tests of controls are used to determine whether controls are operating effectively. Checking for initials provides evidence that a person has verified the quantitative data as prescribed. Finding items that were corrected verifies that the control was effective. Finding uncorrected errors indicates the control was not in operation or not effective.
  2. If the auditor intends to rely on the operating effectiveness of relevant controls, which test of controls is necessary to obtain sufficient appropriate evidence?

    According to AU-C 330, an auditor’s tests of controls include other audit procedures in combination with inquiry. For this purpose, inquiry combined with inspection, reperformance, or recalculation may be preferable to inquiry and observation. Observation is relevant only at a moment in time.
  3. An auditor may decide to perform only substantive procedures for certain assertions because the auditor believes
    Controls are not relevant to the assertions.

    The auditor’s risk assessment procedures may not have identified any suitably designed and implemented controls that are relevant to the assertions. Another possibility is that testing of controls may be inefficient. But the auditor needs to be satisfied that performing only substantive procedures will be effective in reducing audit risk to an acceptable level.
  4. An auditor uses the assessed risks of material misstatement to
    Determine the acceptable level of detection risk for financial statement assertions.

    For a given audit risk, the acceptable detection risk (the auditor’s risk) is inversely related to the assessed RMMs (the entity’s risks) at the assertion level. Detection risk is the risk that audit procedures will not detect a material misstatement. It relates to the nature, timing, and extent of procedures performed to reduce audit risk to an acceptably low level. Thus, it depends on the effectiveness of audit procedures and their application by the auditor (AU-C 330).
  5. Which of the following is true related to the auditor’s consideration of controls?

    A.The absence of misstatements detected by an auditor’s substantive procedures should be considered evidence that controls related to the relevant assertion being tested are effective.

    B.A material misstatement detected by the auditor, but not detected by the entity, should be considered a material weakness in internal control.

    C.Misstatements detected by the auditor’s substantive procedures should be considered when testing the effectiveness of related controls.

    D.The auditor should consider testing and documenting the efficiency of the entity’s controls related to relevant assertions.
    C.Misstatements detected by the auditor’s substantive procedures should be considered when testing the effectiveness of related controls.

    Misstatements detected by the auditor’s substantive procedures should be considered when testing the effectiveness of related controls. The auditor may need to assess the risks of material misstatement at a higher level if fraud or error is detected that should have been detected by the entity’s controls.
  6. When an auditor increases the assessment of the risks of material misstatement because certain controls were determined to be ineffective, the auditor will most likely increase the
    Extent of tests of details.

    An auditor should obtain an understanding of internal control to assess the RMMs. The greater (lower) the assessment of the RMMs, the lower (greater) the acceptable detection risk for a given level of audit risk. In turn, the acceptable audit risk affects substantive testing. For example, as the acceptable audit risk decreases, the auditor changes the nature, timing, or extent of substantive procedures to increase the reliability and relevance of the evidence they provide.