Pamantasan ng Cabuyao

Katapatan Subd., Banay Banay, Cabuyao, Laguna

PRE-FINALS No. 2

Name: _________________________________ Score:___________

Auditing Theory Mr. W.E. Peralta
Encircle the letter of the best answer.

1. The development of a general strategy and a detailed approach for the expected nature, timing, and extent of audit
refers to :
A. Supervision B. Audit procedures C. Directing D. Planning

2. The auditor should consider the nature, extent, and timing of the work to be performed and should prepare a written
audit program for every audit. Which audit standard is most closely related to this requirement?
A. The audit is to be performed by a person or persons having adequate technical training and proficiency as an
auditor.
B. In all matters relating to the assignment, an independent mental attitude is to be maintained by the auditor(s).
C. Due professional care is to be exercised in the planning and performance of the audit and preparation of the
report.
D. The work is to be adequately planned and assistants, if any, are to be properly supervised.

3. Which of the following would a successor auditor normally perform after acceptance of an audit client?
A. Inquiry of predecessor auditor regarding the client.
B. Review the SEC filings of the client.
C. Inquiry of bankers regarding the client.
D. Review of predecessor auditor working papers.

4. To obtain an understanding of a `continuing client’s business in planning an audit, an auditor most likely would
A. Perform tests of details of transactions and balances.
B. Review prior-year working papers and the permanent file for the client.
C. Read specialized industry journals.
D. Reevaluate client’s internal control environment.

5. Which of the following is required documentation in an audit in accordance with generally accepted auditing
standards?
A. A flowchart or narrative of the information system describing the recording and classification of transactions for
financial reporting.
B. An audit program setting forth in detail the procedures necessary to accomplish the engagement’s objectives.
C. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity
personnel.
D. An internal control questionnaire identifying policies and procedures that assure specific objectives will be
achieved.

6. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
A. Inquiring of the client’s legal counsel concerning pending litigation.
B. Comparing the financial statements to anticipated results.
C. Examining computer generated exception reports to verify the effectiveness of internal controls.
D. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

7. Analytical procedures used in planning an audit should focus on

A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential material misstatements will be identified.
C. Enhancing the auditor’s understanding of the client’s business.
D. Assessing the adequacy of the available evidential matter.
8. Analytical procedures, which means the analysis of significant ratios and trends including the resulting investigation
of fluctuations and relationships that are inconsistent with other relevant information or which deviate from predicted
amounts, are not required to be applied
A. At the planning stage of the audit C. As substantive procedures
B. Overall review stage of the audit D. None of the above

9. Which of the following statements is correct concerning analytical procedures?

A. Analytical procedures usually involve comparisons of ratios developed from recorded amounts to assertions
developed by management.
B. Analytical procedures used in planning an audit generally use data aggregated at a high level.
C. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control
risk.
D. Analytical procedures are more efficient, but not more effective, than tests of details and transactions.

10. Which of the following is an effective audit planning and control procedures that helps prevent misunderstandings
and inefficient use of audit personnel?
A. Make copies, for inclusion in the working papers, of those client supporting documents examined by the auditor.
B. Provide the client with copies of the audit programs to be used during the audit.
C. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.
D. Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final
closing.

11. Which of the following is an aspect of scheduling and controlling the audit engagement?
A. Including in the audit program a column for estimated and actual time.
B. Performing audit work only after the client’s books of account have been closed for the period under
examination.
C. Writing a conclusion in individual working papers indicating how the results of the audit will affect the auditor’s
report.
D. Including in the engagement letter an estimate of the minimum and maximum audit fee.

12. Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in
electronic form without any paper documentation?
A. Discrete phases of planning, interim, and year-end field work.
B. Increased effort to search for evidence of management fraud.
C. Performance of audit tests on a continuous basis.
D. Increased emphasis on the completeness assertion.

13. Which of the following statements is not correct about materiality?

A. The concept of materiality recognizes that some matters are important for fair presentation of financial
statements in conformity with GAAP, while other matters are not important.
B. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements
that could be material to any one of the financial statements.
C. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative
and qualitative judgments.
D. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable
person who will rely on the financial statements.

14. The risk that the assertion contains material misstatements that, when aggregated with misstatements in other
assertions, could make the entire financial statements materially misstated is:
A. Individual audit risk B. Inherent risk C. Control risk D. Detection risk

15. Incremental risk is the increased risk that errors may not be detected at the balance sheet date because:
A. Audit procedures were performed at an interim date
B. Inherent risk was assessed too low.
C. Analytical procedures were not performed.
D. Detection risk was set too high a level.
16. Adequate planning of the audit work helps the auditor of accomplishing the following objectives, except:
A. Gathering of all corroborating audit evidence.
B. Ensuring that appropriate attention is devoted to important areas of the audit.
C. Identifying the areas that need a service of an expert.
D. The audit work is completed efficiently.

17. The extent of planning will vary according to any of the following, except:
A. Size of the audit client.
B. Auditor’s experience with the entity and knowledge of the business.
C. The nature and complexity of the audit engagement
D. The assessed level of control risk.

18. Which of the following is least likely considered by the auditor in developing the overall audit plan?
A. Understanding of the accounting and internal control systems.
B. Relevant risk and materiality.
C. The involvement of other auditors in the audit of major component of financial statements
D. The general level of competence of audit assistants.

19. Which of the following is not considered by the CPA when he makes an overall audit plan?
A. Identification of complex accounting areas including those involving accounting estimates.
B. The information technology used by the client.
C. The content of the representation letters.
D. The nature and timing of reports or other communication with the entity that are expected under the engagement.

20. Which of the following least likely affect the form and content of the overall audit plan?
A. Complexity of the audit engagement.
B. Methodology and technology used by the auditor.
C. The entity’s form of business organization.
D. The size of the entity.

21. The audit program should contain the following, except:

A. Audit objective
B. Time budget for the various audit areas
C. Set of planned audit procedures
D. The combined assessed level of inherent and control risk

22. Which of the following will most likely help the auditor to identify and understand the events, transactions and
practices of his audit client?
A. Obtaining a sufficient knowledge of the business of his client.
B. Understanding of accounting and internal control.
C. Testing control policies and procedures.
D. Obtaining a representation letter from the client management.

23. The auditor should have or obtain a knowledge of the client’s business sufficient to:
A. Evaluate whether the financial statements are materially misstated.
B. Document material weaknesses in accounting and internal control systems.
C. Identify and understand events, transactions and practices that may have effect on financial statements.
D. Have an overall evaluation of whether financial assertions are fairly presented in the financial statements.

24. The auditor is not expected to have

A. A particular knowledge of the economy and the industry within which the entity operates.
B. A particular knowledge of how the entity operates.
C. A level of knowledge of business ordinarily less than that possessed by management.
D. A knowledge of business which is used in assessing inherent and control risk.
25. Understanding the business and using this information appropriately assists the auditor in, except
A. Deciding whether to do tests of controls.
B. Evaluating audit evidence.
C. Assessing risks and identifying potential problems.
D. Planning and performing the audit effectively and efficiently.

26. Which of the following is the ultimate concern of the knowledge about the business?
A. Consideration of how it affects the financial statements taken as a whole.
B. Assists the auditor in enforcing quality control procedures.
C. To assure that sufficient audit evidence is obtained.
D. It assists in determining the type of audit report to be issued.

27. A knowledge of the business is a frame of reference within which the auditor exercises professional judgment. This
assists the auditor in carrying out the following objectives, except:
A. Assessing risks and identifying problems.
B. Evaluating audit evidence.
C. Determining the audit opinion to be expressed.
D. Planning and performing the audit effectively and efficiently.

28. Throughout the course of the audit, the auditors make judgment about many matters where knowledge of the business
is important. These procedures do not include:
A. Evaluating accounting estimates and management representations.
B. Identifying related parties and related party transactions.
C. Assessing inherent and control risks.
D. Assessing the appropriateness of using statistical sampling instead of judgmental sampling.

29. According to PSA 400, which of the following is correct regarding internal control system?
A. Internal control system refers to all the policies and procedures adopted by the auditor to assist in achieving
management’s objective.
B. A strong environment, by itself, ensure the effectiveness of the internal control system.
C. 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.
D. The internal control system is confined to those matters which relate directly to the functions of the accounting
system.

30. Which of the following is correct about internal control?

A. Accounting and internal control systems provide management with conclusive evidence that objectives are
reached.
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.
C. Most internal controls tend to be directed at non-routine transactions.
D. Management does not consider costs of the accounting and internal control systems.

31. Corporate directors, management, external auditors, and internal auditors all play important roles in creating a proper
control environment. Top management is primarily responsible for
A. Establishing a proper environment and specifying overall internal control.
B. Reviewing the reliability and integrity of financial information and the means used to collect and report such
information.
C. Ensuring that external and internal auditors adequately monitor the control environment.
D. Implementing and monitoring controls designed by the board of directors.

32. Which of the following best describe the interrelated components of internal control?
A. Organizational structure, management philosophy, and planning.
B. Control environment, risk assessment, control activities, information and communication systems, and
monitoring.
C. Risk assessment, backup facilities, responsibility accounting and natural laws.
 D. Legal environment of the firm, management philosophy, and organizational structure.

33. In an audit of financial statements, an auditor’s primary consideration regarding a control is whether it
A. Reflects management’s philosophy and operating style.
B. Affects management’s financial statement assertions.
C. Provides adequate safeguards over access to assets.
D. Enhances management’s decision-making processes.

34. Effective internal control

A. Eliminates risk and potential loss to the organization.
B. Cannot be circumvented by management.
C. Is unaffected by changing circumstances and conditions encountered by the organization.
D. Reduces the need for management to review exception reports on a day-to-day basis.

35. Which of the following statements about internal control is correct?

A. Properly maintained internal controls reasonably assure that collusion among employees cannot occur.
B. Establishing and maintaining internal control is the internal auditor’s responsibility.
C. Exceptionally strong control allows the auditor to eliminate substantive tests.
D. The cost-benefit relationship should be considered in designing internal control.

36. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that
A. Tests of controls may fail to identify controls relevant to assertions.
B. Material misstatements may exist in the financial statements.
C. Specified controls requiring segregation of duties may be circumvented by collusion.
D. Entity policies may be overridden by senior management.

37. A proper understanding of the client’s internal control is an integral part of the audit planning process. The results of
the understanding
A. Must be reported to the shareholders and the SEC.
B. Bear no relationship to the extent of substantive testing to be performed.
C. Are not reported to client management.
D. May be used as the basis for withdrawing from an audit engagement.

38. An entity should consider the cost of a control in relationship to the risk. Which of the following controls best reflects
this philosophy for a large peso investment in heavy machine tools?
A. Conducting a weekly physical inventory.
B. Placing security guards at every entrance 24 hours a day.
C. Imprinting a controlled identification number on each tool.
D. Having all dispositions approved by the vice president of sales.

39. 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.

40. Which of the following statements about preliminary assessment of control risks is correct?
A. After obtaining an understanding of the accounting and internal control systems, the auditor should make a
preliminary assessment of control risks, at the assertion level, for all accounts or transaction classes.
B. The preliminary assessment of control risk can be done only after completing tests of controls.
C. The preliminary assessment of control risk for a financial assertion is normally low, unless the auditor is able to
identify weaknesses that may indicate ineffectiveness of accounting and internal control system.
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.
41. Which of the following statements concerning control risk is correct?
A. When control risk is at the maximum level, an auditor is required to document the basis for that assessment.
B. Control risk may be assessed sufficiently low to eliminate substantive testing for significant transaction classes.
C. When assessing control risk, an auditor should not consider evidence obtained in prior audits about the operation
of controls.
D. Assessing control risk and obtaining an understanding of an entity’s internal control may be performed
concurrently.

42. 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
A. Tests of controls were not performed by the internal auditor during the remaining period.
B. Internal control provides a basis for limiting the extent of substantive testing.
C. The auditor used nonstatistical sampling during the interim period testing of controls.
D. Inquiries and observations lead the auditor to believe that conditions have changed.

43. Although substantive tests may support the accuracy of underlying records, these tests frequently provide no
affirmative evidence of segregation of duties because
A. Substantive tests rarely guarantee the accuracy of the records if only a person who performs incompatible
functions.
B. The records may be accurate even though they are maintained by a person who performs incompatible functions.
C. Substantive tests relate to the entire period under audit, but tests of controls ordinarily are confined to the period
during which the auditor is on the client’s premises.
D. Many computerized procedures leave no audit trail of who performed them, so substantive tests may necessarily
be limited to inquiries and observation of office personnel.

44. 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.
B. Assessed level of inherent risk exceeded the assessed level of control risk.
C. Internal control was properly designed and justifiably may be relied on.
D. Evidence obtainable through tests of controls would not support an increased assessment of control risk.

45. The objective of tests of details of transactions performed as tests of controls is to

A. Monitor the design and use of entity documents such as prenumbered shipping for
B. Determine whether controls have been placed in operation.
C. Detect material misstatements in the account balances of the financial statements.
D. Evaluate whether controls operated effectively.

46. 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
A. Confirmation and observation. C. Analytical procedures and confirmation.
B. Observation and inquiry. D. Inquiry and analytical procedures

47. Which of the following would not be a method used to conduct tests of controls?
A. Inquiry B. Walkthrough C. Confirmation D. Observation

48. The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the
extensions. This is an example of a
A. Test of controls C. Dual purpose test
B. Substantive test D. Test of balances
49. Which of the following types of evidence would an auditor most likely examine to determine whether controls are
operating as designed?
A. Confirmations of receivables verifying account balances.
B. Letters of representations corroborating inventory pricing.
C. Attorneys’ responses to the auditor’s inquiries.
D. Client records documenting the use of computer programs.

50. 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?
A. Sending confirmation requests to an entity’s principal customers to verify the existence of accounts receivable.
B. Inspecting an entity’s analysis of accounts receivable for unusual balances.
C. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts receivable.
D. Observing an entity’s employee prepare the schedule of past due accounts receivable.

51. An auditor is least likely to test controls that provide for

A. Classification of revenue and expense transactions by product line
B. Approval of the purchase and sale of trading securities
C. Segregation of the functions of recording disbursements and reconciling the bank account
D. Comparison of receiving reports and vendors’ invoices with purchase orders

52. In a small company that doesn't employ an adequate number of employees to permit proper division of
responsibilities, effective internal control can be strengthened by
A. Direct participation by the owner of the business in the record keeping activities of the business.
B. Employment of temporary personnel to aid in the separation of duties.
C. Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.
D. Engaging a CPA to perform monthly "write up" work.

53. Which of the following is true of the communication to management of material weaknesses in accounting and
internal control?
A. Communication must be in writing.
B. Oral communication of material weaknesses, when appropriate, would be documented in the audit working
papers.
C. The communication should indicate that the auditor had extensively examined the accounting and internal
control system of the client.
D. The auditors should indicate in the communication that the examination is primarily designed to determine
whether the accounting and internal control is adequate.

54. Transaction authorization within an organization may be either specific or general. An example of specific
transaction authorization is the
A. Approval of a construction budget for a new warehouse
B. Setting of automatic reorder points
C. Establishment of a customer’s credit limits
D. Establishment of sales prices

55. Internal control should provide reasonable (but not necessarily absolute) assurance which means that:
A. The cost of control activities should not exceed the benefits.
B. Internal control is management’s, not auditor’s, responsibility.
C. An attestation engagement about management’s internal control assertions may not necessarily detect all
reportable conditions.
D. There is always a risk that reportable conditions may result in material misstatements.

56. Which of the following statements is an example of an inherent limitation of internal control.
A. Errors may arise from mistakes in judgments.
B. The effectiveness of control procedures depends on segregation of duties.
C. Procedures are designed to assure that transactions are executed as management authorities.
D. Computers process large numbers of transactions.
57. Proper segregation of functional responsibilities calls for separation of the functions of
A. Authorization, execution, and recording. C. Custody, execution, and reporting.
B. Authorization, execution, and payment. D. Authorization, payment, and recording.

58. Which of the following is a responsibility that should not be assigned to only one employee?
A. Access to securities in the company’s safe deposit box.
B. Custodianship of the cash working fund.
C. Reconciliation of bank statement.
D. Custodianship of tools and small equipment.

59. Which of the following activities would be least likely to strengthen a company’s internal control?
A. Maintaining insurance for fire and theft.
B. Separating accounting from other financial operations.
C. Fixing responsibility for the performance of employee duties.
D. Carefully selecting and training employees.

60. As generally conceived, the “audit committee” of a publicly held company should be made up of
A. Members of the board of directors who are not officers or employees.
B. Representatives of the major equity interests (bonds, preferred stock, common stock).
C. The audit partner, the chief financial officer, the legal counsel, and at least one outsider.
D. Representatives from the client’s management, investors, suppliers, and customers.

61. When considering internal control, the auditor’s primary concern is to determine
A. The reliability of the accounting information system.
B. The possibility of fraud occurring.
C. Compliance with policies, plans, and procedures.
D. The type of an opinion he will issue.

62. Of the following, the best statement of the CPA’s primary objective in considering internal control is that the review
is intended to provide
A. A basis for reliance on the system and determining the scope of other auditing procedures.
B. Reasonable protection against client fraud and defalcations by client employees.
C. A basis for constructive suggestions to the client for improving his internal control system.
D. A method for ensuring that there is reasonable assurance that the financial statements are reliable.

63. When an auditor assesses control risk below the maximum level, the auditor is required to document the auditor’s

Basis for concluding that control Understanding of the entity’s internal

risk is below the maximum level control structure elements
A. Yes Yes
B. No No
C. Yes No
D. No Yes

64. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is
A. Substantive tests, documentation of control structure, and tests of controls
B. Documentation of control structure, tests of controls, and substantive tests
C. Documentation of control structure, substantive tests, and tests of controls
D. Tests of controls, documentation of control structure, and substantive tests
65. 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
A. Yes Yes
B. No Yes
C. Yes No
D. No No

66. Which of the following audit techniques most likely would provide an auditor with the most assurance about the
effectiveness of the operation on an internal control procedure?
A. Confirmation with outside parties C. Recomputation of account balance
B. Observation of client personnel D. Inquiry of client personnel

67. 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
A. ABC B. BAC C. ACB D. BCA

68. 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
A. Cease to perform further substantive tests
B. Not increase the extent of planned substantive tests
C. Increase the extent of anticipated analytical procedures
D. Perform all tests of controls to the extent outlined in the preplanned audit program

69. After considering internal control, an auditor might decide to

A. Increase the extent of tests of controls and substantive tests in areas where internal control is strong
B. Increase the extent of substantive tests in areas where internal control is weak
C. Reduce the extent of tests of controls in areas where internal control is strong
D. Reduce the extent of both substantive tests and tests of controls in areas where internal control is strong

70. To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of the
following except:
A. Make inquiries C. Make observations
B. Design substantive tests D. Inspect documents and records

71. In an auditor’s consideration of internal control, the completion of a questionnaire is most closely associated with
which of the following?
A. Separation of duties C. Flowchart accuracy
B. Understanding the system D. Tests of controls

72. Before relying on the system of internal control, the auditor obtains a reasonable degree of assurance that the internal
control procedures are in use and operating as planned. The auditor obtains this assurance by performing planned
A. Substantive tests C. Transaction tests
B. Tests of controls D. Tests of trends and ratios

73. After obtaining an understanding of a client’s controls, an auditor may decide to omit tests of the controls. Which of
the following in not appropriate reason to omit tests of controls?
A. The controls duplicate other controls.
B. The controls appear adequate.
C. Reportable conditions preclude assessing control risk below the maximum.
D. The effort to test controls exceeds the effort saved by not performing substantive tests.
74. In general, a material weakness in internal control may be defined as a condition in which material errors or
irregularities may occur and not be detected within a timely period by
A. An independent auditor during tests of controls.
B. Management when reviewing interim financial statements and reconciling account balances.
C. Employees in the normal course of performing their assigned functions.
D. Outside consultants who issue a special-purpose report on internal control structure.

75. Internal control procedures are not designed to provide reasonable assurance that
A. Transactions are executed in accordance with management's authorization.
B. Access to assets is permitted only in accordance with management's authorization.
C. Irregularities will be eliminated.
D. The recorded accountability for assets is compared with the existing assets at reasonable intervals.

76. A secondary purpose of the auditor's consideration of internal control is to provide

A. A basis for assessing control risk.
B. An assurance that the records and documents have been maintained in accordance with existing company
policies and procedures.
C. A basis for constructive suggestions about improvements in internal control structure.
D. A basis for the determination of the resultant extent of the tests to which auditing procedures are to be restricted.

77. The auditor's review of the client's internal control is documented in order to substantiate
A. Conformity of the accounting records with GAAP.
B. Adherence to requirements of management.
C. Compliance with generally accepted auditing standards.
D. The fairness of the financial statement presentation.

78. A consideration of internal control made during an audit is usually not sufficient to express an opinion on an entity's
controls because
A. Weaknesses in the system may go unnoticed during the audit engagement.
B. A consideration of internal control is not necessarily made during an audit engagement.
C. Only those controls on which an auditor intends to rely are reviewed, tested, and evaluated.
D. Controls can change each year.

79. The accountant's report expressing an opinion on an entity's internal controls should state that the
A. Objectives of the client's internal controls are being met.
B. Consideration of the internal controls was conducted in accordance with generally accepted auditing standards.
C. Establishment and maintenance of internal control is the responsibility of management.
D. Inherent limitations of the client's internal controls were examined.

80. The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor
with
A. Evidential matter to use in reducing detection risk.
B. A basis from which to modify tests of controls.
C. Knowledge necessary to plan the audit.
D. Information necessary to prepare flowcharts.

81. Which of the following is not part of the control environment?

A. Management philosophy and operating style.
B. Organizational structure and methods of assigning authority and responsibility.
C. Information and communication systems.
D. The function of the board of directors and its committees.

82. When obtaining an understanding of the accounting and internal control system the auditor may trace a few
transactions through the accounting system. This technique is:
A. Reperformance test C. Walk-through test
B. Test of transactions D. Validity test
83. Which of the following least likely affects the nature, timing, and extent of the procedures performed by the auditor
to obtain an understanding of the accounting and internal control systems of an audit client?
A. Materiality considerations
B. The auditor’s assessment of inherent risk
C. The level of acceptable detection risk
D. The size and complexity of the entity and of its computer system

84. The evaluation of deviations that were observed upon completing tests of controls
A. May require the need for doing more extensive understanding of control.
B. May require more extensive tests of controls.
C. Always requires documentation of the basis of assessment of control risk.
D. May require modification of the nature, timing, and extent of planned substantive procedures.

85. The following statements are true about observation when used as tests of control procedures, except.
A. The auditor may supplement his observations with other tests of control capable of providing audit evidence.
B. Audit evidence obtained by doing observation pertains only to the point in time at which the procedure was
applied.
C. Observation of who applies a control procedure is useful as a test of control procedures when evaluating control
effectiveness of both computerized and manual system
D. Ordinarily, making inquiries provides more reliable audit evidence than doing observation when testing
segregation of functional responsibilities.

86. Tests of controls may include the following, except:

A. Reperformance of internal control procedures
B. Inquiries about, and observation of, internal controls which leave no audit trail.
C. Inspection of documentary support for transactions evidencing authorization
D. Analytical procedures involving comparison of operating expenses with budgeted amount.

87. Tests of controls are performed to obtain audit evidence about the effectiveness of the
A. Operation of the internal controls at the time the tests are being applied.
B. Operations of the internal controls in eliminating fraud and errors.
C. Design of the internal controls in eliminating fraud and errors.
D. Design of the accounting and internal controls systems.

88. The auditor should consider whether the assessment of control risk is confirmed
A. Upon completion of understanding of internal control.
B. Upon completion of tests of controls
C. Before the final audit program is completed.
D. Upon the conclusion of the audit, based on the results of substantive procedures and other audit evidence
obtained.

89. Which of the following is least likely considered by the auditor in determining the significance of service
organization activities to the client and the relevance to the audit?
A. Terms of contract and relationship between the client and the service organization.
B. The material financial statement assertions that are affected by the use of the service organization.
C. Client's internal controls that are applied to the transactions processed by the service organization.
D. The control policies and procedures of the client of requiring that all payments for goods and services be
supported by receiving reports.

90. When the auditor considers that the service organization activities are significant to the client and relevant to the audit
and he concludes that it would be efficient to obtain audit evidence from tests of control to support an assessment of
control risk at a lower level. Such evidence may be obtained by, except
A. Performing tests of the client's controls over activities of the service organization.
B. Obtaining a service organization auditor's report that expresses an opinion as to the operating effectiveness of the
service organization's accounting and internal control systems for the processing applications relevant to the
audit.
C. Visiting the service organization and performing tests of control.
D. Review the service contract between the client and the service organization.
91. Which statement is incorrect regarding the client auditor’s use of service organization auditor’s report?
A. When using a service organization auditor’s report, the client auditor should consider the nature of and content of
that report.
B. The client auditor should consider the scope of work performed by the service organization auditor and should
assess the usefulness and appropriateness of reports issued by the service organization auditor.
C. When a Type B report is to be used as evidence to support a lower control risk assessment, a client auditor would
consider whether the controls tested by the service organization auditor are relevant to the client's transactions
(significant assertions in the client's financial statements) and whether the service organization auditor's tests of
control and the results are adequate.
D. Since Type A reports may be useful to a client auditor in gaining the required understanding of the accounting
and internal control systems, an auditor may use such reports as a basis for reducing the assessment of control
risk.

92. Which of the following is the least concern of the client auditor in reviewing the report of service organization auditor
on suitability of internal control design of the service organization?
A. The accuracy of description of the service organization's accounting and internal control systems, ordinarily
prepared by the management of the service organization.
B. The systems' controls have been placed in operation.
C. The accounting and internal control systems are suitably designed to achieve their stated objectives.
D. The type of documentation of the understanding of the service organization’s control system.

93. Which of the following is least likely entitled to the report of the service organization auditor on the suitability of the
design and operating effectiveness of the service organization?
A. Service organization’s management C. Client’s auditors
B. Service organization’s customers D. Service organization’s stockholders