Ch8 Execution Of The Audit—performing Full Test Bank - Auditing Canada 4e | Test Bank with Answers by Robyn Moroney. DOCX document preview.
CHAPTER 8
EXECUTION OF THE AUDIT—PERFORMING SUBSTANTIVE PROCEDURES
CHAPTER LEARNING OBJECTIVES
1. Define substantive audit procedures.
Substantive audit procedures are procedures designed to obtain direct evidence of the completeness, accuracy, and validity of data, and the reasonableness of estimates and other information contained in the financial statements. Substantive procedures include inspection, observation, enquiry, confirmation, recalculation, re-performance, analyses of many types, and analytical reviews.
2. Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
The combination of inherent risk and control risk determines the level of detection risk the auditor is willing to accept that will still allow them to conclude that the financial statements are not materially misstated. Detection risk is reduced or increased in direct proportion to the amount of substantive testing performed. There are several factors that influence how much substantive testing must be performed, including the nature of the test, the level of assurance necessary, the type of evidence required, and the complexity of the client’s data-capturing systems. The timing of substantive procedures is most flexible when controls have been tested and assessed as effective. In that case, the procedures can be performed up to six months before year end. When controls are not tested or are not assessed as effective, the timing of substantive procedures is at or near year end.
3. Provide examples of different substantive audit procedures.
The different types of substantive procedures are tests of transactions/underlying data, and analytical procedures. Different analytical procedures include absolute data comparisons, ratio analysis, trend analysis, common-size financial statements, break-even analysis, and pattern and regression analysis. Substantive analytical procedures are different from those analytical procedures used during the planning phase of the audit.
4. Explain the different levels of audit evidence obtained when performing substantive procedures.
The different levels of audit evidence obtained when performing substantive procedures include persuasive, corroborative, minimal, and general audit evidence.
5. Design an audit plan to audit accounting estimates.
After an auditor identifies and assesses the risk of misstatement relating to accounting estimates, the auditor plans the audit response. Procedures may include obtaining evidence after year end but before the audit report date, developing an estimate and comparing with management’s, and testing how management made the estimate. Additional work is required if a risk is assessed as a significant risk. The auditor should also “stand back” to assess the audit evidence gathered in an unbiased fashion.
6. Describe the documentation of the conclusions reached as a result of performing substantive procedures.
Conclusion statements are documented for each significant account (including the execution of the relevant audit program steps), the results, and any significant findings, including any misstatements. The auditor also documents that the financial statements reconcile to the underlying accounting records. Overall conclusions are usually prepared for each audit program step completed, as well as for each significant account and significant assertion.
`TRUE-FALSE STATEMENTS
1. A significant account is one that could contain material misstatements based upon their materiality and/or relationship to identified inherent and financial statement risks.
Difficulty: Easy
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
2. Control risk is assessed to be low when there are no internal controls tested or relied upon by the auditor.
Difficulty: Easy
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
3. Normally, it is more efficient to carry out substantive procedures than to test and rely on controls.
Difficulty: Easy
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
4. The timing of substantive procedures is directly influenced by the level of control risk.
Difficulty: Easy
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
5. Roll-forward procedures are performed during the period between the end of the financial year and the date of the audit report.
Difficulty: Easy
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
6. Key item testing is an example of a technique used when conducting substantive procedures.
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
7. Vouching involves tracking a source document back to the underlying accounting records.
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
8. Audit sampling is the application of audit procedures to less than 100 per cent of items within a population.
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
9. Analytical procedures may not be useful when they are used on a company with significantly diverse operations and geographical segments.
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
10. Analytical procedures that provide persuasive or corroborative evidence contribute minimal support for the audit conclusion.
Difficulty: Easy
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
11. Comparing the number of days purchases in trade payables with prior years would provide persuasive evidence of accounts payable.
Difficulty: Easy
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
12. Corroborative evidence confirms audit findings from other procedures.
Difficulty: Easy
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
13. Estimates include estimation uncertainty, which will have no impact on the risk of material misstatement.
Difficulty: Easy
Learning Objective: Design an audit plan to audit accounting estimates.
Section Reference: 8.5 Auditing Accounting Estimates
CPA: Audit and Assurance
AACSB: Analytic
14. When considering the impact of accounting estimates on the audit, the greater the estimation uncertainty, the greater the audit effort required.
Difficulty: Easy
Learning Objective: Design an audit plan to audit accounting estimates.
Section Reference: 8.5 Auditing Accounting Estimates
CPA: Audit and Assurance
AACSB: Analytic
15. When auditing accounting estimates, the auditor can develop a point of estimate and compare against management’s estimate to ensure the amount is reasonable.
Difficulty: Easy
Learning Objective: Design an audit plan to audit accounting estimates.
Section Reference: 8.5 Auditing Accounting Estimates
CPA: Audit and Assurance
AACSB: Analytic
16. The lack of significant change in an account balance from one year to the next does not necessarily mean that the auditor can assume the balance is reasonable.
Difficulty: Easy
Learning Objective: Describe the documentation of the conclusions reached as a result of performing substantive procedures.
Section Reference: 8.6 Evaluating and Documenting Substantive Analytical Procedures’ Results
CPA: Audit and Assurance
AACSB: Analytic
17. Misstatements can only arise from fraud.
Difficulty: Easy
Learning Objective: Describe the documentation of the conclusions reached as a result of performing substantive procedures.
Section Reference: 8.6 Evaluating and Documenting Substantive Analytical Procedures’ Results
CPA: Audit and Assurance
AACSB: Analytic
18. The audit program serves as the instructions for the audit team members to complete the required testing.
Difficulty: Easy
Learning Objective: Describe the documentation of the conclusions reached as a result of performing substantive procedures.
Section Reference: 8.6 Evaluating and Documenting Substantive Analytical Procedures’ Results
CPA: Audit and Assurance
AACSB: Analytic
MULTIPLE CHOICE QUESTIONS
19. Matilda Papas has been asked to lead her audit team in the audit of the Toronto Raptors basketball team. She performed a review of their risks and found that the team’s risks tend to be driven by the nature of certain significant accounts or business activities that the Raptors pursue. This risk is
a) audit risk.
b) inherent risk.
c) control risk.
d) detection risk.
Difficulty: Medium
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
20. Manny Regimbald is concerned about the audit of a high-risk client, the Lewiston Stampeders. He believes that there is a high likelihood that because his audit team is inexperienced, the testing procedures will not detect a material misstatement. This is a(n)
a) audit risk.
b) control risk.
c) detection risk.
d) none of the above
Difficulty: Medium
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
21. Kelton Kittle is ready to undertake substantive procedures at an educational institution. Which of the following factors will influence his substantive tests?
a) the nature of the test
b) the type of evidence required
c) the complexity of the client's data-capturing systems
d) all of the above
Difficulty: Easy
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
22. After performing a risk assessment of a food processing company, Abrar Singh has come to the conclusion that he will require more evidence to be obtained by his audit team from substantive procedures. Which of the factors below led him to this conclusion?
a) the level of assurance necessary
b) the type of evidence required
c) the nature of the test
d) the complexity of the client's data capturing systems
Difficulty: Easy
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
23. Ying Ye believes that she will have to employ sophisticated substantive audit procedures for her client. What contributes to this decision?
a) the nature of the client’s accounting system
b) the availability of an internal auditor to assist in the testing
c) the complexity of the client's data capturing systems
d) none of the above
Difficulty: Easy
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
24. Inherent risk is
a) assessed as high when there are no internal controls tested or relied upon by the auditor.
b) assessed as low when there are good internal controls in place.
c) the risk of a misstatement occurring irrespective of any internal controls put in place by management.
d) the risk that the auditor's testing procedures will not detect a material misstatement.
Difficulty: Easy
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
25. Which of the following statements is correct?
a) If detection risk is high, few substantive procedures are necessary to reduce the detection risk.
b) There is an inverse relation between the auditor's assessed risk of material misstatement and detection risk.
c) There is no relation between the auditor's assessed risk of material misstatement and detection risk.
d) If detection risk is low, significant substantive procedures are necessary to reduce the detection risk.
Difficulty: Easy
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
26. The purpose of substantive procedures includes obtaining direct evidence as to
a) the reasonableness of the estimates and other information in the financial statements.
b) the completeness, accuracy, and validity of data.
c) both a and b
d) none of the above
Difficulty: Easy
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
27. Substantive testing can be conducted using which of the following procedures?
a) enquiry
b) confirmation
c) analytical review
d) all of the above
Difficulty: Easy
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
28. Which of the following factors do not influence the extent and timing of substantive procedures to be undertaken?
a) the audit risk assessment
b) the nature of the procedures
c) complexity of the audit client’s data-capturing system
d) the level of assistance received from the internal auditor who responds directly to management
Difficulty: Easy
Learning Objective: Define substantive audit procedures
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
29. Uber Levin has performed a test of controls of a flower shop. He has concluded that the controls are very effective and that the inherent risk is low. He is trying to determine the timing of substantive procedures at year end. Which factor will determine the timing of his audit procedures?
a) timing of the year-end work
b) audit risk
c) inherent risk
d) control risk
Difficulty: Easy
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
30. Olaf Kuzino is trying to determine the extent of testing his team will have to perform in order to determine whether controls are working. How will he decide how much testing to perform?
a) He will utilize statistical sampling.
b) He will use his professional judgement.
c) He will use last year’s results as a basis for this year’s tests.
d) none of the above
Difficulty: Easy
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
31. Which of the following factors should not influence the extent and timing of when substantive procedures are performed?
a) the type of audit opinion that the client would like the auditor to issue
b) the complexity of the client's data capturing systems
c) the level of assurance necessary
d) the type of evidence required
Difficulty: Easy
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
32. Typically, substantive testing tends to be performed
a) at the start of the financial year.
b) at or near year end.
c) half way through the financial year.
d) only when the client's management allows the auditor to conduct the tests.
Difficulty: Easy
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
33. Roll-forward procedures are performed
a) to update the audit findings from the time of the interim procedures through to year end.
b) to detect fraud in various balance sheet accounts.
c) before the end of the financial year.
d) none of the above
Difficulty: Easy
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
34. Which of the following examples of substantive procedures would often be performed prior to year end?
a) confirming the client's bank balance
b) attending the client's annual inventory count
c) testing additions and disposals to the fixed asset register
d) performing confirmations of accounts receivable
Difficulty: Easy
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
35. Performing substantive procedures prior to year end, in the absence of specific effective controls, may be acceptable when
a) the auditor is able to conclude overall that the client's control environment is effective.
b) the likelihood of errors or fraud is high.
c) the likelihood of errors or fraud is low.
d) both a and c
Difficulty: Easy
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
36. An auditor’s ability to perform substantive procedures at an interim date is dependent on
a) the evaluation of audit risk.
b) convenience.
c) the materiality of the account to be tested.
d) an effective control environment.
Difficulty: Easy
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
37. Which of the following substantive tests would an auditor most likely conduct at year end?
a) testing the proper authorization of purchase orders.
b) review of the audit client’s credit procedures.
c) testing the mathematical accuracy of invoices.
d) confirmation of accounts receivable.
Difficulty: Medium
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
38. Roll-forward procedures are conducted to
a) update findings from the previous year’s audit to the current year.
b) update findings from an interim date to year end.
c) adjust accounts at year end for prepayments.
d) none of the above
Difficulty: Easy
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
39. Which of the following factors would most likely influence an auditor's consideration of the reliability of data when performing analytical procedures?
a) if the data were developed in a computerized accounting system
b) if the data were prepared in conformity with GAAP
c) if the data were developed under a system with adequate controls
d) if the data were processed in an online system
Difficulty: Medium
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
40. Sherry Galo is performing procedures and has decided to vouch the balance in the fixed assets ledger of a furniture manufacturing company back to supporting documentation. She is performing a
a) test of details.
b) test of controls.
c) risk assessment.
d) none of the above
Difficulty: Medium
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
41. Daniel Morency has performed evaluations of financial information and determined whether the fluctuations of his client’s sales figures are consistent with other data he has gathered. He has used this information to predict year-end amounts of sales. This is an example of substantive procedures called
a) tests of details.
b) computer-assisted audit techniques.
c) analytical procedures.
d) none of the above
Difficulty: Medium
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
42. Tobias Appel is trying to ensure that he can review controls over purchasing transactions. In addition, he would like to substantiate the dollar amounts he is reviewing. What type of procedures can he perform that will provide evidence as to whether a control is effective as well as if an item is being recorded properly?
a) statistical sampling
b) dual purpose tests
c) test of balances
d) test of controls
Difficulty: Medium
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
43. Stella Zhang has been performing analytical procedures techniques as a substantive test. The techniques that can be used to perform analytical procedures are
a) preparation of common-sized financial statements.
b) break-even analysis.
c) ratio analysis.
d) all of the above
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
44. The nature of substantive procedures normally consists of one or a combination of techniques. Which of the following is not one of these techniques?
a) analytical procedures
b) representative sampling
c) key item testing
d) testing proper authorization of invoicing
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
45. Vouching involves
a) tracking a source document through to the underlying accounting records.
b) agreeing the details of a transaction to supporting evidence outside of the company's accounting records.
c) the application of audit procedures to less than 100 per cent of items within a population.
d) none of the above
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
46. Tracing is primarily directed towards verifying which of the following assertions?
a) completeness
b) existence
c) occurrence
d) accuracy, valuation, and allocation
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
47. The primary purpose of vouching is to ensure that
a) the balances or transactions are not understated.
b) sufficient information is disclosed in the notes to the financial statements.
c) the balances or transactions are not overstated.
d) all transactions have been recorded.
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
48. Common examples of substantive procedures related to key items testing and representative sampling include
a) tests of income statement accounts for account classification.
b) tests of client-prepared schedules.
c) tests of underlying data to be used as part of the analytical procedures.
d) all of the above
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
49. Analytical procedures may not be used
a) as primary tests of an account balance.
b) in testing internal controls.
c) to provide at least some minimal level of support for the conclusion.
d) as corroborative tests in combination with other procedures.
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
50. Which of the following is not a type of analytical procedure?
a) confirmation analysis
b) ratio analysis
c) break-even analysis
d) trend analysis
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
51. Which of the following is the first step an auditor performs when performing analytical procedures?
a) determine appropriate procedures for investigating the reasons for differences if they are significant
b) draw conclusions
c) identify the computation, comparison, or relationship to be made or investigated
d) assess the reliability of any data to be used
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
52. Using computer-assisted audit techniques (CAATs) makes the audit
a) more comprehensive.
b) more expensive.
c) more efficient.
d) both a and c
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
53. Jacqueline Martineau was told by her audit senior to ensure that the evidence she provided through analytical procedures was both persuasive and corroborative. Which of the following evidences are persuasive?
a) When reviewing accruals for commissions, refer to terms of agreements and payment dates.
b) When reviewing trade receivables or sales, review the volatility of the customer base and compare with expectations.
c) When reviewing sales and commissions expense, compare sales commissions or bonuses with related sales.
d) When reviewing payroll expense, compare payroll tax expenses to the annual payroll times the statutory tax rates.
Difficulty: Hard
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
54. Analytical procedures that provide persuasive evidence include
a) reviewing the cash accounts in the general ledger for unusual items.
b) relating average amounts invested to an average interest rate.
c) comparing the number of days purchases in trade payables with prior years.
d) reviewing the property, plant, and equipment account in the general ledger for unusual items.
Difficulty: Easy
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
55. Comparing sales commissions or bonuses with related sales provides what level of evidence?
a) corroborative
b) absolute
c) minimal
d) persuasive
Difficulty: Medium
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
56. The levels of evidence that can be obtained when performing substantive procedures includes
a) minimal.
b) persuasive.
c) general.
d) all of the above
Difficulty: Easy
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
57. Corroborative evidence
a) supplements the results from analytical procedures.
b) confirms audit findings from other procedures.
c) confirms the auditor’s evaluation of internal controls.
d) none of the above
Difficulty: Easy
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
58. Which of following procedures provides an example of minimal support for conclusions?
a) comparison of sales commissions with related sales
b) comparison of direct labour costs and the number of employees with prior periods
c) comparison of selling prices less selling costs to normal gross margins
d) none of the above
Difficulty: Medium
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
59. An example of an analytical procedure which provides persuasive evidence is
a) calculating commissions paid as a percentage of sales.
b) comparing sales commissions and bonuses paid with related sales.
c) reviewing cash accounts in the general ledger for unusual items.
d) comparing the debtor’s turnover in the current year to the previous year.
Difficulty: Medium
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
60. Analytical procedures may be used
a) as primary tests of a balance.
b) as corroborative tests in combination with other procedures.
c) to provide at least some minimal level of support for the conclusion.
d) all of the above
Difficulty: Easy
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
61. Which of the following tests of details should be considered when significant risk exists in accounting estimates?
a) examining documents to corroborate terms
b) verifying mathematical accuracy
c) agreeing assumptions to supporting documents
d) all of these are correct
Difficulty: Easy
Learning Objective: Design an audit plan to audit accounting estimates.
Section Reference: 8.5 Auditing Accounting Estimates
CPA: Audit and Assurance
AACSB: Analytic
62. When the documentation pertaining to auditing an estimate is complete, the auditor should
a) always discuss their findings with management.
b) stand back and assess whether the estimate is reasonable.
c) repeat the tests performed to ensure they were accurate.
d) the audit requirements of the estimate is complete and no further work is required.
Difficulty: Medium
Learning Objective: Design an audit plan to audit accounting estimates.
Section Reference: 8.5 Auditing Accounting Estimates
CPA: Audit and Assurance
AACSB: Analytic
63. Which of the following is not an event which causes a fluctuation in the accounting data?
a) changes in the payroll rates
b) the introduction of a new sales item
c) changes to the organizational chart of the entity
d) increased costs of inventory
Difficulty: Easy
Learning Objective: Describe the documentation of the conclusions reached as a result of performing substantive procedures.
Section Reference: 8.6 Evaluating and Documenting Substantive Analytical Procedures’ Results
CPA: Audit and Assurance
AACSB: Analytic
64. Judgmental misstatements can arise from
a) the auditor conducting substantive tests inappropriate to the account being tested.
b) differences in the interpretation or application of accounting policies.
c) selecting a sample that is not representative of the population.
d) none of the above
Difficulty: Easy
Learning Objective: Describe the documentation of the conclusions reached as a result of performing substantive procedures.
Section Reference: 8.6 Evaluating and Documenting Substantive Analytical Procedures’ Results
CPA: Audit and Assurance
AACSB: Analytic
65. When an auditor identifies unexpected misstatements or errors, he/she will
a) re-evaluate the effectiveness of internal controls and overall assessment of risk.
b) plan to conduct predominately substantive tests.
c) increase the level of tests of internal controls.
d) none of the above
Difficulty: Medium
Learning Objective: Describe the documentation of the conclusions reached as a result of performing substantive procedures.
Section Reference: 8.6 Evaluating and Documenting Substantive Analytical Procedures’ Results
CPA: Audit and Assurance
AACSB: Analytic
66. Fluctuations in financial data identified by the auditor when planning the audit may be caused by
a) dependent relationships.
b) seasonal patterns.
c) external decisions directly impacting the business.
d) all of the above
Difficulty: Easy
Learning Objective: Describe the documentation of the conclusions reached as a result of performing substantive procedures.
Section Reference: 8.6 Evaluating and Documenting Substantive Analytical Procedures’ Results
CPA: Audit and Assurance
AACSB: Analytic
67. Which of the following statements is correct?
a) Misstatements can only arise from fraud.
b) Misstatements can only arise from error.
c) Misstatements can arise from error or fraud.
d) none of the above
Difficulty: Easy
Learning Objective: Describe the documentation of the conclusions reached as a result of performing substantive procedures.
Section Reference: 8.6 Evaluating and Documenting Substantive Analytical Procedures’ Results
CPA: Audit and Assurance
AACSB: Analytic
68. Overall significant account conclusion statements are captured on
a) audit programs.
b) lead sheets.
c) confirmation requests.
d) minutes of board of directors' meetings.
Difficulty: Easy
Learning Objective: Describe the documentation of the conclusions reached as a result of performing substantive procedures.
Section Reference: 8.6 Evaluating and Documenting Substantive Analytical Procedures’ Results
CPA: Audit and Assurance
AACSB: Analytic
SHORT ANSWER QUESTIONS
69. Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Svetlana Petrova was reviewing the risk profile of Gaz Prom Industries in order to determine detection risk. She concluded: “Both my inherent and control risks are low. I guess I should be willing to accept high detection risk.”
b) Boris Ivanov had performed an assessment of the accounts payable system at Magnitogirsk Iron and Steel Works Operations in the Urals. His focus was on the completeness assertion for accounts payable balances. Inherent risk and control risk were both high. He decided that because the overall risk assessment was high he would have to set his detection risk high.
c) Jana Novotna, the auditor in charge of the Mosenergo petroleum giant, was explaining to Valentin Titov the importance of the timing of substantive procedures: “Although we associate examinations of internal controls with interim work and substantive procedures with year-end work, we can perform substantive procedures before year end if there exists an effective control environment.”
d) Susan Martin, the audit senior at Canadian National Railways, was explaining to the junior auditor how vouching works: “We take a balance or a transaction from the underlying accounting records and agree it to the supporting evidence inside the accounting records of the company.”
e) Larisa McCarthy, the auditor in charge of the Firestone audit, feels that the large population of sales transactions warrants the use of representative sampling. She mentions to her staff: “Representative sampling using audit risk tables is especially useful when a lot of errors exist in an accounting system and the auditor perceives the risk of understatement to be high.”
Difficulty: Hard
Learning Objective: Define substantive audit procedures.
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Learning Objective: Provide examples of different substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
70. Discuss the factors that influence the extent and timing of substantive procedures.
Difficulty: Medium
Learning Objective: Understand the link between the audit risk model and the nature, timing, and extent of substantive procedures.
Section Reference: 8.2 Relationship between Risk Assessment and the Nature, Timing, and Extent of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
71. Explain the difference between vouching and tracing.
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures.
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
72. Explain the three common sampling strategies that can be applied when the auditor applies representative sampling.
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures.
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
73. Identify the steps used by the auditor when performing analytical procedures.
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures.
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
74. Explain the four different levels of evidence obtained when performing substantive procedures.
Difficulty: Easy
Learning Objective: Explain the different levels of audit evidence obtained when performing substantive procedures.
Section Reference: 8.4 Levels of Evidence
CPA: Audit and Assurance
AACSB: Analytic
75. Explain the auditor’s responsibility over accounting estimates.
Difficulty: Easy
Learning Objective: Design an audit plan to audit accounting estimates.
Section Reference: 8.5 Auditing Accounting Estimates
CPA: Audit and Assurance
AACSB: Analytic
ESSAY QUESTIONS
76. There are certain audit procedures that are required to be performed according to various auditing standards. Identify specific examples of such procedures and explain why the procedures are mandatory.
Difficulty: Medium
Learning Objective: Define substantive audit procedures.
Section Reference: 8.1 Overview of Substantive Procedures
CPA: Audit and Assurance
AACSB: Analytic
77. Analytical procedures are evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. Discuss why analytical procedures are used by an auditor and explain several of the common types of analytical procedures.
Difficulty: Easy
Learning Objective: Provide examples of different substantive audit procedures.
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
78. Before they can complete an audit, auditors need to evaluate the causes of any unexpected fluctuations in a client’s financial statements detected by the use of analytical procedures. Explain how auditors interpret the results of analytical procedures and why it is done.
Difficulty: Medium
Learning Objective: Describe the documentation of the conclusions reached as a result of performing substantive procedures.
Section Reference: 8.6 Evaluating and Documenting Substantive Analytical Procedures’ Results
CPA: Audit and Assurance
AACSB: Analytic
CASE QUESTION
79. Raisa Alexseev was getting ready to perform analytical procedures at Vulcan Spice Mills. She had made the following notes in her audit file:
- Review allowance for doubtful accounts.
- Don’t forget to bring calculator to work.
- Figure out the probability of $5,000,000 sales commissions threshold of last year.
- Perform variance analysis.
Instructions
Can you summarize the steps Raisa will have to go through using analytical procedures before she can draw any conclusions about the subject matter?
Difficulty: Medium
Learning Objective: Provide examples of different substantive audit procedures.
Section Reference: 8.3 Substantive Audit Procedures
CPA: Audit and Assurance
AACSB: Analytic
LEGAL NOTICE
Copyright © 2021 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.
The data contained in these files are protected by copyright. This manual is furnished under license and may be used only in accordance with the terms of such license.
The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.