Question 1

When internal controls are effective,

Accepted Answer

A)  there will be an increased reliance on substantive tests of transactions and account balances. 
B)  control risk will also be high. 
C)  the organization is more likely to achieve its strategic and operating objectives. 
D)  the organization is less likely to achieve its strategic and operating objectives. 
A)  there will be an increased reliance on substantive tests of transactions and account balances. 
B)  control risk will also be high. 
C)  the organization is more likely to achieve its strategic and operating objectives. 
D)  the organization is less likely to achieve its strategic and operating objectives. C

Question 2

Benny Pecarve is planning to visit an airline company to review the collective assessment of the client's control environment, risk assessment process, information system, control activities
And monitoring of controls. What does this mandate describe?

Accepted Answer

A)  entity level controls 
B)  transaction-level controls 
C)  both a and b 
D)  none of the above 
A)  entity level controls 
B)  transaction-level controls 
C)  both a and b 
D)  none of the above A

Question 3

Jorge Yulia was anxious to start the selection and testing of controls at Walley Real Estate Group, a company that specializes in unique coastal properties nestled along the Nova Scotia coastline. A charming collection of coastal communities dots the rocks along the Bay of Fundy. Chaz Walley brings years of talent and experience from being an executive in the marketing, technology and finance world to personally owning, renovating, aggregating and subdividing property. Along with investment analysis and extensive contract negotiation experience, clients are expertly represented in every transaction. Chaz imparts a sense of ease and joy to finding the perfect property for each client, making owning beach and coastal property a dream! Jorge had two main "big picture" objectives: to prevent or detect misstatements in the financial statements.
Jorge was concerned about the following issues:
1. Revenue recognition was the trickiest as many of the transactions took place over a year to complete. Partial payments and deposits are being made and have to be matched up with proper revenue recognition criteria.
2. The entertainment and promotional expenses were high and he was not sure how they compared to industry standards, although they appeared to be consistent with the Walley Real Estate Group's profile and the deep pockets of its clientele.
Required:
a) What are detective and preventive controls?
b) Can Jorge use these preventive and detective controls to help him resolve the two issues he is concerned about?
c) Which factors will Jorge have to consider when determining the "extent" of tests to be performed?
d) When would Jorge perform substantive testing of revenue?

Accepted Answer

a) Preventive controls
Preventive controls can be applied to each transaction during normal processing to avoid errors occurring. When designing controls, consideration is given to what can go wrong with the transac?tion (the risk of material misstatement), which would result in an error. These are some?times referred to as WCGWs (what can go wrongs). Effective controls should prevent the WCGWs from occurring (preventive controls), or, if they do occur, that the errors are detected and corrected as quickly as possible (detective controls).
An absence of effective preventive controls increases the risk that errors or fraud will occur and, therefore, increases the need for controls that are sensitive enough to detect these errors should they occur.
Detective controls
The purpose of detective controls is to discover fraud or errors that may have occurred during transaction processing (in spite of any preventive controls) and to rectify those errors. As dis?cussed above, companies put detective controls in place to assist management in ensuring WCGWs do not occur and that the business is functioning as planned through the design and implementation of its business processes.
Detective controls are often 'unofficial' procedures that client personnel perform to make sure that the information for which they are responsible is accurate.
b) Jorge could integrate preventive and detective controls into the revenue recognition audit program. For example, he could check whether revenue transactions were allowed if customers exceeded their credit limits (preventive control) or if the accounting system had captured all the relevant data of a closed sales transaction.
Jorge would be hard pressed to use preventive or detective controls over the reasonableness of promotional expenses unless he had standards or benchmarks, such as budgeted amounts that he could compare actual expenses to.
c) The factors to consider when deciding the extent of testing include the following:
1. How often the control is performed.
2. The degree to which the auditor intends to rely on the control as a basis for limiting their substantive tests.
3. The persuasiveness of the evidence produced by the control.
4. The need to be satisfied that the control operated as intended throughout the period of reliance.
5. The existence of a combination of controls that may reduce the level of assurance that might be needed from any one of the controls.
6. The relative importance of the 'what could go wrong' questions or statement being considered.
7. Other factors that relate to the likelihood that a control operated as intended during the period of reliance, including:
- The competence of the person who performs the control
- The quality of the control environment
- Changes in the accounting system
- Unexplained changes in related account balances
- The auditor's prior-period experiences with the engagement
Even though the above factors may reduce the expectation of errors, the auditor's tests of a control need to be sufficiently extensive to provide reasonable assurance that the control operated effectively throughout the period of reliance.

Question 4

If the tests of controls confirm the auditor's preliminary evaluation of controls, the planned
substantive audit procedures are not modified.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is an example of a detective control?

Accepted Answer

A)  account coding on purchase orders being checked by the computer to a table of valid account numbers 
B)  quarterly reviews of credit balances in accounts receivable to determine their causes 
C)  amounts are not able to be paid to employees without first matching a valid tax file number to the employee master file 
D)  none of the above 
A)  account coding on purchase orders being checked by the computer to a table of valid account numbers 
B)  quarterly reviews of credit balances in accounts receivable to determine their causes 
C)  amounts are not able to be paid to employees without first matching a valid tax file number to the employee master file 
D)  none of the above

Question 6

It is important that detective controls

Accepted Answer

A)  identify all potentially significant errors. 
B)  completely and accurately capture all data. 
C)  are performed on a consistent and regular basis. 
D)  all of the above 
A)  identify all potentially significant errors. 
B)  completely and accurately capture all data. 
C)  are performed on a consistent and regular basis. 
D)  all of the above

Question 7

Millicent Vonareva was reviewing her IT General Controls program for her client visit. She noticed an item that she thought did not belong in her "Controls to prevent unauthorized access
To data" section of the program. Which item did not belong there?

Accepted Answer

A)  Data files and critical applications are regularly backed up in offsite locations. 
B)  Program changes are subject to formal change management procedures. 
C)  Policies exist to ensure departing employees are denied access to software programs and databases. 
D)  All the above items belonged in the "controls to prevent unauthorized access to data" section of the program. 
A)  Data files and critical applications are regularly backed up in offsite locations. 
B)  Program changes are subject to formal change management procedures. 
C)  Policies exist to ensure departing employees are denied access to software programs and databases. 
D)  All the above items belonged in the "controls to prevent unauthorized access to data" section of the program.

Question 8

What are the factors considered by auditors in determining whether there is a need for additional detailed tests of controls?

Accepted Answer

In determining whether there is a need f

Question 9

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) During her career as a public accountant, Faye Teller has performed audits of large and medium sized clients. When she visited a small business client, a food wholesaler that has a history of poor controls, she gave a lot of thought to performing her planned audit approach. She decided to use the combined audit approach.
b) Lea Konczynski was discussing with her audit manager how she could assess whether controls are being monitored. Her audit manager mentioned that the internal audit function is a primary source of assessing and monitoring control activities.
c) The audit senior has been reviewing the key controls in the purchasing and payables process. She has been asked by a junior auditor: "When should the client set up the payable?" She answers: "The company can set up the payable when the goods are received in good order and then the client can make the payment when the invoice is received."
d) The auditor decided to review transaction-level controls at year-end.

Accepted Answer

a) Disagree. When a client's internal co

Question 10

Rina Glickstein is unsure about the best way to evaluate her audit staff. She decides to look at their professional characteristics such as their expertise, experience, knowledge and training. What best describes what she is looking for?

Accepted Answer

A)  their independence 
B)  their professional judgment 
C)  their due care 
D)  none of the above 
A)  their independence 
B)  their professional judgment 
C)  their due care 
D)  none of the above

Question 11

A partner and his team performed an audit and issued an unqualified audit report. A year later his firm was sued when a shareholder found out the financial statements were misstated.
This situation best describes

Accepted Answer

A)  poor internal controls. 
B)  human error. 
C)  unethical behaviour. 
D)  audit risk. 
A)  poor internal controls. 
B)  human error. 
C)  unethical behaviour. 
D)  audit risk.

Question 12

Internal control encompasses which of the following elements of an organization?

Accepted Answer

A)  processes 
B)  culture 
C)  systems 
D)  all of the above 
A)  processes 
B)  culture 
C)  systems 
D)  all of the above

Question 13

Which of the following is not a method of recording an audit client's internal control system?

Accepted Answer

A)  narratives 
B)  organizational charts 
C)  flowcharts 
D)  questionnaires 
A)  narratives 
B)  organizational charts 
C)  flowcharts 
D)  questionnaires

Question 14

If inherent risk is high and no assurance has been obtained from controls testing,

Accepted Answer

A)  only overall analytical review procedures need to be performed to reduce detection risk to an acceptable level. 
B)  no further substantive testing needs to be performed. 
C)  extensive substantive procedures need to be performed to estimate the dollar value of any error in the account balance. 
D)  none of the above 
A)  only overall analytical review procedures need to be performed to reduce detection risk to an acceptable level. 
B)  no further substantive testing needs to be performed. 
C)  extensive substantive procedures need to be performed to estimate the dollar value of any error in the account balance. 
D)  none of the above

Question 15

Internal control weaknesses decrease the risk of material misstatements being undetected
by management's processes and controls.

Accepted Answer

A) True 
 B)False

Question 16

The purpose of the management letter is to inform

Accepted Answer

A)  the auditor with concerns held by the client's management about the audit fee. 
B)  the client's management of the auditor's opinion on the company's financial statements. 
C)  the client's audit committee's disagreements with management. 
D)  the client of the auditor's recommendations for improving its internal controls. 
A)  the auditor with concerns held by the client's management about the audit fee. 
B)  the client's management of the auditor's opinion on the company's financial statements. 
C)  the client's audit committee's disagreements with management. 
D)  the client of the auditor's recommendations for improving its internal controls.

Question 17

Sam Fenton wants to ensure that sales in a retail outlet are not recorded at the wrong amount. Which preventive control will help him ensure his objective?

Accepted Answer

A)  the signature of the goods by the warehouse receiver on a receiving report or a bill of lading 
B)  a credit check by the credit manager 
C)  automatic pricing of sales invoices using a master price file 
D)  none of the above 
A)  the signature of the goods by the warehouse receiver on a receiving report or a bill of lading 
B)  a credit check by the credit manager 
C)  automatic pricing of sales invoices using a master price file 
D)  none of the above

Question 18

In larger entities, there are often limitations surrounding the entity's ability to put effective
internal controls in place.

Accepted Answer

A) True 
 B)False

Question 19

The purpose of management letters is to

Accepted Answer

A)  confirm the terms of the audit engagement. 
B)  set out the responsibilities of management and the auditor in regards to the audit. 
C)  discuss weaknesses in internal control and other matters discovered in the audit. 
D)  make recommendations of substantive procedures to be conducted. 
A)  confirm the terms of the audit engagement. 
B)  set out the responsibilities of management and the auditor in regards to the audit. 
C)  discuss weaknesses in internal control and other matters discovered in the audit. 
D)  make recommendations of substantive procedures to be conducted.

Question 20

The auditor had the following procedures in his audit program for a client: (i) Review performance versus forecasts
(ii) Review performance indicators
(iii) Review exception reports
What are these instructions related to?

Accepted Answer

A)  detective controls 
B)  physical controls 
C)  internal controls 
D)  entity-wide controls 
A)  detective controls 
B)  physical controls 
C)  internal controls 
D)  entity-wide controls

When internal controls are effective,

Benny Pecarve is planning to visit an airline company to review the collective assessment of the client's control environment, risk assessment process, information system, control activities And monitoring of controls. What does this mandate describe?

If the tests of controls confirm the auditor's preliminary evaluation of controls, the planned substantive audit procedures are not modified.

Which of the following is an example of a detective control?

It is important that detective controls

Millicent Vonareva was reviewing her IT General Controls program for her client visit. She noticed an item that she thought did not belong in her "Controls to prevent unauthorized access To data" section of the program. Which item did not belong there?

What are the factors considered by auditors in determining whether there is a need for additional detailed tests of controls?

Rina Glickstein is unsure about the best way to evaluate her audit staff. She decides to look at their professional characteristics such as their expertise, experience, knowledge and training. What best describes what she is looking for?

A partner and his team performed an audit and issued an unqualified audit report. A year later his firm was sued when a shareholder found out the financial statements were misstated. This situation best describes

Internal control encompasses which of the following elements of an organization?

Which of the following is not a method of recording an audit client's internal control system?

If inherent risk is high and no assurance has been obtained from controls testing,

Internal control weaknesses decrease the risk of material misstatements being undetected by management's processes and controls.

The purpose of the management letter is to inform

Sam Fenton wants to ensure that sales in a retail outlet are not recorded at the wrong amount. Which preventive control will help him ensure his objective?

In larger entities, there are often limitations surrounding the entity's ability to put effective internal controls in place.

The purpose of management letters is to

The auditor had the following procedures in his audit program for a client: (i) Review performance versus forecasts (ii) Review performance indicators (iii) Review exception reports What are these instructions related to?

Introduction and Review of Audit and Assurance

Ethics, Legal Liability and Client Acceptance

Audit Planning I

Audit Planning II

Audit Evidence

Sampling and Overview of the Risk Response Phase of the Audit

Execution of the Audit Performing Substantive Procedures

Auditing Sales and Receivables

Auditing Purchases, Payables and Payroll

Auditing Inventories and PPE

Auditing Cash and Investments

Completing and Reporting on the Audit

Filters

Exam 7: Understanding and Testing the Clients System of Internal Controls

When internal controls are effective,

Benny Pecarve is planning to visit an airline company to review the collective assessment of the client's control environment, risk assessment process, information system, control activities And monitoring of controls. What does this mandate describe?

If the tests of controls confirm the auditor's preliminary evaluation of controls, the planned substantive audit procedures are not modified.

Which of the following is an example of a detective control?

It is important that detective controls

Millicent Vonareva was reviewing her IT General Controls program for her client visit. She noticed an item that she thought did not belong in her "Controls to prevent unauthorized access To data" section of the program. Which item did not belong there?

What are the factors considered by auditors in determining whether there is a need for additional detailed tests of controls?

Rina Glickstein is unsure about the best way to evaluate her audit staff. She decides to look at their professional characteristics such as their expertise, experience, knowledge and training. What best describes what she is looking for?

A partner and his team performed an audit and issued an unqualified audit report. A year later his firm was sued when a shareholder found out the financial statements were misstated. This situation best describes

Internal control encompasses which of the following elements of an organization?

Which of the following is not a method of recording an audit client's internal control system?

If inherent risk is high and no assurance has been obtained from controls testing,

Internal control weaknesses decrease the risk of material misstatements being undetected by management's processes and controls.

The purpose of the management letter is to inform

Sam Fenton wants to ensure that sales in a retail outlet are not recorded at the wrong amount. Which preventive control will help him ensure his objective?

In larger entities, there are often limitations surrounding the entity's ability to put effective internal controls in place.

The purpose of management letters is to

The auditor had the following procedures in his audit program for a client: (i) Review performance versus forecasts (ii) Review performance indicators (iii) Review exception reports What are these instructions related to?

Introduction and Review of Audit and Assurance

Ethics, Legal Liability and Client Acceptance

Audit Planning I

Audit Planning II

Audit Evidence

Sampling and Overview of the Risk Response Phase of the Audit

Execution of the Audit Performing Substantive Procedures

Auditing Sales and Receivables

Auditing Purchases, Payables and Payroll

Auditing Inventories and PPE

Auditing Cash and Investments

Completing and Reporting on the Audit

Filters