Deck 12: Designing Substantive Procedures

Question 1

Tests of details of balances focus on obtaining evidence:

A) directly from an outside source.
B) in the least costly manner.
C) directly about an account balance.
D) to refute instead of support an assertion.

Answer 1

C

Question 2

The least costly form of testing is usually:

A) analytical procedures.
B) tests of controls.
C) tests of detail of transactions.
D) tests of detail of balances.

Answer 2

A

Question 3

If the lower assessed level of control risk approach preliminary audit strategy is used, planned detection risk will be:

A) at the lower level.
B) moderate or high.
C) at the higher level.
D) high or very high.

Answer 3

B

Question 4

Which of these is not normally a distinct phase involved in using generalised audit software?

A) using the primarily substantive approach in planning the audit.
B) identification of the relevant audit objective and tests to be performed.
C) designing the application and form of the output.
D) processing the application and reviewing the results.

Question 5

Which of these would be a reason for adopting a predominantly substantive approach?

A) accounts are affected by more than one transaction class.
B) detection risk has been assessed as high.
C) there are no significant control procedures that pertain to the assertion.
D) control risk has been assessed as low.

Question 6

Tests of details of income statement account are likely when?

A) inherent risk is less than high.
B) control risk is moderate to low.
C) analytical procedures indicate no unusual fluctuations.
D) the account requires analysis
E)g. directors' remuneration, income tax

Question 7

Which of these is not considered a substantive procedure?

A) analytical procedures.
B) tests of controls.
C) tests of detail of transactions.
D) tests of detail of balances.

Question 8

For small clients it is often more efficient to adopt the predominantly substantive approach. Which of the following is a reason for this:

A) they may not have adequate resources to implement all appropriate controls.
B) controls may not be effective.
C) the size of the entity may make it inefficient for the auditor to rely on these controls.
D) all of the above.

Question 9

Which of these would not be considered to be a test of details of balances?

A) accounts receivable confirmations.
B) tracing an invoice to the sales journal.
C) observing the entity's stocktake.
D) inspecting plant assets.

Question 10

For a particular account balance assertion, the auditor is most likely to be able to avoid substantive tests of details with which of these set of risk assessments? $$\begin{array} { l l l l } & \underline {\text { Inherent }} & \underline {\text { Control }} & \underline {\text { Results of analytical procedures} } \\ A . & \text { Maxirmumn } & \text { MaximmInn } & \text { Unexpected } \\B.&\text { Maximum } & \text { Maximum } & \text { Expected } \\ C.&\text { Low } & \text { Low } & \text { Expected } \\D.&\text { Low } & \text { Low } & \text { Unexpected }\end{array}$$

A) A
B) B
C) C
D) D

Question 11

Which of these would not necessarily be considered to be a risk factor for potential misstatements?

A) there is intense price competition in the industry of operation.
B) profit margin has increased and inventory turnover days has decreased
C) an employee in the cash office was passed over for a promotion.
D) segregation of duties is not practiced.

Question 12

Tests of details of transactions generally use evidence from:

A) documents found in the entity's files.
B) documents obtained directly from external sources.
C) direct observation on the part of the auditor.
D) inquiry directed to top management personnel.

Question 13

If the lower assessed level of control risk approach preliminary audit strategy is used, the planned level of substantive procedures will be:

A) at the lower level.
B) moderate or high.
C) at the higher level.
D) high or very high.

Question 14

If the predominantly substantive approach preliminary audit strategy is used, the planned level of substantive procedures will be:

A) at the lower level.
B) moderate or high.
C) at the higher level.
D) low or very low.

Question 15

An auditor is examining the detailed debit and credit activity in an account. The auditor is most likely performing:

A) analytical procedures.
B) tests of controls.
C) tests of details of transactions.
D) tests of details of balances.

Question 16

Generalised audit software can be used for:

A) performing calculations.
B) selecting samples.
C) identifying records meeting specified criteria.
D) any of the above.

Question 17

Which of the following is not true in regards to cut-off tests?

A) they are related more to the transaction than to the closing balance.
B) they ensure completeness.
C) they ensure occurrence.
D) they affect the income report and the balance sheet

Question 18

Tests of details of transactions primarily involve:

A) confirmation with outsiders.
B) tracing and vouching.
C) observation and inquiry.
D) income statement accounts.

Question 19

Confirmation and direct knowledge by the auditor are most associated with:

A) analytical procedures.
B) tests of details of balances.
C) tests of details of transactions.
D) tests of controls.

Question 20

If the predominantly substantive approach preliminary audit strategy is used, planned detection risk will be:

A) moderate or high.
B) at the higher level.
C) high or very high.
D) low or very low.

Question 21

An audit program should be sufficiently detailed to provide all of the following except:

A) evidential support for the audit opinion.
B) an outline of the work to be done.
C) a basis for controlling the audit.
D) a basis for supervising the audit.

Question 22

Compared to balance sheet accounts, the audit of income statement accounts generally relies more heavily on:

A) analytical procedures.
B) tests of detail of balances.
C) tests of detail of transactions.
D) both tests of detail of balances and of transactions.

Question 23

Describe the contents and purpose of an audit program.

Question 24

When substantive procedures are performed before the balance sheet date the auditor should, at or after the balance sheet date:

A) obtain a letter from management stating that no significant changes occurred in the account balances between the two dates.
B) perform a comparison of the account balances at the two dates.
C) confirm all balances that were not confirmed at interim.
D) perform tests of reasonableness on all balances that were not confirmed at interim.

Question 25

Which of the following is not true in relation to external confirmations?

A) They are highly reliable.
B) They are expensive to perform.
C) They are time-consuming to collect.
D) It is mainly liabilities that require external confirmation.

Question 26

The auditor would be least likely to perform early substantive tests of details of balances when:

A) a number of significant deviations from control policies and procedures were detected during tests of controls.
B) variance reports do not distinguish between price and quantity variances.
C) the client uses a financial business year instead of the calendar year.
D) the taking of the client's inventory is performed at an early date.

Question 27

In practice, early substantive tests of details of balances is done only when:

A) the client has a calendar year end.
B) internal controls are weak.
C) evidence indicates effective control policies and procedures.
D) the primarily substantive approach is taken.

Question 28

Which of these is not compatible with a high level of inherent and control risk?

A) detection risk is low.
B) a larger sample should be used.
C) substantive procedures are less effective.
D) year end tests are preferable.

Question 29

A procedure the auditor would employ in identifying related party transactions is:

A) reviewing previous period working papers.
B) reviewing shareholder records.
C) reviewing minutes of shareholders and directors meetings.
D) all of the above.

Question 30

The nature of substantive procedures refers to the type and effectiveness of the auditing procedures to be performed.
Identify and discuss the three types of substantive procedures, addressing the relative effectiveness and cost of each.

Question 31

The following is a list of balance sheet accounts. For each balance sheet account, indicate its related income statement account.
$$\begin{array} { | l | l |} \hline \text { Balance Sheet Accuunt } &\underline { \text { Related Incame }} \\&\underline {\text { Statement Account }}\\\hline \text { Accourits receivable } & \\\hline \text { Iruventories } & \\\hline \text { Prepaid expenses } & \\\hline \text { Irvestrnents } & \\\hline \text { Plarit assets } & \\\hline \text { Intarngible assets } & \\\hline \text { Accrued payables } & \\\hline \text { Interest-bearing liabilities } & \\\hline\end{array}$$

Question 32

ASA 520 (ISA 520) indicates that the extent of reliance on analytical procedures depends on which of the following?

A) materiality.
B) accuracy of predicted results.
C) inherent and control risks.
D) all of the above.

Question 33

The major factor affecting the decision by the auditor to perform substantive procedures during the interim period will be based upon:

A) staffing considerations.
B) the cooperation of client personnel, especially internal auditors.
C) controlling detection risk and cost effectiveness.
D) the approach followed in the past.

Question 34

In which of these accounts would you not expect the use of estimates?

A) allowance for bad and doubtful debts.
B) accounts receivable.
C) warranty expense.
D) all of the above involve the use of estimates

Question 35

Why are related party transactions a risk area for auditors?

A) they have minimal disclosure requirements.
B) they have a higher than average risk of irregularities.
C) they have a direct impact on profit.
D) they are difficult to assess.

Question 36

Extensive tests of detail for an income statement account is least likely to be required when:

A) inherent risk is high.
B) control risk is high.
C) detection risk is high.
D) analytical procedures reveal some unexpected fluctuations.

Question 37

When auditing accounting estimates, ASA 540 (ISA 540) suggests all of the following approaches except:

A) review and test the process used by management to develop the estimate.
B) use an independent estimate for comparison.
C) rely on management's representation.
D) review subsequent events.

Question 38

The auditor is performing substantive procedures several months before the end of the year. This most likely means that:

A) inherent risk is set at high.
B) detection risk is set at high
C) control risk is set at maximum.
D) none of the above are correct

Question 39

Each income statement account is linked to at least one balance sheet account. Which of the following would be the related income statement account for the balance sheet account of inventories?

A) cost of sales.
B) depreciation expense.
C) sales.
D) none of the above.

Question 40

The audit program is basically a list of:

A) detailed audit objectives.
B) audit procedures to be performed.
C) account balances and their related assertions.
D) control policies and procedures to be tested.

Question 41

List two procedures that could be performed to obtain evidence about accounts receivable for each type of substantive procedure.

Question 42

1. List three substantive procedures that are commonly performed before the reporting date.
2.Explain why there is an increased audit risk from conducting procedures before the reporting date and identify two ways in which this increased risk is controlled.

Question 43

Answer each of the following:
1.Control risk has been assessed as high and detection risk is low. What is the timing of the substantive procedures likely to be?
2.The auditor has decided that they will use a larger sample for confirmations at year end. What is the level of detection risk?
3.Control risk has been assessed as low and detection risk is high. What type of substantive procedures are the auditors more likely to use?
4.Control risk has been assessed as low and detection risk is high. What size sample are the auditors more likely to use?
5.The auditor has decided that they will do more tests of details of balances and use larger samples. What is the likely level of control risk?
6.The auditor has been comparing the customer closing balances with the balance in the control account for a large sample of customers at year end. What is the level of control risk and detection risk?

Question 44

1. List the three assumptions that would cause an auditor to assess control risk as being high and adopt the predominantly substantive approach.
2.Give three reasons as to why the predominantly substantive approach can be more suitable to smaller entities.

Question 45

There are three steps in assessing the risk of material misstatement. Identify and briefly explain each of these steps.