Question 1

Which of these is not considered a substantive procedure?

Accepted Answer

A) Tests of controls. 
B) Tests of details of balances. 
C) Analytical procedures. 
D) Tests of details of transactions.

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

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 4

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

Accepted Answer

A) Allowance for bad and doubtful debts. 
B) Accounts receivable. 
C) Warranty expense. 
D) All of the above involve the use of estimates.

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

A) Accounts receivable confirmations. 
B) Tracing an invoice to the sales journal. 
C) Observing the entity's stocktake. 
D) Inspecting plant assets.

Question 7

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

Accepted Answer

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

Question 8

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

Accepted Answer

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

Question 9

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?

Accepted Answer

A) Sales. 
B) Cost of sales. 
C) Depreciation expense. 
D) None of the above.

Question 10

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

Accepted Answer

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

Question 11

Tests of details of transactions generally use evidence from:

Accepted Answer

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 12

The least costly form of testing is usually:

Accepted Answer

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

Exam 11: Designing Substantive Procedures