1. The auditor is testing the operating effectiveness of controls in the revenue cycle and notes the following: (a) the organization does not regularly follow its credit policies; rather it often overrides the credit policy when divisional management needs to meet its performance goals; and (b) the sales manager has the ability to override the credit policy for important customers. Which of the following statements would be correct regarding an integrated audit of sales and receivables?
a. Based on the test of controls, the auditor would likely assess control risk as high.
b. The auditor would be able to perform less rigorous substantive procedures.
c. The auditor likely concluded that the controls were not effectively designed.
d. All of the above are correct statements.
2. Assume the auditor concludes the controls related to accounts receivable are operating effectively based on inquiry and other appropriate tests. Which of the following is a correct inference regarding the auditor's conclusion?
a. The auditor will not need to perform direct tests on the valuation of accounts receivable.
b. The auditor could not have concluded that the internal controls over credit were effective unless the auditor determined that the credit limits are updated for changed conditions.
c. The auditor does not need to confirm accounts receivable because the risk of a material misstatement of receivables is mitigated by the controls.
d. The auditor does not need to perform any more direct tests of the account balances if the auditor has tested the IT general controls.
3. In performing substantive procedures, which of the following statements provides appropriate guidance to the auditor?
a. The auditor can perform both substantive analytical procedures and substantive tests of details.
b. The auditor should perform substantive procedures for all assertions of all financial statement accounts.
c. The auditor should perform more (or more rigorous) substantive procedures when control risk is low than when control risk is high.
d. All of the above statements provide appropriate guidance.
4. In which of the following scenarios is the auditor likely to obtain more (or more rigorous) substantive evidence?
a. When subjectivity related to the assertion is low.
b. When controls are determined to be operating effectively.
c. When the account is immaterial.
d. When the design of controls is determined to be ineffective.
5. Which of the following procedures is least likely to be performed during Phase V of the audit opinion formulation process?
a. Assessment of misstatements detected during the performance of substantive procedures and tests of controls.
b. Performance of preliminary analytical review procedures.
c. Performance of an engagement quality review.
d. Determination of the appropriate audit opinion(s) to issue.
6. Which of the following statements is correct regarding the auditor's report on a public company's internal control over financial reporting?
a. A company cannot have a material weakness in internal controls if the auditor does a quality audit and does not find a material misstatement.
b. The auditor must explicitly reference the criteria for evaluating internal control, using the COSO framework, for example.
c. The audit is performed in conjunction with the auditing standards promulgated by the AICPA Auditing Standards Board.
d. The audit must report on whether management used the appropriate tools in its assessment of internal control over financial reporting.
7. The auditor discovers that there is a key control deficiency over sales contracts and that some contracts near the end of the year are not properly reviewed by management. Which of the following would be the best way for the auditor to respond to the control deficiency identified?
a. Expand the testing over the control with a larger sample from the last quarter of the year.
b. Wait to assess whether the deficiency is a material weakness or significant deficiency based on the actual number of errors or misstatements found in the related account balances.
c. Expand the sample size for substantive testing and review of contracts during the latter part of the year to determine if revenue is appropriately identified.
d. All of the above.
8. Assume the auditor has assessed the design of controls and determines that the company has an ineffective control design related to pricing and dating of sales. This assessment is due to an inadequate segregation of duties. Based on this information, which of the following actions should the auditor take?
a. Resign from the audit because the entity is not auditable.
b. Do not test controls over sales pricing and dating of sales transactions.
c. Expand the direct tests of related account balances by selecting recorded sales and tracing back to shipping documents and authorized price lists.
d. Answers (b) and (c) above.