Auditing Techniques & Internal Audit Introduction

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Questions and Answers

What is a potential drawback of test-checking in auditing?

Test-checking makes it impossible for auditors to use their professional judgement.

Test-checking can lead to a more comprehensive audit, encompassing every transaction.

Test-checking is unsuitable for businesses with strong internal controls.

Test-checking can result in a higher risk of missing errors and fraud. (correct)

Why is test-checking considered less reliable than a full audit?

Test-checking is only suitable for companies with weak internal controls.

Test-checking does not guarantee the detection of all errors and fraudulent activities. (correct)

Test-checking can be easily manipulated by the client's staff.

Test-checking relies on the auditor's personal judgement, which can be flawed.

What is a key factor to consider when deciding whether to use test-checking in an audit?

The strength of the company's internal controls. (correct)

The availability of technology for data analysis.

The complexity of the company's business model.

The auditor's level of experience in the industry.

What is the primary benefit of classifying and stratifying transactions before performing test-checking?

It allows the auditor to prioritize selecting transactions for review. (C) Signup and view all the answers

What precautions should auditors take to mitigate the risks associated with test-checking?

Conduct a 100% review of transactions in high-risk areas. (A) Signup and view all the answers

What is a potential consequence of revealing the details of test-checking to the client's staff?

All of the above. (D) Signup and view all the answers

How can the auditor mitigate the risk of their personal judgement influencing the selection of transactions for test-checking?

All of the above. (D) Signup and view all the answers

Which of the following is NOT a valid precaution to take when using test-checking in an audit?

Reviewing transactions from the beginning of the audit period to ensure that all potential errors and frauds are detected. (A) Signup and view all the answers

What does the risk of under-reliance and incorrect rejection cause?

An increase in the cost of the audit (B) Signup and view all the answers

What is the relationship between the tolerable error and the sample size?

The tolerable error and sample size are inversely proportional (A) Signup and view all the answers

When determining the expected error in a population, what should the auditor consider?

All of the above (D) Signup and view all the answers

What does the risk of overreliance and incorrect acceptance result in?

A decrease in the effectiveness of the audit (C) Signup and view all the answers

What is the effect of a strong system of internal control on the audit sample size?

It requires a smaller sample size. (D) Signup and view all the answers

What does the term "tolerable error" represent in compliance procedures or tests of controls?

The maximum deviation from a prescribed control procedure that the auditor is willing to accept as tolerable (B) Signup and view all the answers

How does the auditor's willingness to accept sampling risk affect the sample size?

The lower the risk, the smaller the sample size. (A) Signup and view all the answers

What is the purpose of the audit sample size?

To provide a reasonable basis for expressing an opinion on the financial statements. (B) Signup and view all the answers

What is the purpose of the company auditor's report regarding internal controls under CARO, 2003?

To evaluate the adequacy and effectiveness of the company's internal control system. (C) Signup and view all the answers

Which of the following is NOT a limitation of internal control systems as described in the text?

Internal control systems can be easily circumvented by sophisticated hackers. (C) Signup and view all the answers

Which of these is NOT a factor that the company auditor considers when evaluating the effectiveness of the internal control system?

The cost of implementing the internal control system. (A) Signup and view all the answers

What is a key challenge in addressing the limitation of 'Unusual Transactions' in internal control systems?

Developing a system that can adapt to changing business needs. (A) Signup and view all the answers

What is the primary reason why the text emphasizes the importance of the auditor's role in evaluating internal control systems?

To ensure that the company's financial statements are prepared accurately. (D) Signup and view all the answers

Which of these is a potential risk associated with a lack of effective internal controls over cash sales?

Cash sales may be unrecorded, leading to lost revenue. (C) Signup and view all the answers

Based on the example provided, what is the purpose of having the counter salesman prepare the cash-memo in quadruplicate for each cash sale?

To provide a means of tracking the cash flow through different departments. (C) Signup and view all the answers

Why is the 'PAID' stamp applied to the cash-memo copies in the example of cash sales?

To acknowledge that the customer has paid the cashier for the goods. (D) Signup and view all the answers

Which auditing technique involves examining documents and records to confirm the authenticity of transactions?

Inspection (A) Signup and view all the answers

In the context of auditing, what does 'observation' involve?

Witnessing a process or procedure (D) Signup and view all the answers

Which auditing technique is particularly relevant in assessing the accuracy of financial transactions recorded in the books of account?

Computation (B) Signup and view all the answers

What is the primary purpose of 'confirmation' in auditing?

Obtaining information from outside sources (A) Signup and view all the answers

Which of the following is NOT considered an audit procedure according to AAS-5?

Risk assessment procedures (D) Signup and view all the answers

Which of these is NOT an example of an accounting ratio used for analytical review?

Debt-to-equity ratio (D) Signup and view all the answers

What is the main difference between audit techniques and audit procedures?

Techniques relate to specific steps, while procedures are broader methods (D) Signup and view all the answers

How does the increasing use of computerized accounting systems impact the relevance of the 'computation' auditing technique?

It makes this technique less necessary due to automated accuracy (A) Signup and view all the answers

In the context of auditing, what is the primary purpose of 'Compliance Procedures'?

To assess the effectiveness of internal controls by examining a small sample of transactions in detail (A) Signup and view all the answers

Which of the following is NOT a feature of 'Test Checking' in auditing?

Test checking is primarily applied to non-similar and extraordinary transactions. (C) Signup and view all the answers

What is the primary rationale behind using 'Test Checking' in auditing?

To obtain reliable and sufficient evidence regarding the financial statements. (B) Signup and view all the answers

Which of the following is NOT a common substantive procedure used by auditors during an audit?

Trend Analysis (A) Signup and view all the answers

Why would an auditor perform 'Ledger Scrutiny' as a substantive procedure?

To verify the accuracy of individual entries in the general ledger. (B) Signup and view all the answers

When performing 'Vouching', an auditor would typically use which of the following documents to confirm the existence of a particular transaction?

Sales invoice (B) Signup and view all the answers

What is the main difference between 'Compliance Procedures' and 'Substantive Procedures'?

Compliance Procedures focus on internal control while Substantive Procedures focus on the accuracy of financial statements. (C) Signup and view all the answers

Which of the following best describes the approach taken by auditors when using 'Test-Checking'?

Selecting a small sample of transactions and examining them in detail. (D) Signup and view all the answers

What is a major concern the auditor should have when using the systematic sampling method?

Making sure the sampling interval doesn't align with a pattern in the population. (C) Signup and view all the answers

Which of the following is NOT a characteristic of haphazard sampling?

It involves a deliberate attempt to include or exclude specific items. (C) Signup and view all the answers

What is the primary purpose of evaluating sample results in an audit?

To identify and assess the nature, cause, and potential impact of errors. (A) Signup and view all the answers

In haphazard sampling, what is the primary concern about selecting easily located items?

It can result in an unrepresentative sample. (C) Signup and view all the answers

What is an example of a qualitative aspect of an error that an auditor should consider?

The nature of the error. (D) Signup and view all the answers

How does the auditor determine whether an item in the sample constitutes an error?

By referring to the relevant audit objectives. (C) Signup and view all the answers

When an auditor identifies an error in a sample item, what is the next step?

Analyze the error and consider its potential impact. (A) Signup and view all the answers

What is the primary objective of an auditor when designing a sample?

To ensure the sample is representative of the entire population. (A) Signup and view all the answers

Study Notes