Tests of Controls (PSA 330)
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Questions and Answers

When a control is deemed ineffective, what should be the emphasis on tests of controls for a private company?

  • No
  • Relatively little
  • Moderate
  • Heavy (correct)

    • What is expected from the auditor when reliance on the effectiveness of a control is greater?

  • Obtain more persuasive audit evidence (correct)
  • Obtain less persuasive evidence notwithstanding the reliance
  • Obtain more persuasive evidence regardless of reliance
  • Obtain less persuasive audit evidence

    • Which statements regarding the usage of prior audit evidence about internal controls are true?

  • Only statement II is true
  • Both statements are true
  • Both statements are false
  • Only statement I is true (correct)

    • If evidence from last year's audit indicates a key control was effective, what should the auditor do this year?

    <p>Reduce tests if the control is still in place</p> Signup and view all the answers

    What should a CPA do if no changes have occurred since the last control test?

    <p>Rely on the prior year's assessment of internal controls</p> Signup and view all the answers

    What is the relationship between the risk of misstatement and the amount of audit evidence required?

    <p>Higher risk requires more evidence</p> Signup and view all the answers

    When controls are found to be operating effectively, what is a common procedure for future audits?

    <p>Extent of tests may be reduced if evidence supports prior effectiveness</p> Signup and view all the answers

    What action is taken when controls are assessed as having moderate effectiveness?

    <p>Moderate emphasis on additional testing</p> Signup and view all the answers

    Which statement about prenumbered shipping and billing documents is true?

    <p>They are examples of controls related to the existence of sales transactions.</p> Signup and view all the answers

    What condition indicates a need for additional testing of controls within the sales cycle?

    <p>Weak internal control is found regarding shipping and billing processes.</p> Signup and view all the answers

    Which control objective directly relates to the existence of trade receivables?

    <p>All recorded credit sales must reflect legitimate transactions.</p> Signup and view all the answers

    Which statement about controls for petty cash is accurate?

    <p>Imprest fund is the most critical control for petty cash.</p> Signup and view all the answers

    What is a likely outcome when control risk is assessed as high?

    <p>There will be an increase in the number of substantive tests performed.</p> Signup and view all the answers

    Which of the following combinations regarding internal control for petty cash is true?

    <p>True, False</p> Signup and view all the answers

    In what scenario would an auditor conduct additional testing despite strong internal controls?

    <p>When 80% of sales revenue is attributed to three major clients.</p> Signup and view all the answers

    Which aspect of internal control related to the sales and collection cycle is often a concern for auditors?

    <p>Authorization of sales transactions.</p> Signup and view all the answers

    When should an auditor perform a Test of Controls (TOC)?

    <p>When substantive procedures alone cannot provide sufficient evidence.</p> Signup and view all the answers

    What is required for controls to be included in a Test of Controls?

    <p>They must be demonstrably effective in preventing misstatements.</p> Signup and view all the answers

    What is the relationship between reliance on the effectiveness of a control and the level of audit evidence obtained?

    <p>Higher reliance requires more persuasive audit evidence.</p> Signup and view all the answers

    Which of the following is NOT a procedure in the Test of Controls?

    <p>Review of historical financial statements.</p> Signup and view all the answers

    What is the purpose of performing other audit procedures in combination with inquiry during a Test of Controls?

    <p>To understand how controls were applied and their effectiveness.</p> Signup and view all the answers

    What should an auditor determine regarding indirect controls during the Test of Controls?

    <p>Whether it's necessary to obtain evidence supporting the effective operation of indirect controls.</p> Signup and view all the answers

    What is the timing consideration for testing controls?

    <p>Testing should occur throughout the period the auditor intends to rely on the controls.</p> Signup and view all the answers

    Which of the following statements about understanding and evaluating controls is true?

    <p>Testing effectiveness is different from evaluating design and implementation.</p> Signup and view all the answers

    Which of the following is not a type of internal control?

    <p>Controls over employee attendance</p> Signup and view all the answers

    Employees maintaining the accounts receivable subsidiary ledger should not approve which of the following?

    <p>Write-offs of customer accounts</p> Signup and view all the answers

    What is the most effective control to offset weaknesses when an accounts receivable clerk has access to cash?

    <p>The owner reviews credit memos after they are recorded</p> Signup and view all the answers

    Which documents should the accounts payable department compare for verifying acquisitions?

    <p>Purchase order, receiving report, and vendor’s invoice</p> Signup and view all the answers

    What should an auditor rely upon if controls leave no documentary evidence?

    <p>Substantive tests to verify the area</p> Signup and view all the answers

    How is audit evidence regarding segregation of duties primarily obtained?

    <p>Obtaining a flowchart of activities performed</p> Signup and view all the answers

    Which matter is typically excluded from communication to those charged with governance, according to PSA 260?

    <p>Details about the internal control system</p> Signup and view all the answers

    What is the auditor's best approach for observing internal controls in practice?

    <p>Performing tests of transactions</p> Signup and view all the answers

    Which procedure is generally not used to support the operating effectiveness of internal controls?

    <p>Perform analytical procedures on financial statements</p> Signup and view all the answers

    Which statement regarding internal controls and substantive testing is true?

    <p>Internal controls require testing if reliance on them is intended.</p> Signup and view all the answers

    What does the extent of procedures in an audit depend on?

    <p>The frequency of operation of the controls</p> Signup and view all the answers

    Which factor is least likely to affect an auditor's judgment concerning internal controls?

    <p>The effectiveness of the internal audit function</p> Signup and view all the answers

    What must auditors do if they do not perform tests of controls on certain assertions?

    <p>Assess control risk at the MAXIMUM level for those assertions</p> Signup and view all the answers

    Which is a primary reason for evaluating the effectiveness of internal controls?

    <p>To establish the nature and extent of substantive testing</p> Signup and view all the answers

    What is the implication if an auditor assesses that controls have been circumvented?

    <p>There may be increased levels of errors and fraud</p> Signup and view all the answers

    To which extent can an auditor assess control risk?

    <p>It can vary depending on how effectively controls prevent fraud</p> Signup and view all the answers

    Study Notes

    Tests of Controls (PSA 330)

    • Tests of Controls (TOC) are essential when an auditor assesses risks of material misstatement and expects effective controls, or when substantive procedures alone are insufficient.
    • TOCs are only performed on controls assessed as suitably designed to prevent, detect, or correct material misstatements.
    • Testing the effectiveness of controls differs from understanding their design and implementation.
    • Greater reliance on a control requires more persuasive audit evidence to be gathered.
    • Nature and extent of TOCs should involve combination of inquiries and examining how controls were applied, their consistency, and identification of those who applied them.
    • Controls may rely on indirect controls, which necessitates obtaining evidence of their effective operation.

    Timing and Reliability

    • Testing of controls should occur during the relevant time period for intended reliance.
    • Audit evidence can be gathered both during the interim period and at year-end.
    • If controls are deemed ineffective with maximum assessed control risk, minimal emphasis will be placed on TOCs.

    Evaluating Control Effectiveness

    • Reliance on the effectiveness of a control influences the required persuasiveness of audit evidence; more reliance means more persuasive evidence is needed.
    • When using evidence from past audits, TOCs must be tested at least every other year.
    • If controls remain unchanged since the last evaluation, prior assessments can inform current year evaluations.

    Audit Procedures and Internal Controls

    • Common audit procedures to support internal controls include inquiries, design document inspections, document examinations, and reperformance of client procedures.
    • Internal controls are critical and must be tested if relied upon to reduce substantive testing; ineffective controls reduce operational efficiency.
    • Control risk assessments depend on the client's internal controls ensuring prevention or detection of errors and fraud.

    Specific Control Objectives

    • Effective internal controls ensure existence of trade receivables and that recorded transactions are legitimate.
    • Joint custody over assets is crucial for controls like petty cash management.
    • In the sales and collection cycle, effective controls include detecting embezzlement, cutoff controls, and allowance for doubtful accounts.

    Responsibilities and Verification

    • Employees should not have dual roles in approving transactions and maintaining records to ensure segregation of duties.
    • Comparison of vendor and receiving documents is essential for verifying acquisitions in accounts payable.
    • Absence of documentary evidence necessitates reliance on other verification means like inquiries or observations.

    Communication with Governance

    • Matters to communicate to those charged with governance include responsibilities related to the audit and the planned audit opinion, but specifics may vary based on the audit context.

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    Description

    This quiz focuses on the Tests of Controls (TOC) as outlined in PSA 330. It covers the importance of TOCs in assessing risks of material misstatement and the methodologies for testing effectiveness. Participants will learn about the combination of inquiries, consistency checks, and reliance on indirect controls during audits.

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