AT-12 Tests of Controls PDF

ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY CPA Review Batch 48  October 2024 CPA Licensure Examination AT-12 AUDITING (Auditing Theory) IRENEO  ALLAUIGAN  ARAÑAS  TUGAS  YABUT...

ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY CPA Review Batch 48  October 2024 CPA Licensure Examination AT-12 AUDITING (Auditing Theory) IRENEO  ALLAUIGAN  ARAÑAS  TUGAS  YABUT TESTS OF CONTROLS Tests of Controls (PSA 330) The auditor shall design and perform a Test of Controls (TOC) to obtain sufficient appropriate audit evidence as to the operating effectiveness of relevant controls when: (a) The auditor’s assessment of risks of material misstatement at the assertion level includes an expectation that the controls are operating effectively; or (b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level. 1. Tests of controls are performed only on those controls that the auditor has determined are suitably designed to prevent, or detect and correct, a material misstatement in an assertion. 2. Testing the operating effectiveness of controls is different from obtaining an understanding of and evaluating the design and implementation of controls. 3. The greater the reliance the auditor places on the effectiveness of a control, the more persuasive audit evidence shall be obtained. 4. Nature and Extent of Tests of Controls (a) Perform other audit procedures in combination with inquiry to obtain audit evidence about the operating effectiveness of the controls, including: a. How the controls were applied at relevant times during the period under audit; b. The consistency with which they were applied; and c. By whom or by what means were they applied. (b) Determine whether the controls to be tested depend upon other controls (indirect controls), and if so, whether it is necessary to obtain audit evidence supporting the effective operation of those indirect controls. (c) Test of controls procedures include: a. Examination of evidence through inspection and inquiry b. Reperformance of controls. c. Observation of the performance of control procedures. 5. Timing of Tests of Controls The auditor shall test controls for the particular time, or throughout the period, for which the auditor intends to rely on those controls in order to provide an appropriate basis for the auditor’s intended reliance. -The auditor can obtain audit evidence about internal controls in the interim period and at period end. -The auditor can obtain audit evidence about internal controls from previous audits. 6. Evaluating the Operating Effectiveness of Controls The auditor shall evaluate whether, on the basis of the audit work performed, the auditor has identified a material weakness in the operating effectiveness of controls. a. Check the deviations from controls upon which the auditor intends to rely b. Evaluate whether misstatements that have been detected by substantive procedures indicate that controls are not operating effectively 7. Report on Material Weakness in Internal Control The auditor shall communicate material weaknesses in internal control identified during the audit on a timely basis to management at an appropriate level of responsibility. Page 1 of 6 0915-2303213  [email protected] ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY TESTS of CONTROLS AT-12 MULTIPLE CHOICE QUESTIONS 1. Tests of controls A. are used to support the ending balances in the balance sheet and income statement accounts. B. are performed at the end of the audit. C. are designed to detect fraud. D. are the procedures used to test the effectiveness of controls in support of a reduced assessed control risk. 2. What does the effectiveness of internal controls influence? A. Inherent risk. C. Risk of material misstatement. B. Control risk. D. Both B and C. 3. Which of the following is true regarding the relationship between tests of controls and procedures to obtain an understanding? A. In obtaining an understanding of internal control, the procedures to obtain an understanding are applied to all controls identified during that phase. B. Tests of controls are applied only when the assessed control risk has not been satisfied by the procedures to obtain an understanding. C. Procedures to obtain an understanding are performed only on one or a few transactions. D. All of the above are correct. 4. Which of the following statements is/are true? I. The auditor uses control risk assessment and results of tests of controls to evaluate detection risk and the related substantive tests for the financial statement audit. II. Testing of internal controls can only be performed by the auditor at the end of the fiscal year. A. Both statements are true C. Only statement II is true B. Both statements are false D. Only statement I is true 5. When controls are deemed ineffective and assessed control risk is at the maximum for a private company, there will be ______ emphasis placed on tests of controls. A. heavy C. relatively little B. No D. moderate 6. In designing and performing test of controls, the auditor shall A. obtain more persuasive audit evidence the greater the reliance the auditor places on the effectiveness of a control. B. obtain less persuasive audit evidence the greater the reliance the auditor places on the effectiveness of a control. C. obtain more persuasive audit evidence the lesser the reliance the auditor places on the effectiveness of a control. D. obtain less persuasive audit evidence notwithstanding the degree of reliance the auditor places on the effectiveness of a control. 7. Which of the following statements is/are true? I. When auditors plan to use evidence about the operating effectiveness of internal control contained in prior audits, auditing standards require tests of the controls’ effectiveness at least every other year. II. The greater the risk of misstatement, the less audit evidence the auditor should obtain that controls are operating effectively. A. Only statement I is true C. Only statement II is true B. Both statements are false D. Both statements are true 8. If evidence was obtained in the prior year’s audit that indicates a key control was operating effectively: A. The extent of tests of that control may be reduced this year if the auditor determines that it is still in place. B. It will be unnecessary to test that control this year. C. The tests of that control will be reduced this year. D. The auditor would not test this area again this year. Page 2 of 6 0915-2303213  [email protected] ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY TESTS of CONTROLS AT-12 9. If no changes have occurred since the controls were last tested, a CPA should A. Rely on the prior year audit’s assessment of internal controls and use this assessment in the current year. B. Test the operating effectiveness of such controls at least once in every third audit. C. Test the operating effectiveness of such controls at least once in every fourth audit. D. Rely entirely on the performance of substantive audit procedures. 10. An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls. Which of the following would generally not be used? A. make inquiries of appropriate client personnel B. inspect design documents C. examine documents, records, and reports D. reperform client procedures 11. Evaluate the following statements: I. Internal controls that the auditor expects to rely on to reduce substantive testing must be tested. II. The internal controls of an organization have no impact on the efficiency of an audit. III. The purpose of the auditor’s consideration of the effectiveness of internal controls is to determine the nature, extent, and timing of substantive testing. A. False, True, True C. True, True, True B. True, False, True D. True, False, False 12. Which of the following is an accurate statement relating to the extent of procedures? A. If an auditor wants a lower assessed control risk than the preliminary assessed control risk, the number of controls tested increases while the extent of the tests for each control decrease. B. The extent of testing depends on the frequency of the operation of the controls. C. All controls must be tested only at year-end. D. The frequency of testing is the same for both manual and computer controls. 13. Which of the following would not affect an auditor's judgment concerning internal controls? A. The assertion being tested. B. The design of the control. C. The operation of the control. D. The level of inherent risk. 14. In the assessment of control risk, the auditor is basically concerned that the client's internal control provides reasonable assurance that A. Management cannot override the system. B. Operational efficiency has been achieved in accordance with management plans. C. Controls have not been circumvented by collusion D. Errors and fraud have been prevented or detected. 15. If the auditors do NOT perform tests of controls of certain assertions: A. They have performed a substandard audit. B. They must issue a qualified opinion. C. They are not required to communicate reportable conditions relating to those accounts to management. D. They must assess control risk at the MAXIMUM level for those assertions. 16. The objective of dual-purpose tests is to: A. Evaluate whether internal controls are operating effectively. B. Detect material misstatements in the client’s financial statements. C. Identify unusual trends or patterns in comparative financial statements. D. Test internal controls as well as transactions and balances using the same test procedures. 17. With a dual-purpose test, what is an auditor likely to do? A. Perform a substantive procedure concurrently with a test of a control. B. Perform a substantive procedure concurrently with a risk assessment test. C. Perform a risk assessment test concurrently with a test of a control. D. None of the above. Page 3 of 6 0915-2303213  [email protected] ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY TESTS of CONTROLS AT-12 18. Tests of controls are least likely to be omitted with regard to A. Accounts believed to be subject to ineffective control activities B. Subsequent events C. Accounts representing few transactions D. Accounts representing many transactions 19. Which of the following would the auditor consider as part of the control environment related to debt? A. Recalculation of the underwriter’s commission. B. Inquiry of trustee regarding the registration of current bondholders and distribution of interest payments. C. Inspection of documentation to confirm refinancing of debt. D. Independence of the board of directors with respect to long-term financing. 20. In testing controls, it is best to remember this statement: “The basic components of business operations and the primary subject matter of internal accounting control are: A. Assets.” C. Control methods and behavior.” B. Transactions.” D. Employees.” 21. Which of the following is not an element of internal control for inventory? A. Perpetual inventory system. B. Authorization for all purchases. C. Rapid introduction of new products without market studies. D. Proper accounting for receipt of inventory. 22. Which of the following is not a common test of controls for marketable securities? A. Inquire of management about its process for reclassifications. B. Review the minutes of the board meetings. C. Review broker’s advice for accurate recording of security. D. Review reports of internal audits. 23. The following relates to the testing of controls. Which is the true statement? A. Prenumbered shipping and billing documents are examples of controls related to the existence of sales transactions. B. The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of authorization. C. If control risk is assessed as high, the auditor may send significantly fewer confirmations for a sample of accounts receivable than if the control risk is assessed low. D. An auditor would test controls over the occurrence of sales transactions by sampling recorded revenues and tracing them back to invoices and shipping documents. 24. The auditor is studying internal control policies and procedures within the sales, shipping, and billing subset of the revenue cycle. Which of the following conditions suggests a need for additional testing of controls? A. Internal control over sales, billing, and shipping appears strong, but 80% of sales revenue is attributable to three major customers. B. Internal control is found to be weak with regard to shipping and billing. C. Internal control over billing and shipping is thought to be strong and the auditor considers additional testing of selected controls will result in a major reduction in substantive testing. D. Internal control over the recording of sales is found to be weak and the sales are evenly divided among a large number of customers. 25. Which of the following control objectives pertain to existence of trade receivables? A. The entity is entitled to trade receivable balances shown at the period-end B. Recorded credit sales transactions include the effects of all transactions that have occurred C. Recorded credit sales transactions are real and not fictitious. D. Recorded cash balances are realizable at the amounts stated 26. S1: The most important control for petty cash is that two individuals maintain joint custody of the asset. S2: The most important control for petty cash is the use of an imprest fund. A. True, True C. True, False B. False, True D. False, False Page 4 of 6 0915-2303213  [email protected] ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY TESTS of CONTROLS AT-12 27. Auditors are often concerned with three aspects of internal controls related to the sales and collection cycle. Which of the following is not one of those controls? A. Controls that detect or prevent embezzlement. B. Controls over acquisitions. C. Controls over the cutoff. D. Controls related to the allowance for doubtful accounts. 28. For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve: A. Cash disbursements C. Write-offs of customer accounts B. Employee overtime wages D. None of the above 29. During the review of a small business client’s internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness? A. The owner reviews errors in billings to customers and postings to the subsidiary ledger. B. The controller receives the monthly bank statement directly and reconciles the checking accounts. C. The controller reconciles the total of the subsidiary ledger to the amount shown in the general ledger. D. The owner reviews credit memos after they are recorded. 30. The accounts payable department usually has responsibility for verifying the propriety of acquisitions by comparing the details on the: A. Vendor’s invoice and the receiving report. B. Purchase requisition, purchase order, and receiving report. C. Vendor’s invoice and the purchase requisition. D. Purchase order, receiving report, and vendor’s invoice. 31. When controls leave no documentary evidence or trail: A. It is impossible for the auditor to verify them so he/she will have to rely on substantive tests. B. The only thing available as verification of their effectiveness is inquiry of management. C. The auditor generally observes them being applied. D. It is impossible to audit that area of the client’s system. 32. Audit evidence concerning segregation of duties ordinarily is best obtained by: A. Performing tests of transactions that corroborate management’s financial statement assertions. B. Observing the employees as they apply specific controls. C. Obtaining a flowchart of activities performed by available personnel. D. Developing audit objectives that reduce control risk. 33. In accordance with PSA 260, matters to be communicated to those charged with governance may include the following, except A. Planned audit opinion B. The auditor’s responsibilities in relation to the financial statement audit C. Significant findings from the audit D. Auditors independence 34. PSA 265 states that the auditor is to communicate deficiencies in internal control that the auditor has identified during the audit and that in the auditor’s judgment, are of sufficient importance to merit the respective attention of, the following: A. Management only B. Those charged with governance only C. Management and those charged with governance D. Management, those charged with governance, and the Securities and Exchange Commission 35. S1-A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a control objective is referred to as a compensating control. S2-When the auditor identifies an area of the accounting system with missing controls (i.e., a material weakness), this would lead to a modification of the audit program in that area that would eliminate the need for a test of controls. A. Only statement II is true B. Both statements are true C. Both statements are false D. Only statement I is true Page 5 of 6 0915-2303213  [email protected] ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY TESTS of CONTROLS AT-12 36. When a compensating control exists, a weakness in the system: A. Is no longer a concern because the potential for misstatement has been sufficiently reduced B. Is reduced but is not removed; therefore, it is still of concern to the auditor C. Could cause a material loss, so it must be tested using substantive procedures D. Is magnified and must be removed from the sampling process and examined in its entirety 37. Which of the following statements concerning material weaknesses and reportable conditions is correct? A. An auditor should report immediately material weaknesses and reportable conditions discovered during an audit. B. An auditor should identify and communicate material weaknesses separately from reportable conditions. C. All material weaknesses are reportable conditions. D. All reportable conditions are material weaknesses. 38. The auditors who become aware of an internal control reportable condition are required to communicate this to the: A. Board of directors and internal auditors. B. Audit committee and client’s legal counsel. C. Audit committee. D. Internal auditors. 39. A deficiency in internal control exists when: A B C D A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the FS on a timely basis Yes Yes No Yes A control necessary to prevent, or detect and correct, misstatements in the FS on a timely basis is missing No Yes Yes Yes 40. A deficiency in internal control that, in the auditor’s professional judgment, is of sufficient importance to merit the attention of those charged with governance. A. Reportable condition B. Significant deficiency in internal control C. Cute deficiency in control D. Material control deficiency 41. How must significant deficiencies and material weaknesses be communicated to those charged with governance? A. Either oral or written communication is acceptable. B. Written communication is required. C. Written communication is required for material weaknesses, but oral communication is allowed for significant deficiencies. D. Oral communication is required. 42. When reporting on conditions relating to an entity’s internal control structure observed during an audit of the financial statements, the auditor should include a A. Description of tests performed to search for material weaknesses. B. Statement of a positive assurance on the structure. C. Paragraph describing the inherent limitations of the structure. D. Restriction on the distribution of the report. 43. The development of constructive suggestions to clients for improvements in internal control is A. A requirement of the auditor’s consideration of internal control. B. A desirable by-product of an audit engagement. C. Addressed by the auditor only during a special engagement. D. As important as establishing a basis for reliance upon the internal control structure. - END – Page 6 of 6 0915-2303213  [email protected]