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TEST OF CONTROLS AND SAMPLING

1. The primary purpose for obtaining and understanding of an entity’s internal control is to:
a. determine the nature, timing and extent of tests to be performed in the audit
b. obtain sufficient appropriate audit evidence from which to draw conclusion as a basis for forming an opinion on the financial
statements
c. provide a basis for making constructive suggestions in a management letter
d. provide information for communication of internal control-related matters to management

2. Test of controls are required for:


a. accomplishing control over the occurrence of recorded transactions
b. analytical procedures applied to financial statement assertions
c. obtaining evidence about the financial statement assertions
d. obtaining evidence about the operating effectiveness of client internal procedures

3. Which of the following audit procedures should not be considered a test of controls?
a. observing preparation of the bank reconciliation
b. inquiring about the entity’s organizations structure
c. inspecting customer order forms for the signature of the credit manager
d. confirming with the customer the amount owed to the client

4. One of the company’s internal control structure procedures requires that shipping documents be matched with customer invoices.
To which of the following is that procedure relevant?
a. the completeness assertion for revenue
b. the existence assertion for inventory
c. the occurrence assertion for purchases
d. the presentation and disclosure assertion for accounts receivable

5. Tests of controls are primarily concerned with all but which of the following questions?
a. How were policies or procedures performed?
b. Were the policies or procedures performed?
c. How were the policies or procedures designed?
d. Do policies or procedures exist?

6. Which of the following is not a reason an auditor should obtain an understanding of the elements of an entity’s internal control
structure when planning an audit?
a. to identify types of potential misstatements that can occur
b. to design substantive tests
c. to consider the operating effectiveness of the internal control structure
d. to consider factors that affects the risk of material misstatements

7. Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of an
internal control?
a. inquiry of client personnel
b. recomputation of account balance amounts
c. observations of client personnel
d. confirmations with outside parties

8. The sequence of the steps in the auditor’s consideration of the internal control structure is as follows:
a. obtain an understanding, design substantive tests, perform test of controls, determine assessed level of control risk
b. design substantive tests, obtain an understanding, perform tests of control, determine assessed level of control risk
c. obtain an understanding, perform test of controls, determine assessed level of control risk, design substantive tests
d. perform tests of controls, obtain an understanding, determine assessed level of internal control, design substantive tests

9. When documenting the assessed level of control risk, the auditor should:
a. express the assessed level of control risk in either quantitative or qualitative terms for all assertions
b. state the basis for the conclusion when the assessed level of control risk is below the maximum level for an assertion
c. state the basis for the conclusion when the assessed level of control risk is at the maximum level; for an assertion
d. describe how the planned substantive test have been affected by the assessed level of control risk

10. In determining the assessed level of control risk, which of the following statements is correct?
a. the knowledge obtained form the understanding of the internal control structure cannot be used
b. the knowledge obtained about the internal control structure from prior audits can be used
c. the auditor evaluates the design of a policy and whether it has been placed in operation
d. observation provides more persuasive evidence about the operating effectiveness of a policies or procedure than inspecting
documentation

11. To determine the sample size for a test of controls, an auditor should consider the tolerable occurrence rate, the allowable risk of
assessing control risk too low and the:
a. expected occurrence rate
b. risk of incorrect acceptance
c. risk of incorrect rejection
d. upper precision limit

12. Reportable conditions are matters that come to an auditor’s attention, which should be communicated to an entity’s audit
committee because they represent:
a. flagrant violations of the entity’s documented conflict of interest
b. intentional attempts by client personnel to limit the scope of the auditor’s field work
c. material irregularities or illegal acts perpetrated by high-level structure
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d. significant deficiencies in the design or operation of the internal control sturcture

13. After considering a client’s internal control system, an auditor has concluded that it is well-designed and is functioning as intended.
Under these circumstances the auditor most likely:
a. determine the control policies and procedures that should prevent or detect errors or irregularities
b. determine whether transactions are recorded to permit preparation of financial statements in conformity with GAAP
c. not increase the extent of predetermined substantive tests
d. perform test of controls to the extent outlined in the audit program

14. Ideally, test of controls should be applied to transactions and controls:


a. at ach quarterly interim period
b. at the balance sheet date
c. at the beginning of the fiscal year
d. for the entire period under audit

15. A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation of
functions and that leave no transaction trail is:
a. inspection
b. observation
c. reconciliation
d. reperformance

16. Each key control that the auditor intends to rely on must be supported by sufficient:
a. analytical review procedures
b. test of controls
c. test of transactions
d. reperformance procedures

17. 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. it is impossible to audit that area of client’s system
c. the auditor generally observes them being applied
d. the only thing available as verification of their effectiveness is inquiry of management

18. If evidence was obtained in the prior year’s audit that indicates a key control was operating effectively:
a. it will be unnecessary to test that control this year
b. the auditor would not test this area again this year
c. the extent of tests of that control may be reduced this year if the auditor determines that it still in place
d. the tests of control will e reduced this year

19. When a compensating control exists, a weakness in the system:


a. could cause a material loss, so it must be tested using substantive procedures
b. is magnified and must be removed from the sampling process and examined in its entirety
c. is no longer a concern because the potential for misstatement has been sufficiently reduced
d. is reduced but not removed; therefore, it is still of concern to the auditor

20. One of the ways to eliminate non-sampling risk is through:


a. controls which endure that the sample drawn is random and representative
b. proper supervision and instruction of the audit team
c. proper supervision and instruction of the client’s employees
d. the use of attributes sampling rather than variables sampling

21. Sampling risk is an inherent part of sampling that results from:


a. failure to recognize exceptions
b. inappropriate audit procedures
c. testing less than the entire population
d. weaknesses in client’s internal control system

22. If the auditor decides to assess control risk at the maximum level, tests of controls are:
a. increased in number
b. not performed
c. reduced in number
d. unchanged from prior planned settings

23. An auditor selects a sample from, the file of shipping documents to determine whether invoices were prepared. This test is
performed to satisfy the audit objective of:
a. accuracy
b. existence
c. completeness
d. control

24. An auditor examining inventory may appropriately apply sampling for attributes in order to estimate the:
a. average price of inventory items
b. physical quantity of inventory items
c. percentage of slow-moving inventory items
d. peso value of inventory

25. When using statistical sampling plan, the auditor would probably require a smaller sample if the:
a. desired precision interval narrows
b. desired reliability decreases
c. expected exception rate increases
d. population increases
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26. A principal advantage of statistical methods of attributes sampling over non-statistical method is that they provide a scientific basis
for planning the:
a. expected population exception rate
b. risk of assessing control risk too low
c. sample size
d. tolerable exception rate

27. The procedures to test the effectiveness of control policies and procedures in support of a reduced assessed control risk are
called:
a. analytical tests
b. a walk-through tests
c. test of controls
d. tests of transactions

28. Which of the following illustrates the concept of sampling risk?


a. an auditor may fail to recognize errors in the documents examined for the chosen sample
b. an auditor may select audit procedures that are not appropriate to achieve the specific objective
c. a randomly chosen sample may not be a representative of the population as a whole on the characteristics of interest
d. the documents related to the chosen sample may not be available for inspection

29. Which of the following combinations results in a decrease in sample size in a sampling for attributes?
Risk of assessing control risk Tolerable exception rate Expected population
too low exception rate
a. Increase Decrease Increase
b. Decrease Increase Decrease
c. Increase Increase Decrease
d. Increase Decrease Increase

30. Which of the following statements is not true?


a. it is acceptable to use random selection procedures without drawing statistical conclusions
b. it would be inappropriate to draw a statistical conclusion unless the sample were randomly selected
c. random selection is art of statistical sampling
d. random selection is statistical measurement

31. Attributes sampling would be an appropriate method to use on which one of the following procedures in an audit program?
a. examine a sample of duplicate sales invoices for credit approval by the credit manager
b. observe whether the duties of the accounts receivable clerk are separate from handling cash
c. review sales transactions for large and unreasonable amounts
d. review the aged schedule of accounts receivable to determine if receivables from officers are included

32. The auditor’s tests of the client’s cost accounting system are primarily designed to determine that:
a. quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual
quantities on hand
b. physical inventories are in substantial agreement with book value inventories
c. the system is in accordance with GAAP and is functioning as planned
d. costs have been properly assigned to finished goods; work in process and cost of goods sold

33. Statistical sampling is applied by auditors because an audit has to be conducted:


a. in detailed manner
b. on a test basis
c. subject to the reliability of records
d. none of the above

34. Which of the following sampling method is most useful to an auditor when testing for compliance?
a. variable sampling
b. attribute sampling
c. stratified random sampling
d. cluster sampling

35. Effective control over purchase procedures normally involves the request for an itrem arising in some department or office, placing
the purchase orders with a vendor, receipt of goods or services and:
a. review of prices obtaining in the community
b. review of technical specifications
c. verification that purchase orders are forwarded to accounting
d. approval of invoice

36. The auditor must have proficiency in a variety of sampling techniques. Which of the following need not be known to evaluate the
results of a sample for a particular attribute?
a. desired confidence level
b. size of the sample
c. occurrence rate disclosed by the sample
d. occurrence rate in the population

37. This type of attribute sampling procedure which is sometimes adopted where intentional or unintended errors of high materiality are
believed to be remotely possible in a population of accounting data:
a. discovery sampling
b. difference estimation sampling
c. stratified sampling
d. judgmental sampling

38. Which of the following best describes the distinguishing features of statistical sampling?
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a. it requires the examination of a smaller number of supporting documents
b. it provides a means for measuring mathematically the degree of uncertainty which results from examining only a part of a
population
c. it reduces the problems associated with the auditor’s judgment concerning materiality
d. it is evaluated in terms of two parameters: statistical mean and random selection

39. After obtaining an understanding of an entity’s financial reporting controls, an auditor may assess control risk at the maximum level
for some assertions because the auditor:
a. believes the internal control policies and procedures are unlikely to be effective
b. determines that the pertinent financial reporting control elements are not well documented
c. identifies internal control policies and procedures that are likely to prevent material misstatements
d. perform tests of controls to restrict detection risk to an acceptable level

40. When control risk is assessed at the maximum level for all financial statement assertions, an auditor should document the
auditor’s:
Basis for understanding of the Conclusion that control risk is Concluding that control risk is
entity’s internal control at the maximum level at the maximum level
elements
a. Yes No No
b. Yes Yes No
c. No Yes Yes
d. Yes Yes Yes

41. The objective of test of details of transactions performed as test of controls is to:
a. detect material misstatements in the account balances of the financial statements
b. determine the nature, timing and extent of substantive tests for financial statement assertions
c. evaluate whether financial reporting controls operated effectively
d. reduce control risk, inherent risk and detection risk to an accpetbaly low level

42. During consideration of the internal control system in a financial statement audit, an auditor is not obligated to:
a. determine whether the control procedures relevant to audit planning have been placed in operation
b. perform procedures to understand the design of the internal control system,
c. search for significant deficiencies in the operation of the internal control structure
d. understand the internal control environment and the accounting system

43. In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would
be most appropriate?
a. attributes
b. ratio
c. stratified
d. variable

44. In planning a statistical sample for tests of controls, an auditor increased the expected occurrence rate form the prior year’s rate
because of the results of the prior year’s tests of controls and the overall control environment. The auditor most likely would then
increase the planned:
a. allowance for sampling risk
b. risk of assessing control risk too low
c. sample size
d. tolerable rate

45. Which of the following statements is correct concerning a statistical sampling in tests of controls?
a. as the population size doubles, the sample size should also double
b. deviations from control procedures at a given rate usually result in misstatements at a higher rate
c. the auditor does not consider the qualitative aspects of deviations
d. there is an inverse relationship between the sample size and the tolerable occurrence rate

46. To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is
recorded. The population of documents for this test consists of all:
a. cancelled checks
b. purchase orders
c. receiving reports
d. vendor’s invoices

47. The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an):
a. clock card or time ticket
b. employee’s personnel record
c. employee’s form W-2 (earnings record)
d. payroll register entry

48. Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?
a. an employee who is independent of the receiving department compares invoices with purchase orders
b. purchase orders, receiving reports and vendor’s invoices are independently matched in preparing vouchers
c. receiving reports require the signature of the individual who authorized the purchase
d. the receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports

49. Samples to test internal control procedures are intended to provide a basis for an auditor to conclude whether:
a. materiality for planning purposes is at a sufficiently low level
b. the control procedures are operating effectively
c. the financial statements are materially misstated
d. the risk of incorrect acceptance is too high
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50. An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the client’s internal control procedures.
One of the chosen samples of 20 cannot be found. The auditor should consider the reasons for this limitation and:
a. choose another check to replace the missing check in the sample
b. evaluate the results as if the sample had been 19
c. treat the missing check as an error for the purpose of evaluating the sample
d. treat the missing check in the same manner as a majority of the other 19 checks, that is countersigned or not

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