Question

1. Substantive tests:
a. are procedures designed to test for monetary misstatements in financial statement accounts and disclosures
b. are used to determine whether transaction-related audit objectives have been satisfied for each class of transactions
c. are used to determine whether ending balances and disclosures in the financial statements are correct and in compliance with the stated accounting framework (e.g., GAAP)
d. all of the above

2. Which of the following factors affect the auditor's decisions regarding the mix of audit evidence to be obtained in the audit?

a. the nature and effectiveness of the client's internal control   
b. the level of assessed inherent risk
c. the results of testing during the audit   
d. all of the above

3. The relationship between audit assurance obtained from substantive tests and tests of controls is best described as follows:

a. the auditor can obtain almost all of the assurance needed in an audit by performing tests of controls

b. performing tests of controls may reduce the amount of assurance needed from substantive tests

c. even when it is more efficient to perform substantive tests, the auditor must rely, at least to some degree, on controls

d. there is no relationship between the amounts of assurance required by substantive tests and tests of controls

4. Which of the following affect the design of the auditor's tests of details of balances?

a. performance materiality
b. assessed level of control risk
c. evidence obtained from substantive analytical procedures
d. all of the above

5. If the auditor identifies a significant risk due to either error or fraud, the auditor should:
a. identify controls that mitigate the risk
b. design and perform substantive tests to determine whether misstatements occurred
c. incorporate knowledge of the significant risk in the evaluation of inherent and control risk
d. all of the above

Answer 1

1. Substantive tests is an audit procedure where the financial documents and statements are checked to ensure accuracy and completeness. All the options from a to c are covered under the scope of substantive tests. Thus the correct option is "d. All of the above".

2. The auditor takes into consideration various factors while deciding the mix of audit evidence to support the assertion made regarding the financial statements. These include the the nature and effectiveness of the client's internal control, the level of assessed inherent risk and the results of testing during the audit. Thus option "d. all of the above." is correct.

3. While conducting the test of controls, if the auditor finds that the internal controls are strong and effective, it would mean that the probability of errors in recording transactions is lesser and thus reduce the burden of substative testing. On the other hand, if internal controls are weak, it would mean that the auditor would require to carry out intensive substatial testing to ensure the accuracy and completeness of the transactions recorded. Thus the option "b. performing tests of controls may reduce the amount of assurance needed from substantive tests" is correct.

4. The design of auditor's test of details is affected by the results of various analysis carried out before starting the test of details. These include the result of assessment of internal controls, the result of the analytical procedures and auditor's judgement of performance materiality. Thus option"d. all of the above" is correct.

5. If the auditor identifies a significant risk due to either error or fraud, the auditor should conduct intensive audit procedures to make sure that any effect of such error or fraud is captured during the audit. The form of testing to reduce the risk of error or fraud is surprise testing and detailed testing that are a part of substantive testing. Thus Option "b. design and perform substantive tests to determine whether misstatements occurred" is correct.