Question

After obtaining an understanding of internal control and assessing control risk of an entity an auditor decided to perform tests of controls. The auditor most likely decided that:

A The available evidence obtained through tests of controls would not support an assessment of control risk as high.

B It would be inefficient to perform tests of controls given they would not result in reduced substantive tests.

C The assessed level of inherent risk exceeded the assessed level of control risk.

D Control risk should be assessed as low for key financial report assertions.

 
Question (ii)
When control risk is assessed as less than high, tests of control should be undertaken with regard to?
A Design of internal control.

B Effectiveness and continuity of controls that have been determined to exist.

C Both design and operation of internal control.

D Both the control environment and the entity’s risk assessment process.

Question (iii)
Which of the following audit tests would be regarded as test of controls?

A Performing bank reconciliations for the client’s trading account.

B Observing the client’s warehouse staff checking shipments.

C Sending an external confirmation to a debtor to check the outstanding balance at year end.

D Counting inventory and checking that the quantity is accurately recorded in the inventory records.

Question (iv)
Which of the following is the most effective control activity to detect vouchers that were prepared for the payment of goods that were not received?

A Compare goods received with goods requisitioned in the receiving department.

B Count goods upon receipt in the storeroom.

C Verify vouchers for accuracy and approval in the internal audit department.

D Match purchase order, receiving report and supplier’s invoice for each voucher in the accounts payable department.

Answer 1

1) Answer A

When auditors decide to perform tests of controls, they have made a preliminary assessment that controls are operating effectively. Accordingly, the performance of tests of controls is not indicative of an increase in the assessed level of control risk.

2) Answer B

If control risk is assessed as less than high, the auditor has identified specific policies andprocedures that are likely to prevent or detect misstatements. Evidence is needed to supportthe conclusion that those policies and procedures are effective. The evidence shoulddemonstrate:

The effectiveness of the design of the policies and procedures; and

The operating effectiveness of the policies and procedures

3) Answer B

A test of controls is an audit procedure to test the effectiveness of a control used by a client entity to prevent or detect material misstatements. Depending on the results of this test, auditors may choose to rely upon a client's system of controls as part of their auditing activities.

4) Answer D

The most effective control activity to detect vouchers that were prepared for the payment of goods that were not received is to match the purchase order, receiving report, and vendor’s invoice for each voucher in the accounts payable department.

Controls that start with goods received would not be effective at detecting a situation where vouchers are prepared for goods that were not received.

Verifying vouchers for accuracy and approval in the internal audit department might detect vouchers that were prepared for the payment of goods that were not received. However, this is not the most effective control, since it would likely occur subsequent to the processing of the transaction.