ANSWER: A

53. Under which of the following conditions would you consider

lowering individual item materiality thresholds.
a. Study of the business and industry, together with the
application of analytical procedures, reveals that the
client has enjoyed a surge in sales and gross profit
during an industry downturn.
b. Application of analytical procedures shows that the
client's gross profit rate is significantly below last
year and also is materially lower than the industry
average.
c. Study of internal controls within the revenue cycle
reveal material weaknesses.
d. Study of internal controls within the payroll cycle
confirm the auditor's belief that few errors have
occurred.

ANSWER: A

54. Which of the following is not a medium that can normally be

used by an auditor to record information concerning a
client's internal control policies and procedures?
a. Narrative memorandum.
b. Procedures manual.
c. Flowchart.
d. Questionnaire.

ANSWER: B

55. With respect to the client's system of internal control, the

auditor is concerned that the existing policies and
procedures provide reasonable assurance that
a. Operational efficiency has been achieved in accordance
with management plans.
b. Errors and fraud have been prevented or detected.
c. Controls have not been circumvented by collusion.
d. Management cannot override the internal controls.

ANSWER: B

56. The auditor observes client employees during the review of

the client's system of internal control in order to
a. Prepare a flowchart.
b. Update information contained in the organization and
procedure manuals.

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Chapter 7 Audit Planning: Assessment of Control Risk 97

c. Assist in obtaining an understanding of the client's

internal control policies and procedures.