ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 43  May 2022 CPA Licensure Examination  Week No. 10

AUDITING (Auditing Theory) J. IRENEO  M. NGINA  F. TUGAS

AT-11: TESTS OF CONTROLS

SUGGESTED READINGS
• PSA 315 (Redrafted): Identifying and Assessing The Risks of Material Misstatement Through Understanding The Entityand
Its Environment
• PSA 330 (Redrafted): The Auditor’s Responses to Assessed Risks
• PSA Glossary of Terms

1. Which of the following represents a correct statement regarding internal control testing?
A. 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.
B. The greater the risk, the less audit evidence the auditor should obtain that controls are operating
effectively.
C. The auditor uses control risk assessment and results of tests of controls to determine planned
detection risk and the related substantive tests for the financial statement audit.
D. Testing of internal controls can only be performed by the auditor at the end of the fiscal year.

2. 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. examine documents, records, and reports
C. reperform client procedures
D. inspect design documents

3. Tests of controls
A. are the procedures used to test the effectiveness of controls in support of a reduced assessed control
risk.
B. are used to support the ending balances in the balance sheet and income statement accounts.
C. are performed at the end of the audit.
D. are designed to detect fraud.

4. 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.

5. 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.

6. 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. Transactions.” (X)
B. Control methods and behavior.” D. Employees.”

7. 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.

8. 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.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AT-11
Week 10: TESTS of CONTROL

9. 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.

10. 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:
A. Increase the amount of tests of controls.
B. Increase the reliance on tests of controls.
C. Cause the issuance of a qualified or adverse opinion.
D. Eliminate the need for a test of controls.

11. If the auditors do NOT perform tests of controls of certain assertions:

A. They have performed a substandard audit.
B. They are not required to communicate reportable conditions relating to those accounts to
management.
C. They must issue a qualified opinion.
D. They must assess control risk at the MAXIMUM level for those assertions.

12. Tests of controls are least likely to be omitted with regard to

A. Accounts believed to be subject to ineffective control activities
B. Accounts representing few transactions
C. Accounts representing many transactions
D. Subsequent events

13. 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 control.
A. conditional B. limited C. compensating D. offset

14. 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

15. 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 effectivein 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.

16. 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 tests of that control will be reduced this year.
C. The extent of tests of that control may be reduced this year if the auditor determines that it is still in
place.
D. The auditor would not test this area again this year.

17. 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 fourth audit.
C. Rely entirely on the performance of substantive audit procedures.
D. Test the operating effectiveness of such controls at least once in every third audit.

18. In accordance with PSA 260, matters to be communicated to those charged with governance may include
the following, except
A. The auditor’s responsibilities in relation to the financial statement audit
B. Planned audit opinion
C. Significant findings from the audit
D. Auditors independence

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19. 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

20. Which of the following statements concerning material weaknesses and reportable conditions is correct?
A. An auditor should identify and communicate material weaknesses separately from reportable
conditions.
B. All material weaknesses are reportable conditions.
C. An auditor should report immediately material weaknesses and reportable conditions discovered
during an audit.
D. All reportable conditions are material weaknesses.

21. The auditors who become aware of an internal control reportable condition are required to communicate
this to the:
A. Audit committee and client’s legal counsel. C. Audit committee.
B. Board of directors and internal auditors. D. Internal auditors.

22. 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

23. A deficiency or combination of deficiencies 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. Cute deficiency in control
C. Significant deficiency in internal control
D. Material control deficiency

24. How must significant deficiencies and material weaknesses be communicated to those charged with
governance?
A. Either oral or written communication is acceptable.
B. Oral communication is required.
C. Written communication is required.
D. Written communication is required for material weaknesses, but oral communication is allowed for
significant deficiencies.

25. 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.

26. 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.

27. 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, False D. False, True

28. For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not
also approve:
A. Employee overtime wages
B. Write-offs of customer accounts
C. Cash disbursements
D. None of the above

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29. 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. Vendor’s invoice and the purchase requisition.
C. Purchase order, receiving report, and vendor’s invoice.
D. Purchase requisition, purchase order, and receiving report.

30. 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 embezzlements.
B. Controls over cutoff.
C. Controls over acquisitions.
D. Controls related to the allowance for doubtful accounts.

31. Which of the following control objectives pertain to existence of trade receivables?
A. Recorded credit sales transactions are real and not fictitious.
B. Recorded credit sales transactions include the effects of all transactions that have occurred
C. The entity is entitled to trade receivable balances shown at the period-end
D. Recorded cash balances are realizable at the amounts stated

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