B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: Audit 4 — Questions and Answers
Question 1: Which of the following best describes a 'walk-through' in an audit of internal controls?
- A summary review of the prior year's audit workpapers
- Tracing a transaction from origination through the recording process (Correct answer)
- Verifying mathematical accuracy of financial statement totals
- Inspecting physical assets at client locations
Correct answer: Tracing a transaction from origination through the recording process
A walk-through involves following a transaction from its initiation through the accounting system to confirm that controls operate as described.
Question 2: Lapping is a type of fraud that most commonly involves which account?
- Inventory
- Accounts receivable (Correct answer)
- Fixed assets
- Prepaid expenses
Correct answer: Accounts receivable
Lapping involves concealing a cash shortfall by applying later customer receipts to earlier accounts, making it an accounts receivable fraud.
Question 3: An auditor increases the assessed level of control risk. The effect on detection risk and planned substantive procedures is:
- Detection risk increases; substantive procedures decrease
- Detection risk decreases; substantive procedures increase (Correct answer)
- Detection risk increases; substantive procedures increase
- Detection risk decreases; substantive procedures decrease
Correct answer: Detection risk decreases; substantive procedures increase
When control risk rises, detection risk must be reduced to keep overall audit risk at an acceptable level, which requires more extensive substantive procedures.
Question 4: Which of the following is an example of a 'substantive analytical procedure'?
- Observing a client's physical inventory count
- Comparing recorded interest expense to the expected amount based on average debt balance (Correct answer)
- Testing the controls over the payroll approval process
- Confirming bank balances directly with financial institutions
Correct answer: Comparing recorded interest expense to the expected amount based on average debt balance
Substantive analytical procedures use relationships among financial data (e.g., average debt × interest rate) to detect material misstatements.
Question 5: The auditor's standard report on financial statements prepared under US GAAP is addressed to:
- Management and the board of directors
- The shareholders, board of directors, or equivalent governing body (Correct answer)
- The Securities and Exchange Commission
- The Public Company Accounting Oversight Board
Correct answer: The shareholders, board of directors, or equivalent governing body
Audit reports are addressed to shareholders and/or the board of directors, as these are the parties who engage the auditor on behalf of the entity.
Question 6: Which of the following is NOT a required element of an audit engagement letter?
- The objective and scope of the audit
- The responsibilities of management
- A guarantee that the audit will detect all fraud (Correct answer)
- The expected form of the auditor's report
Correct answer: A guarantee that the audit will detect all fraud
Auditors cannot guarantee detection of all fraud; engagement letters acknowledge limitations of the audit and provide reasonable but not absolute assurance.
Question 7: When auditing fair value measurements, which assertion is typically of greatest concern?
- Existence
- Completeness
- Valuation (Correct answer)
- Rights and obligations
Correct answer: Valuation
Valuation is the most challenging assertion for fair value measurements because it requires judgment about measurement methods, inputs, and assumptions.
B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: Audit 4
Which of the following best describes a 'walk-through' in an audit of internal controls?