Chapter 5: Engineering - Multiple Choice

b. The control environment. The control environment is is the most important foundational component of the internal control system. All other components are dependent, in part, on the effectiveness of the control environment.

b. Determine the nature, timing, and extent of tests to be performed in the audit. These are the auditors' responsibilities under GAAS.

d. Performing procedures during the interim period as opposed to at the fiscal year-end date. Performing procedures at an interim date is less effective.

b. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed The testing of design effectiveness relates primarily to whether the control has been properly put in place to prevent or detect errors or fraud. In AS5, this is exactly the objective of testing the design effectiveness of a control as per paragraph 42 of the standard.

c. Confirmation of balances This is a substantive test, not a test of a control's operating effectiveness.

c. Separation of duties between the payroll and personnel departments.

b. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs. The cost savings of substantive testing exceeds the control evaluation cost.

b. An internal control questionnaire. The internal control questionnaire is a device for collecting evidence in the form of answers to control questions.

d. Obtaining evidence about the operating effectiveness of client control activities. Tests of controls produce the evidence about actual operation of company control activities.

b. An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company. This is one way to describe the purpose of a transaction-level control activity.

a. Identify significant accounts, locations, and assertions. The audit team identifies significant accounts, locations, and assertions in the planning stage of an audit of internal controls.

c. It is probable that a material financial statement misstatement would not be detected on a timely basis. By definition, a material weakness in internal control is defined as a deficiency, or combination of deficiencies that results in a reasonable possibility that a material misstatement would not be prevented or detected on a timely basis.

d. Test Controls Testing controls is required only for audits of issuers under AS 2201

c. Financial reporting AS 2201 applies to financial reporting controls only.

c. No; Yes AS 2201 requires auditors to issue a report on the audit of internal controls.

c. Both operating and design effectiveness. AS 2201 requires testing for design effectiveness and operating effectiveness.

d. Overproduction by the manufacturing plant. This does not directly relate to a material misstatement of the financial statements but is an operational issue.

c. Disclaimer of opinion—significant deficiencies exist. A disclaimer is used when the auditor's scope is limited but not when significant deficiencies exist, so it is not an appropriate report.

a. Authorization of transactions from the custody of related assets. This is an example of effective separation of duties. Separation of duties is designed to help the organization achieve effective internal control. To accomplish separation of duties, the payroll function should be divided into its authorization, recording, and custody functions. Authorization of hiring, wage rates, and deductions is typically completed by the human resources department. Authorization of hours worked is typically completed by the production department (or the department where the work was completed). Based on these authorizations, the accounting department would then calculate and record the payroll in the accounting system. Based on the calculated amounts, the treasurer would then prepare and distribute payroll checks.

d. Disclaimer of opinion. The reporting option when a scope limitation exists is a disclaimer of opinion.

a. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance. When an auditor plans to reduce control risk below the maximum and rely on controls to reduce substantive testing, they must make sure that the controls have been designed and are operating effectively in order to feel comfortable relying on such controls. The auditor cannot take the client's word that the controls are operating effectively. Rather, they must test the controls.

d. Both A and C are correct When testing the operating effectiveness of a control, the auditor should use a combination of inquiry, observation, inspection, and reperformance. Thus, response (a) and response (c) are appropriate responses. Thus, this is the correct answer.

d. The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity The relevance and reliability of the evidence to be obtained would not have an impact on the extent of testing to be completed. The extent of testing required should be determined and then the necessary evidence should be gathered.

d. All of the above. Evidence obtained during the test of controls would be relevant to the assessment of control risk (response a); misstatements detected during the audit (response b); and control deficiencies detected during the audit (response c) would all be relevant. As a result, the correct answer is all of the above.

b. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion. The first step an auditor is likely to take after detecting a control deficiency is to determine the impact of the severity of the deficiency on the auditor's control risk assessment for that assertion. The additional steps to be taken will depend in large part on this determination.