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AT-6804 (assessed risk) Page 1 of 4

AUDITING THEORY

PSA 330
THE AUDITOR’S RESPONSES TO ASESSED RISKS
Overall Responses
1. The auditor should design and implement overall responses to address the risks of material misstatement at the financial
statement level. Such responses may include:
 Emphasizing to the audit team the need to professional skepticism.
 Assigning more experienced staff or those with special skills or using experts.
 Providing more supervision.
 Incorporating additional elements of unpredictably in the selection of further audit procedures to be performed.
 Making general changes to the nature, timing, or extent of audit procedures.

Audit Procedures Responsive to Risks of Material Misstatement at the assertion Level


1. In designing the further audit procedures, the auditor shall:

(a) Consider the reasons for the assessment given to the risks of material misstatement at the assertion level for each class
of transactions, account balance, and disclosure including:
i. The likelihood of material misstatement due to the particular characteristics of the relevant class of transaction,
account balance or disclosure (that is, the inherent risk); and
ii. Whether the risks assessment takes account t of relevant controls (that is, the control risk), thereby requiring the
auditor to obtain audit evidence to determine whether the controls are operating effectiveness of controls in
determining the nature, timing and extent of substantive procedure); and
(b) Obtain more persuasive evidence the higher the auditor’s assessment of risks.

2. Considering the nature, timing, and extent of further audit procedures

The nature of further audit procedures refers to their:

a) Purpose – tests of controls or substantive procedures.


b) Type – inspection, observation, inquiry, confirmation, recalculation, reperformance or analytical procedures.

Timing refers to when audit procedures are performed or the period or date to which the audit evidence applies.

Extent includes the quantity of a specific audit procedure to be performed.

TESTS OF CONTROLS
1. The audit is required to perform tests of controls when:
a) The auditor’s risks assessment includes an expectation of the operating effectiveness of control; or
b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level.
2. Tests of operating effectiveness of controls are performed only on those controls that the auditor has determined are suitably
designed to prevent, or detect and correct, a material misstatement in an assertion.
3. Testing the operating effectiveness of controls includes obtaining evidence about:
a) How controls were applied at relevant times during the period under audit;
b) The consistency with which they were applied; and
c) By whom or by what means they were applied.

SUBSTANTIVE PROCEDURES
1. Substantive test procedures are performed in order to detect material misstatements at the assertion level, and include:
 Tests of details of classes of transactions, account balances, and disclosures; and
 Substantive analytical procedures.

2. The auditor substantive procedures should include the following audit procedures related to the financial statement closing
process:
 Agreeing or reconciling the financial statements with the underlying accounting records; and
 Examining material journal entries and other adjustments made during the course of preparing the financial
statements.

3. The auditor should perform the audit procedures to evaluate whether the overall presentation of the financial statements,
including the related disclosures, are in accordance with the applicable financial reporting framework.

Evaluating the sufficiency and appropriateness of audit evidence obtained


1. Based on the audit procedures performed and the audit evidence obtained, the auditor should evaluate whether the
assessments of risks of material misstatement at the assertion level remains appropriate.
2. The auditor should conclude whether sufficient appropriate audit evidence has been obtained to reduce to an acceptably low
level the risk of material misstatement in the financial statements.
3. If the auditor has not obtained sufficient appropriate audit evidence as to a material financial statement assertion, the auditor
shall attempt to obtain further audit evidence. If the auditor is unable to obtain further audit evidence, the auditor shall express
a qualified opinion or a disclaimer of opinion.

Documentation
1. The auditor shall include in the audit document:
 The overall response to address the assessed risks of material misstatement at the financial statement level and the
nature, timing, and extent of the further audit procedures;
 The linkage of those procedures with the assessed risks at the assertion level; and
 The results of the audit procedures.
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2. If the auditor plans to use audit evidence about the operating effectiveness of controls obtained in prior audits, the auditor
should documents the conclusions reached with regard to relying on such controls that were tested in a prior audit.
3. The auditors documentation shall demonstrate that the financial statements agree or reconcile with the underlying accounting
records.

MULTIPLE CHOICE QUESTIONS


1. In a financial statement audit, the auditor is required to perform tests of control when
I. The auditor’s risks assessment includes an expectation of the operating effectiveness of controls.
II. When substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion level.
A. I only C. Either I or II
B. II only D. Neither I nor II

2. Tests of controls are concerned primarily with each of the following questioned, except
A. By whom where the controls applied?
B. Where the necessary controls consistently performed?
C. How were the controls applied?
D. Why were the controls applied?

3. Control risks should assessed in terms of


A. Specific control procedures.
B. Typed of potential fraud.
C. Financial statement assertions.
D. Control environment factors.

4. An auditor intends to perform tests of control on a client’s cash disbursements procedures. If the control procedures leave no
audit trail of documentary evidence, the auditor most like will test the procedures by
A. Inquiry and analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.

5. The following statements relate to the use of audit evidence when testing the operating effectiveness of relevant controls.
Which is false?
A. An auditor who obtains sufficient appropriate audit evidence about the operating effectiveness of controls during the
interim period should no longer obtain additional evidence of operating effectiveness for the remaining period.
B. An auditor may plan to use audit evidence about the operating effectiveness of controls obtained in prior audits.
C. If an auditor plans to rely on controls that have changed since they were last tested, the auditor should test the operating
effectiveness of such controls in the current audit.
D. Audit evidence pertaining only to the point in time may be sufficient to the auditor’s purpose, for example, when testing
controls over an entity’s physical count of inventories at the year end.

6. After gaining an understanding of internal control and assessing the risks of material misstatement, an auditor decided to
perform tests of controls. The auditor most likely decided that
A. Additional evidence to support a further reduction in control risk is not available.
B. It is not possible or practicable to reduce the risks of material misstatement at the assertion level to an acceptably low
level with audit evidence obtained only from substantive test procedures.
C. There were many internal control weaknesses that could allow misstatements to enter the accounting system.
D. An increase in the assessed level of control risks is justified for certain financial statement assertions.

7. An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believes
A. Controls are unlikely to pertain to the assertions.
B. The entity’s control components are interrelated.
C. Sufficient appropriate audit evidence to support the assertions is likely to be available.
D. More emphasis on tests of controls than substantive tests is warranted.

8. Which of the following statements is correct concerning an auditor’s assessment of control risk?
A. Assessing control may be performed concurrently during an audit with obtaining an understanding of the entity’s internal
control.
B. Evidence about the operations of controls in prior audits may not be considered during the current year’s assessment of
control risk.
C. The basis for an auditor’s conclusions about the assessed level of control risk need not be documented unless control risk
is assessed at the maximum level.
D. The lower the assessed level of control risk, the less assurance the evidence must provide that the controls are operating
effectively.

9. According to PSA 330 (The Auditor’s Procedures in Response to Assessed Risks), An auditor who plans to rely on controls
that have not change since they were last tested should test the operating effectiveness of such controls at least once every
A. Second audit C. Fourth audit
B. Third audit D. Fifth audit

10. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from
the originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the
auditor would
A. Increase inherent risk. C. Decrease inherent risk.
B. Increase materiality level. D. Decrease detection risk.

11. When an auditor increased the planed assessed level of control risk because certain controls were determined to be
ineffective, the auditor would most likely increase the
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A. Extent of test of details. C. Extent of tests of controls.


B. Level of inherent risk. D. Level of detection risk.

12. Regardless of the assessed level of control risk, an auditor would perform some
A. Test of controls to determine the effectiveness of internal control policies.
B. Analytical procedures to verify the design of internal control procedures.
C. Substantive tests to restrict detection risk for significant transaction classes.
D. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

13. When an accounting application is processed by computer, an auditor cannot verify the reliable operation of programmed
control procedures by
A. Manually comparing detail transaction files use by an edit program with the program’s generated error listings to
determine that errors were properly identified by the edit program.
B. Constructing a processing system for accounting applications and processing actual data from throughout the period
through both the client’s program and the auditor’s program.
C. Manually reperforming, as of a moment in time, the processing of input data and comparing the simulated results with the
actual results.
D. Periodically submitting auditor-prepared test data to the same computer process and evaluating the results.

14. In performing tests of the operating effectiveness of an entity’s controls, an auditor selects from a variety of techniques,
including
A. Reperformance and observation.
B. Inquiry and analytical procedures.
C. Comparison and confirmation.
D. Inspection and verification.

15. An auditor intends to perform tests of control on a client’s cash disbursements procedures. If the control procedures leave no
audit trail of documentary evidence, the auditor most likely will test the procedures by
A. Inquiry and analytical procedures.
B. Inquiry and observation.
C. Analytical procedures and confirmation.
D. Confirmation and observation.

16. Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?
A. Scan the sales journal for sequential and unusual entries.
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales salary.
D. Inspect unused sales invoices for consecutive prenumbering.

17. An auditor is least likely to test controls that provide for


A. Approval of the purchase and sale of trading securities.
B. Classification of revenue and expense transactions by product line.
C. Segregation of the functions of recording disbursements and recording the bank account.
D. Comparison of receiving reports and vendors’ invoices with purchase orders.

18. An auditor uses the knowledge provided by the understanding of internal control and the final assessed of level control risk
primarily to determine the nature, timing, and extent of the
A. Attribute tests C. Tests of controls
B. Compliance tests D. Substantive tests

19. When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at
a low level usually performs
A. Tests of controls and extensive tests of property and equipment balances at the end of the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.

20. Which of the following procedures concerning accounts receivable would an auditor most likely to perform evidential matter in
support of an assessed level of control risk below the maximum level?
A. Observing an entity’s employee prepare the schedule of past due accounts receivable.
B. Sending confirmation request to an entity’s principal customers to verify the existence of accounts receivable.
C. Inspecting an entity’s analysis of accounts receivable for unusual balances.
D. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts receivable.

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


A. Accounts believe to be subject to ineffective controls.
B. Accounts representing few transactions.
C. Accounts representing many transactions.
D. Subsequent events.

22. Which of the following type of evidence would an auditor most likely to examine to determine whether controls are operating as
designed?
A. Confirmation of receivables verifying account balances.
B. Letters of representation corroborating inventory pricing.
C. Attorneys’ responses to the auditor’s inquiries.
D. Client records documenting the use of computer programs.
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23. An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for
payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating
effectively?
A. Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the
receiving reports.
B. Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving
reports.
C. Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks.
D. Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

24. Based on observations made during an audit, the independent auditor should discuss with management the effectiveness of
the company’s controls and protect against the purchase of
A. Required supplies provided by a vendor who offers no trade discounts.
B. Required supplies provided by a vendor who offers no cash discounts.
C. Inventory items required based on an economic order quantity (EOQ) inventory management concept.
D. Supplies individually ordered, without considering possible volume discounts.

25. In assessing control risk for the purchasing cycle, the auditor will be least influenced by
A. The effectiveness of controls in other cycle, e.g., the sales-receivable-cash receipts cycle.
B. The existence within the purchasing cycle of internal control strengths that offset weaknesses.
C. The audit work performed in the purchasing cycle by the company's internal auditor.
D. The availability of a company manual describing policies and procedures for the purchasing cycle.
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