Audit planning 002

12. Statement on Auditing Standards No. 60 requires the auditor to communicate "reportable conditions" to the audit
committee of the board of directors or, in the absence of an audit committee, to a body having similar oversight
authority. Of the following, which does not represent a reportable condition?
a. Bank accounts have not been reconciled in the last nine months, including the last month of the fiscal year.
b. The corporate controller, unknown to the board of directors, has submitted her resignation effective two months
from now.
c. Perpetual inventory records contain numerous errors and can no longer be relied upon to reflect proper inventory
levels.
d. Although documents are prenumbered, they are not safeguarded and are not being used in numerical sequence.
ANSWER: B
13. In connection with the examination of financial statements by an independent auditor, the client suggests that
members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most
appropriately be delegated to the internal audit staff?
a. Selection of accounts receivable for confirmation, based upon the internal auditor's judgment as to how many
accounts and which accounts will provide sufficient coverage.
b. Preparation of schedules for negative accounts receivable responses.
c. Evaluation of the internal control for accounts receivable and sales.
d. Determination of the adequacy of the allowance for doubtful accounts.
ANSWER: B
14. An auditor uses the knowledge provided by the understanding of internal control and the final assessed level of
control risk primarily to determine the nature, timing, and extent of the
a. Attribute tests. b. Compliance tests. c. Tests of controls. d. Substantive tests.
ANSWER: D
15. Flowcharting as a means of internal control evaluation provides the following advantage over the use of
questionnaires and descriptive narratives:
a. Ease of preparation.
b. Comprehensive coverage of controls.
c. Simplicity.
d. Ease in following information flow.
ANSWER: D
16. Which of the following factors most likely affects the auditor's judgment about the quantity, type, and content of
working papers?
a. The effectiveness of the existing internal control.
b. The content of the client's representation letter.
c. The timing of substantive tests completed prior to the balance sheet date.
d. The usefulness of the working papers as a reference source for the client.
ANSWER: A
17. If the independent auditors decide that the work performed by the internal auditor may have a bearing on their
own procedures, they should consider the internal auditor's
a. Competence and objectivity.
b. Efficiency and experience.
c. Independence and review skills.
d. Training and supervisory skills.
ANSWER: A
18. An auditor's purpose for further testing of internal control procedures is to
a. Provide a basis for reducing the assessed level of control risk below that which resulted from the auditor's initial
understanding of internal control.
b. Reduce the risk that errors or fraud which are not prevented or detected by internal control are not detected by the
independent audit.
c. Provide assurance that transactions are executed in accordance with management's authorization and accessed to
assets is limited by a segregation of functions.
d. Provide assurance that transactions are recorded as
necessary to permit the preparation of the financial
statements in conformity with GAAP.
ANSWER: A
19. Control testing is performed in order to determine whether or not
a. The assessed level of control risk can be reduced.
b. Necessary controls are absent.
c. Incompatible functions exist.
d. Material dollar errors exist.
 ANSWER: A
20. The independent auditor should acquire an understanding of the internal audit function as it relates to the
independent auditor's study and evaluation of internal control because
a. The audit programs, working papers, and reports of internal auditors can often be used as a substitute for the work
of the independent auditor's staff.
b. The procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive
study and evaluation of internal control.
c. The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the
independent auditor's procedures.
d. The understanding of the internal audit function is an important substantive test to be performed by the
independent auditor.