Performing Substantive Test

The primary objective of tests of details of transactions performed as substantive procedures is to:

• A. Comply with generally accepted auditing standards

• B. Attain assurance about the reliability of the accounting system

• C. Detect material misstatements in the financial statements

• D. Evaluate whether management's policies and procedures are operating effectively

Answer explanation

The objective of tests of details of transactions performed as substantive procedures is to detect material misstatements in the financial statements as transactions are tested to

determine whether they have been properly recorded.

A procedure designed to test for monetary misstatements directly affecting the validity of the financial statement balances is a:

• A. Test of controls

• B. Substantive test

• C. Test of attributes

• D. Monetary-unit sampling test

Answer explanation

Substantive tests are audit procedures designed to substantiate the account balances or to detect material misstatements in the financial statements.

The auditor must plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion. Among the two, which correctly measures the quantity of audit evidence?

• A. As the risk of material misstatement in the audit of financial statements increases, the amount of evidence that the auditor should obtain also increases.

• B. Quality of the audit evidence obtained. As the quality of the evidence decreases, the need for additional corroborating evidence also decreases.

Answer explanation

The quantity of audit evidence needed is affected by the risk of misstatement

in which the greater the risk, the more audit evidence is likely to be required.

Also, by the quality of such audit evidence, the higher the quality, the less the audit

evidence that may be required.

Accordingly, the sufficiency and appropriateness of audit evidence are interrelated.

The reliability of audit evidence is influenced by its source and by its

nature and is dependent on the individual circumstances under which it is obtained. Which among the two about the reliability of audit evidence is not useful?

• A. Audit evidence is more reliable when it is obtained from knowledgeable

  independent sources inside the entity.

• B. Audit evidence that is generated internally is more reliable when the

  related controls imposed by the entity are effective.

Answer explanation

The reliability of audit evidence is more reliable when the evidence is obtained outside of the company because the external party is unbiased and presumably has no reason to deceive the audit team.

Which of the following is not one of the primary functions of working papers?

• A. Assist the auditor in planning and performance of the audit

• B. Assist the auditor in supervision and review of work

• C. Provide information useful in rendering other services

• D. Support the auditor's opinion on FS and as to compliance with PSA

Answer explanation

Choices A, B and D are the primary functions of working papers. Choice C is one of the secondary not primary functions of the working papers.

Which of the following statements about working papers is true?

I. Working papers are the property of the auditor and the client has a right to the working papers prepared by the auditor.

II. Working papers may be considered as a substitute for the client's accounting record.

• A. Both statements are true

• B. Only statement I is true

• C. Only statement II is true

• D. Both statements are false

Answer explanation

The client has no right to the working papers prepared by the auditor and it should not be considered as a substitute for the client's records.

To obtain satisfaction about the reasonableness of the accounting estimates, the auditor can do the following except?

• A. Review and test the process used by the management to develop the estimate

• B. Make an independent estimate

• C. Make sure to include the accounting estimates in the financial statements

• D. Review subsequent events which confirm the estimate made

Answer explanation

A, B, and D are the 3 ways in order for the auditor to obtain satisfaction on the reasonableness of the accounting estimates.

Choice C is not part of it, and making accounting estimates included in the financial statements is the responsibility of the Management, not the auditor.

It is the approximation of the amounts of an item in the absence of a precise means of measurement.

• A. Testing of calculations

• B. Accounting of item

• C. Accounting estimate

• D. Accounting accounts

Answer explanation

As defined by PSA 540, accounting estimate is the approximation of the amounts of an item in the absence of a precise means of measurement, and is often made in conditions of uncertainty and involve the use of judgement.

The work of internal auditors may affect the independent auditor’s:

i. Procedures performed in obtaining an understanding of internal control

ii. Substantive procedures performed in gathering direct evidence

• A. Both statement are true

• B. Only statement 1 is true

• C. Both statements are false

• D. Only statement 2 is true

Answer explanation

The internal audit function is part of the client’s internal control.

The auditor should obtain an understanding of this function when obtaining an understanding of internal control.

A primary purpose of internal auditors is to review, assess, and monitor internal control. Thus, their work is relevant to the understanding of internal control and the

What is/are the preliminary assessment of internal auditing?

• A. Due professional care

• B. Scope of function

• C. Competence

• D. All of the above

Answer explanation

Choices A, B, C are part of the preliminary procedures along with the objectivity.