Chapter 5 MC solutions Essay

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SOLUTIONS FOR MULTIPLE‑CHOICE QUESTIONS

5.33 a. Incorrect Effectiveness and efficiency is an objectives category, not a fundamental component. b. Correct “People” is the most important fundamental component. c. Incorrect Reliability of financial reporting is an objectives category, not a fundamental component. d. Incorrect Compliance with laws and regulations is an objectives category, not a fundamental component.

5.34 a. Incorrect Management letter suggestions are a secondary purpose. b. Correct These are the auditors’ responsibilities under GAAS. c. Incorrect This does not relate only to internal control. d. Incorrect Communication of control related matters is a secondary purpose.

5.35 a. Incorrect Larger sample sizes expand audit procedures. b. Incorrect Performing procedures at year‑end instead of at interim generally represents stricter application. c. Incorrect External evidence represents stricter application. d. Correct Performing procedures at an interim date is less effective.

5.36 a. Incorrect The issue of whether the company’s controls are processing data relates to the testing of operating effectiveness, not design effectiveness. b. Correct 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. Incorrect The issue of whether the company’s employees are processing the controls in accordance with procedures relates to the testing of operating effectiveness, not design effectiveness. d. Incorrect Letter b is the correct answer.

5.37 a. Incorrect When testing the operating effectiveness of a control, the auditor should use a combination of inquiry, observation, inspection, and reperformance. b. Incorrect When testing the operating effectiveness of a control, the auditor should use a combination of inquiry, observation, inspection, and reperformance. c. Correct This is a substantive test, not a test of a control’s operating effectiveness. d. Incorrect When testing the operating effectiveness of a control, the auditor should use a combination of inquiry, observation, inspection, and reperformance.

5.38 a. Incorrect This is a detective control. b. Incorrect This is a detective control. c. Correct This is a preventive control. d. Incorrect This is a detective control.

5.39 a. Incorrect The absolute amount of cost is irrelevant. Year‑end substantive work usually costs more than control evaluation work. b. Correct The cost savings of substantive testing exceeds the control evaluation cost. c. Incorrect Whether the cost of control work exceeds (or does not exceed) the cost of year‑end work is irrelevant. Efficiency relates to the cost that can be saved as a result of control evaluation work. d. Incorrect Efficiency is not achieved by reducing cost of substantive procedures to less than control work cost.

5.40 a. Incorrect The narrative is the documentation result of obtaining evidence. b. Correct The internal control questionnaire is a device for collecting evidence in the form of answers to control questions. c. Incorrect A flowchart is the documentation result of obtaining evidence. d. Incorrect Only the internal control questionnaire aids in obtaining the evidence.

5.41 a. Incorrect Substantive procedures produce evidence about financial statement assertions. b. Incorrect Company control activities accomplish a company’s management objectives. c. Incorrect Analytical review is not accomplished with test of control activities. d. Correct Tests of controls produce the evidence about actual operation of company control activities.

5.42 a. Incorrect This describes an audit procedure. b. Correct This is one way to describe the purpose of a transaction-level control activity. c. Incorrect This is a definition of an accounting process or system. d. Incorrect
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