Question 1

Control risk refers to the risk that the auditor's testing procedurwill not be effective in detecting a material misstatement.

Accepted Answer

Control risk refers to the risk that a client's internal controls will not prevent or detect a material misstatement in the financial statements.

Question 2

Benchmarking is an audit strategy that can be used to carry forward the benefit of certain application controls testing into future audit periods.

Accepted Answer

Benchmarking involves comparing the results of testing controls in one audit period to the results of testing controls in future audit periods to identify any changes or deviations. This can help auditors to detect any vulnerabilities or weaknesses that may have been introduced since the last audit and to ensure that application controls are effective on an ongoing basis.

Question 3

Tests of account balanccan often provide evidence about the continued functioning of controls.

Accepted Answer

Tests of account balances can help detect errors or irregularities in financial statements and provide evidence about the effectiveness of control procedures in place. Therefore, it is true that tests of account balances can provide evidence about the continued functioning of controls.

Question 4

Internal control is intended to provide reasonable assurance about the achievement of an entity's objectives.

Accepted Answer

Internal control is designed to ensure that an organization's objectives are achieved with efficiency and effectiveness, and internal control helps in achieving reasonable assurance in this regard. Therefore, the statement is true.

Question 5

IT general controls are driven by the particular software application being used.

Accepted Answer

IT general controls are not driven by the particular software application being used. They are the set of policies, procedures, and technical measures that apply to all systems, applications and data in an organization, ensuring the overall effectiveness and efficiency of IT operations. They include access controls, change management, backups, and disaster recovery planning, among others.

Question 6

Attribute sampling is a sampling technique used to reach a conclusion about the total dollar amount of misstatement in an account balance.

Accepted Answer

Attribute sampling is a sampling technique used to determine the rate of occurrence or proportion of a specific attribute or characteristic within a population. It is not used to estimate the total dollar amount of misstatement in an account balance.

Question 7

The inherent limitations of internal control include the possibility of collusion by two or more individuals to circumvent a control.

Accepted Answer

Internal control systems are designed to prevent fraud and errors, but they are not foolproof and can be bypassed by collusion or other methods. This is an inherent limitation of any internal control system.

Question 8

The internal control objective of 'real' refers to controls in place to ensure that fictitious or duplicate transactions are not included in the books and records of the organization.

Accepted Answer

The internal control objective of 'real' does refer to controls in place to ensure that fictitious or duplicate transactions are not included in the books and records of the organization.

Question 9

An example of a purely manual control is a locked inventory stock cage for high dollar-value items.

Accepted Answer

A locked inventory stock cage for high dollar-value items requires a physical key or code to access, which is a purely manual control.

Question 10

The internal control objective of 'valued' refers to controls in place to ensure thattransactions are recorded in the correct accounting period.

Accepted Answer

The internal control objective of 'valued' refers to controls in place to ensure that transactions are recorded at the appropriate amount in accordance with accounting principles and policies.

Question 11

One of the elements of an entity's control environment is management's philosophy and operating style.

Accepted Answer

Management's philosophy and operating style are important factors that contribute to the control environment of an entity. These can influence the behavior and actions of employees, and ultimately impact the level of control over financial reporting and operations. As such, it is important to consider management's philosophy and operating style when assessing the control environment.

Question 12

Narrativinvolve the auditor describing in words each step of the flow of transactions from start to finish.

Accepted Answer

A narrative involves describing the flow of transactions from start to finish, step-by-step in words.

Question 13

In larger entities, there are often limitations surrounding the entity's ability to put effective internal controls in place.

Accepted Answer

The answer of In larger entities, there are often limitations...

Question 14

To improve efficiency, auditors test only those controls that they believe are critical to their opinion.

Accepted Answer

Auditors prioritize their testing on controls that are important in providing assurance on financial statement assertions. Testing all controls may not be necessary as some may have little impact on the overall audit opinion.

Question 15

The greater the degree of reliance on an internal control, the less they test the control to provide the required assurance.

Accepted Answer

The greater the degree of reliance on an internal control, the more they test the control to provide the required assurance. This is because the more important a control is to the overall system, the more necessary it is to ensure that it is working effectively. Therefore, more testing is required to have confidence in the control's effectiveness.

Question 16

Audit risk is the risk that an entity's internal control system will not prevent or detect material misstatements.

Accepted Answer

Audit risk is the risk that an auditor may issue an unqualified opinion on financial statements that contain a material misstatement, not specifically related to the entity's internal control system's ability to prevent or detect such misstatements.

Question 17

Checklists and preformatted questionnairare particularly helpful in industrithat the auditor may not personally be familiar with auditing.

Accepted Answer

Checklists and preformatted questionnaires provide standardized procedures and questions that can guide the auditor in auditing industries that they may not be familiar with. This helps ensure that important areas are covered and reduces the risk of missing critical audit areas.

Question 18

Transaction-level controls are implemented by businessto reduce the risk of misstatements due to error or fraud and to ensure that processare operating effectively.

Accepted Answer

This statement is true. Transaction-level controls are put in place to minimize the possibility of errors or fraud and ensure that processes are functioning as intended.

Question 19

The purpose of preventive controls is to discover fraud or errors that may have occurred during transaction processing and to rectify those errors.

Accepted Answer

The purpose of preventive controls is to stop errors or fraud from occurring in the first place, not to discover or rectify them after they have occurred.

Question 20

The concept that no one employee should be in a position both to perpetrate and hide errors or fraud in the normal course of their dutiis known as segregation of incompatible duties.

Accepted Answer

Segregation of incompatible duties is a key principle of internal control which ensures that no employee has the ability to both commit and conceal errors or fraud. This helps to prevent situations where one person has too much control over a process or transaction and reduces the risk of financial loss or harm to the organization.

Quiz 7: Understanding and Testing the Clients System of Internal Controls