Question 1

Describe a five-step approach that is used for identifying significant or material internal control weaknesses.

Accepted Answer

1.Identify existing controls.Weaknesses are the absence of adequate controls,so the auditor must first know which controls exist.
2.Identify the absence of key controls.Internal control questionnaires,narratives,and flowcharts are useful to identify areas in which key controls are lacking and the likelihood of misstatements is increased.
3.Consider the possibility of compensating (or mitigating)controls.A compensating (or mitigating)control is a control elsewhere in the system that offsets a weakness.
4.Decide whether there is a significant deficiency or material weakness.The likelihood of misstatements and their materiality are used to evaluate if there are significant deficiencies or material weaknesses.
5.Determine potential material misstatements that could result.This step is intended to identify specific errors or fraud and other irregularities that are likely to result from the absence of controls.

Question 2

When a compensating control exists,a weakness in the system

Accepted Answer

A compensating control is put in place to mitigate the risk of a weakness in the system. Hence, in the presence of a compensating control, the potential for misstatement has been sufficiently reduced, making it no longer a concern for the auditor.

Question 3

When the auditor attempts to determine the operation of the accounting system by tracing one or a few transactions through the accounting system,this is referred to as

Accepted Answer

This is referred to as a walk-through. During a walk-through, the auditor selects a sample of transactions and follows them through the accounting system, documenting the process in order to gain an understanding of the entity's internal controls and identify any areas of weakness. Tracing and vouching are separate procedures used during the substantive testing phase of the audit, and tests of controls are procedures used to evaluate the effectiveness of internal controls.

Question 4

When planning the audit,the auditor's decision on the appropriate assessed level of control risk to use is

Accepted Answer

The appropriate assessed level of control risk is influenced by economic issues, as the auditor needs to weigh the costs of testing controls against the cost of testing balances. The audit risk model is used to determine the overall audit risk and set the planned level of detection risk, but it does not directly determine the level of control risk. There is no standard formula or actuarial tables for determining the appropriate assessed level of control risk, as it is a judgment-based decision.

Question 5

Control risk is a measure of the auditor's expectation that internal controls will

Accepted Answer

The answer of Control risk is a measure of the...

Question 6

Jenny is the information technology support manager at CMH.Jenny is considered to be a super-user at CMH since she can circumvent normal controls.In order to address the risk of super-users,management should

Accepted Answer

Removing a super-user may lead to loss of critical knowledge and skills. Updating background checks and ensuring familiarity with code of conduct are important, but they may not directly address the risk of circumventing controls. Establishing effective compensating controls, such as monitoring and reviewing super-user activities, can mitigate the risk of unauthorized actions and provide accountability.

Question 7

The internal control objective of accuracy is related to the financial statement assertion of

Accepted Answer

The accuracy objective of internal control refers to the proper recording and processing of financial transactions to ensure the amounts are correct. This is directly related to the financial statement assertion of valuation, which confirms that the amounts presented in the financial statements are accurate and reflect the true economic value of the assets, liabilities, and equity of the company. Therefore, choice A) Valuation is the best answer.

Question 8

A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation of functions and that leave no transaction trail is

Accepted Answer

The best choice for an auditor in performing tests of control procedures that involve segregation of functions and leave no transaction trail is observation. This involves physically watching or visually seeing the segregation of duties being performed, such as an employee accessing a secure server with another employee present to monitor the access. This can also include observing the physical handling of certain assets or documents to ensure that segregation of duties is properly in place.

Question 9

Identify the difference among control deficiency,significant deficiency,and material weakness.

Accepted Answer

The answer of Identify the difference among control deficiency,significant deficiency,and...

Question 10

Narratives,flowcharts,and internal control questionnaires are three commonly used methods of

Accepted Answer

Narratives, flowcharts, and internal control questionnaires are all tools used for documenting the auditor's understanding of internal controls. They are not used for testing internal controls or designing the audit manual and procedures. While they may provide some information about the client's organizational structure, their main purpose is to document the controls in place to ensure the reliability of financial reporting.

Question 11

Control tests are required for

Accepted Answer

Control tests are specifically designed to test the operating effectiveness of a company's control procedures. This is necessary to ensure that the procedures are functioning as intended and that the company's financial statements are free from material misstatements. Control tests are a form of substantive testing, which is designed to obtain evidence about the financial statement assertions. Analytical review and accomplishing control over the validity of recorded transactions are both important aspects of financial statement auditing, but they do not involve control testing specifically.

Question 12

Paul is in the process of performing procedures to obtain the necessary understanding of the client's internal controls.As part of this process,Paul received from the client completed narratives,flowcharts,and internal control questionnaires.Paul can use this information from the client

Accepted Answer

Even if the client's completed narratives, flowcharts, and internal control questionnaires were deemed effective in the prior year or were prepared by unbiased management, Paul cannot rely on this information without adequate testing. Further, if there have been significant changes in the internal controls since the prior year, Paul should perform additional procedures to assess the effectiveness of the controls. Therefore, the only correct choice is option C, which states that Paul can use the client's information as long as he performs adequate testing to substantiate subsequent reliance on the controls.

Question 13

After considering a client's internal controls,an auditor has concluded that the internal controls are well designed and are functioning as intended.Under these circumstances,the auditor would most likely

Accepted Answer

When an auditor concludes that a client's internal controls are well designed and functioning as intended, they often use a combined audit approach. This approach includes both tests of controls to assess the effectiveness of the internal controls and substantive tests to directly test for material misstatements in the financial statements. This strategy allows the auditor to rely on the controls to some extent, reducing the extent of substantive testing needed.

Question 14

List and explain the methods of documenting the auditor's understanding of internal controls.

Accepted Answer

The answer of List and explain the methods of documenting...

Question 15

Each key control that the auditor intends to rely on must be supported by sufficient

Accepted Answer

Key controls are controls that have the potential to prevent or detect and correct material misstatements. The auditor can rely on these controls to reduce the amount of substantive testing required. To rely on a key control, the auditor must perform tests of controls to evaluate the design and operating effectiveness of the control. Therefore, the best choice to support key controls would be tests of controls. The other answer choices, such as tests of details of balances, analytical review procedures, and reperformance procedures, are not directly related to evaluating the effectiveness of key controls.

Question 16

The procedures to test effectiveness of control policies and procedures in support of a reduced assessed control risk are called

Accepted Answer

Tests of controls are specifically designed to test the effectiveness of control policies and procedures in support of a reduced assessed control risk. Tests of details of balances are designed to test the completeness, accuracy and validity of account balances. Analytical procedures are used to identify potential significant relationships and trends. A walk-through is a form of testing used to test the effectiveness of controls as well, but is not the specific term used to describe the procedures to test effectiveness of control policies and procedures in support of a reduced assessed control risk.

Question 17

Greenvale Construction Limited was started by four brothers who lived in the Toronto area.Over time,the brothers moved to different parts of the country.They decided it was a good idea to keep the company and organize their work as separate divisions under the same company.There are now three divisions,one for each of the brothers who are actively involved in construction.The fourth brother,Ted,is responsible for accounting and record keeping.Ted went back to school and completed an accounting designation,and now has three employees in the accounting area.
Each of the brothers has moved on to specialize in a different kind of construction work.In Toronto,it is mainly new home construction.In Edmonton,the work is primarily renovations of large homes and small commercial enterprises.In Halifax,the work is mid-sized to large commercial projects.All of the brothers prefer to subcontract their work rather than hiring full time construction employees,although some of the subcontract relationships have lasted over fifteen years now.
Required:
Explain what you would do to document your understanding of internal control for Greenvale.Identify potential risk areas where you would need to focus additional attention.

Accepted Answer

The answer of Greenvale Construction Limited was started by four...

Question 18

You have just finished documenting your understanding of cycle controls at an audit engagement.
Required:A)Explain how you will identify the controls that will be tested.B)What process will you follow for weakness in internal controls?

Accepted Answer

The answer of You have just finished documenting your understanding...

Question 19

Ideally,tests of controls should be applied to controls

Accepted Answer

Tests of controls should ideally be applied for the entire period under audit to provide sufficient and appropriate audit evidence. This enables the auditor to obtain assurance that the controls have operated effectively throughout the period and identify any exceptions or deficiencies in a timely manner. The other options (A, B, and D) do not provide adequate coverage of the entire period or may be too early or late to detect any control failures.

Question 20

Once an understanding of internal controls is obtained that is sufficient for audit planning,then the auditor must first assess

Accepted Answer

The answer of Once an understanding of internal controls is...

Quiz 9: Assessing Control Risk and Designing Test of Controls