Question 1

For efficiency, if internal controls are ignored, then control risk is assumed to be maximum.

Accepted Answer

If internal controls are ignored, there is no assurance that control risk is mitigated or lowered, therefore it is assumed to be at its highest level.

Question 2

It is more common for the auditor's assessment of control risk to be low when auditing larger clients than smaller clients.

Accepted Answer

Larger clients tend to have more complex internal control systems in place due to the complexity and volume of their transactions, which can provide greater assurance to the auditor and result in a lower assessment of control risk.

Question 3

There is a distinction between approval and authorisation.Approval is a policy decision for a general class of transactions.Authorisation is the implementation of management's general authorisation decisions.

Accepted Answer

The answer of There is a distinction between approval and...

Question 4

For proper internal control, the custodianship of cash, including receipts and disbursements, should be the responsibility of the accounting department.

Accepted Answer

Proper internal control principles dictate the separation of duties; the custodianship of cash should be separate from the accounting functions to prevent fraud and errors.

Question 5

When a company designs and implements an internal control system, the control must be cost-effective.

Accepted Answer

It is important for companies to ensure that their internal control system is cost-effective so that it doesn't add unnecessary expenses to the organization. However, the effectiveness of the control should not be compromised in the process.

Question 6

If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably set a low assessment of control risk.

Accepted Answer

If the auditor identified no control activities, it indicates that there are no relevant or adequate controls in place to mitigate risks, and therefore, the auditor would not be able to rely on them. Thus, the auditor would likely set a higher assessment of control risk.

Question 7

It is not always practicable to apply tests of controls to transactions over the entire year.

Accepted Answer

Testing controls over the entire year may not be practical due to resource limitations, timing constraints, or changes in the control environment during the year. Therefore, a risk-based approach is often taken to identify and test controls that are most critical and relevant to the financial statements.

Question 8

An example of a monitoring activity would be reviewing complaints from customers.

Accepted Answer

Reviewing complaints from customers is a common monitoring activity that helps a business stay aware of potential issues or areas for improvement in their products, services, or internal processes.

Question 9

Of the three objectives management has when designing an effective system of internal control, the objective that auditors are primarily concerned with is the client's compliance with applicable laws and regulations.

Accepted Answer

Auditors are primarily concerned with ensuring the reliability of financial reporting, although they also consider compliance with laws and regulations and the effectiveness of operations.

Question 10

When internal controls are not effective, then substantive audit tests are less reliable; thus, the extent of substantive tests should be increased.

Accepted Answer

When internal controls are not effective, there is an increased risk of material misstatement in the financial statements. Substantive audit tests are less reliable in detecting these material misstatements. Therefore, the auditor must increase the extent of substantive tests to obtain sufficient evidence to support their opinion.

Question 11

For proper internal control, there should be adequate separation of duties.However, the extent of separation of duties considered 'adequate' depends heavily on the size of the organisation.

Accepted Answer

This statement is true as the extent of separation of duties required for proper internal control varies based on the size and complexity of the organization. Larger organizations may require a greater degree of separation of duties to ensure adequate internal control, while smaller organizations may need less separation of duties.

Question 12

The auditor's assessment of control risk and the extent of tests of controls are inversely related; that is, if the auditor's assessment of control risk decreases, more extensive tests of controls are applied.

Accepted Answer

This statement is true according to the audit risk model, which states that audit risk equals inherent risk multiplied by control risk multiplied by detection risk. As the auditor's assessment of control risk decreases, the overall audit risk decreases, which means that detection risk must also decrease to achieve a lower level of audit risk. This can be accomplished by performing more extensive tests of controls to obtain a higher level of assurance that the controls are operating effectively.

Question 13

Because the auditor's main responsibility is to express an opinion on financial statements, which are composed of account balances, the primary emphasis by auditors when evaluating and testing internal control is on controls over account balances rather than controls over classes of transactions.

Accepted Answer

Auditors focus on controls over classes of transactions because effective internal control over transactions impacts the accuracy and reliability of account balances. Controls over transactions are fundamental to ensuring that transactions are recorded correctly, which in turn affects the overall accuracy of financial statements.

Question 14

If employees are competent and trustworthy, other controls can be absent.

Accepted Answer

If employees are competent and trustworthy, they can be relied upon to follow procedures, policies and guidelines without the need for other controls. However, it is always good practice to have some level of controls in place to prevent errors or fraud, even with the most competent and trustworthy employees.

Question 15

The less control risk there is, the smaller the amount of planned substantive evidence required.

Accepted Answer

This is true because if there is less control risk, it means that the internal controls in place are stronger and more effective. This reduces the risk of material misstatements occurring, which in turn reduces the amount of substantive evidence needed to be gathered. Conversely, if there is higher control risk, more substantive evidence will be required to provide reasonable assurance that there are no material misstatements in the financial statements.

Question 16

Adequate documents and records is a subcomponent of the control environment.

Accepted Answer

Adequate documents and records is a subcomponent of the information and communication component of internal control, not the control environment. The control environment is more focused on the organization's culture, ethics, and the tone at the top regarding internal control.

Question 17

When documenting their understanding of a client's internal controls, auditors are required to use narratives and may optionally also use flowcharts and/or internal control questionnaires.

Accepted Answer

Auditors can use a variety of methods to document their understanding of a client's internal controls, including narratives, flowcharts, and internal control questionnaires. There is no requirement to use one specific method over the others; the choice depends on what best suits the audit's needs.

Question 18

For most uses, flowcharts are superior to narratives as a method of communicating the characteristics of a system of internal control.

Accepted Answer

Flowcharts provide a visual representation of the steps and logic of a system of internal control, making it easier to understand and review. Narratives, on the other hand, can be more difficult to follow and may not capture all necessary details.

Question 19

If the auditor decides to go for a lower assessed control risk, more extensive tests of controls are applied.

Accepted Answer

When the auditor decides to decrease the assessed control risk, they are relying more on the effectiveness of the client's internal controls. To support this assessment, more extensive testing of controls is needed. This is because the lower the assessed control risk, the greater the reliance that can be placed on internal controls. Therefore, the auditor must test more of the client's internal controls to ensure their effectiveness.

Question 20

One benefit of effective internal control is the guarantee that all employee frauds will now be detected.

Accepted Answer

While effective internal control can mitigate the risk of employee fraud, it cannot guarantee that all frauds will be detected. There may still be instances where fraud is not detected, especially if the controls are not properly designed or enforced.

Quiz 8: Internal control and control risk