Question 1

The text suggested a five-step approach to identify deficiencies,significant deficiencies,and material weaknesses.Describe this approach.

Accepted Answer

The answer of The text suggested a five-step approach to...

Question 2

When a compensating control exists,the absence of a key control
A)is no longer a concern because there is no longer a significant deficiency or material weakness.
B)is still a major concern to the auditor.
C)could cause a material loss,so it must be tested using substantive procedures.
D)is magnified and must be removed from the sampling process and examined in its entirety.

Accepted Answer

A compensating control is a control that, while not a key or primary control, provides an alternative method of achieving the control objective. This means that the compensating control essentially substitutes for the key control and reduces the likelihood of a significant deficiency or material weakness. Therefore, the absence of a key control becomes less of a concern when a compensating control exists.

Question 3

Key controls are not sufficient to achieve the transaction-related audit objectives.

Accepted Answer

The answer of Key controls are not sufficient to achieve...

Question 4

An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls.Which of the following would generally not be used?
A)make inquiries of appropriate client personnel
B)examine documents,records,and reports
C)reperform client procedures
D)inspect design documents

Accepted Answer

Inspecting design documents may be used to understand the design of internal controls, but it would not directly support the operating effectiveness of internal controls. The other three procedures listed (making inquiries, examining documents, and reperforming client procedures) would all help the auditor assess the operating effectiveness of internal controls.

Question 5

Which of the following represents a correct statement regarding internal control testing?
A)When auditors plan to use evidence about the operating effectiveness of internal control contained in prior audits,auditing standards require tests of the controls' effectiveness at least every other year.
B)The greater the risk,the less audit evidence the auditor should obtain that controls are operating effectively.
C)The auditor uses control risk assessment and results of tests of controls to determine planned detection risk and the related substantive tests for the financial statement audit.
D)Testing of internal controls can only be performed by the auditor at the end of the fiscal year.

Accepted Answer

The statement in (C) correctly describes the use of control risk assessment and tests of controls in determining planned detection risk and related substantive tests. Option (A) is incorrect because the frequency of testing is determined by the auditor's assessment of the risk of material misstatement, not by auditing standards. Option (B) is also incorrect because the greater the risk, the more audit evidence is needed to support the assertion that controls are operating effectively. Option (D) is incorrect because testing of internal controls can be done throughout the year, not just at the end of the fiscal year.

Question 6

A(n)________ control is a control elsewhere in the system that offsets the absence of a key control.
A)significant
B)alternate
C)design
D)compensating

Accepted Answer

A compensating control is designed to mitigate the risk associated with a missing or inadequate control. It serves as an alternative control mechanism to reduce or eliminate the risk of a failed control.

Question 7

A significant internal control deficiency is always considered a material weakness.

Accepted Answer

While a significant internal control deficiency can have a material impact on financial reporting, it may not always rise to the level of a material weakness. The determination of whether an internal control deficiency constitutes a material weakness is based on the likelihood and potential magnitude of a misstatement in the financial statements.

Question 8

Which of the following is an accurate statement relating to the extent of procedures?
A)If an auditor wants a lower assessed control risk than the preliminary assessed control risk,the number of controls tested increases while the extent of the tests for each control decrease.
B)The extent of testing depends on the frequency of the operation of the controls.
C)All controls must be tested only at year-end.
D)The frequency of testing is the same for both manual and computer controls.

Accepted Answer

The extent of testing procedures indeed depends on the frequency of the operation of the controls. More frequently operated controls may require more extensive testing to ensure their effectiveness over the period under audit.

Question 9

You are the audit manager for a new audit client.Your staff auditors are unsure of what constitutes a control deficiency.Discuss the terms control deficiency,design deficiency,and operating deficiency.

Accepted Answer

The answer of You are the audit manager for a...

Question 10

A five-step approach can be used to identify deficiencies,significant deficiencies,and material weaknesses.The first step in this approach is
A)identify the absence of key controls.
B)consider the possibility of compensating controls.
C)determine potential misstatements that could result.
D)identify existing controls.

Accepted Answer

The first step in this approach is to identify existing controls, which is necessary to evaluate their effectiveness and identify any potential deficiencies. Only after identifying existing controls can potential misstatements be determined and the absence of key controls can be identified. Compensation controls can also be considered after identifying existing controls.

Question 11

The assessment of control risk is the measure of the auditor's expectation that internal controls will prevent material misstatements from occurring or detect and correct them if they have occurred.

Accepted Answer

The statement is true. The assessment of control risk is a key part of the auditor's risk assessment process and involves evaluating the effectiveness of the entity's internal controls in mitigating the risk of material misstatements in the financial statements. This assessment helps the auditor to determine the nature, timing, and extent of their substantive procedures.

Question 12

A ________ exists if one or more control deficiencies exist that are less severe than a material weakness,but are important enough to merit attention by those responsible for oversight of the company's financial reporting.
A)potential misstatement
B)significant weakness
C)significant deficiency
D)fraud symptom

Accepted Answer

A significant deficiency exists if one or more control deficiencies exist that are less severe than a material weakness, but are important enough to merit attention by those responsible for oversight of the company's financial reporting.

Question 13

Tests of controls
A)are the procedures used to test the effectiveness of controls in support of a reduced assessed control risk.
B)are used to support the ending balances in the balance sheet and income statement accounts.
C)are performed at the end of the audit.
D)are designed to detect fraud.

Accepted Answer

Tests of controls are procedures performed by auditors to test the effectiveness of internal controls, such as testing whether transactions were properly authorized and recorded, in support of a reduced assessed control risk. This can help reduce the risk of material misstatement in the financial statements.

Question 14

In some cases,management can correct deficiencies and material weaknesses before the auditor does significant testing,which may permit a reduction in control risk.

Accepted Answer

If management corrects deficiencies and material weaknesses before the auditor does significant testing, it can provide evidence to support a reduction in control risk. This means the auditor can rely more on the company's internal controls and perform less testing, ultimately saving time and resources. However, if deficiencies and material weaknesses are not corrected, the auditor may have to perform additional testing to obtain sufficient evidence.

Question 15

When testing manual or automated controls,
A)automated controls are always subject to random error or manipulation.
B)automated controls cannot be altered by making a change to the software application.
C)when there are effective general controls and automated application controls,the auditor will need to select a larger sample size of transactions to verify.
D)the extent of testing depends on whether it is a manual or automated control.

Accepted Answer

The extent of testing for controls should not depend on whether it is a manual or automated control. Instead, it should be based on the auditor's assessment of the risks associated with the control and the effectiveness of the control in addressing those risks. Both manual and automated controls can be subject to error or manipulation, and both may require larger sample sizes for testing if there are effective general and application controls in place. It is important for the auditor to assess the risks associated with each control and tailor their testing approach accordingly.

Question 16

When assessing control risk,
A)many auditors use actuarial tables to assist in the control risk assessment process.
B)each control can be used to satisfy only one audit objective.
C)many auditors use a control risk matrix to assist in the control risk assessment process.
D)all controls,including key controls,should be considered.

Accepted Answer

Many auditors use a control risk matrix to assist in the control risk assessment process. This matrix helps auditors consider the likelihood and impact of control failures on each audit objective, and it also helps auditors determine the appropriate level of assessed control risk. Option A is incorrect because actuarial tables are typically used in insurance risk management, not control risk assessment in auditing. Option B is incorrect because some controls may satisfy more than one audit objective, and some audit objectives may be satisfied by multiple controls. Option D is incorrect because not all controls may be relevant or significant to a particular audit objective or assertion.

Question 17

An auditor traces the sales prices to the authorized price list in effect at the date of the transaction.Which of the following procedures has the auditor performed?
A)inquiry
B)observation
C)reperformance
D)examination

Accepted Answer

Reperformance involves the auditor independently executing procedures or controls that were originally performed as part of the entity's internal control. By tracing the sales prices back to the authorized price list, the auditor is reperforming the process of verifying that the sales transactions were executed at the correct prices.

Question 18

A design deficiency exists if the person performing the control is not qualified.

Accepted Answer

The answer of A design deficiency exists if the person...

Question 19

If the results of tests of controls support the design and operations of controls as expected,the auditor uses ________ control risk as the preliminary assessment.
A)a lower
B)the same
C)a higher
D)either a lower or higher

Accepted Answer

The answer of If the results of tests of controls...

Question 20

Which of the following is True regarding the relationship between tests of controls and procedures to obtain an understanding?
A)In obtaining an understanding of internal control,the procedures to obtain an understanding are applied to all controls identified during that phase.
B)Tests of controls are applied only when the assessed control risk has not been satisfied by the procedures to obtain an understanding.
C)Procedures to obtain an understanding are performed only on one or a few transactions.
D)All of the above are correct.

Accepted Answer

The answer of Which of the following is True regarding...

Quiz 12: Assessing Control Risk and Reporting on Internal Controls

The text suggested a five-step approach to identify deficiencies,significant deficiencies,and material weaknesses.Describe this approach.

When a compensating control exists,the absence of a key control

Key controls are not sufficient to achieve the transaction-related audit objectives.

An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls.Which of the following would generally not be used?

Which of the following represents a correct statement regarding internal control testing?

A(n) ________ control is a control elsewhere in the system that offsets the absence of a key control.

A significant internal control deficiency is always considered a material weakness.

Which of the following is an accurate statement relating to the extent of procedures?

You are the audit manager for a new audit client.Your staff auditors are unsure of what constitutes a control deficiency.Discuss the terms control deficiency,design deficiency,and operating deficiency.

A five-step approach can be used to identify deficiencies,significant deficiencies,and material weaknesses.The first step in this approach is

The assessment of control risk is the measure of the auditor's expectation that internal controls will prevent material misstatements from occurring or detect and correct them if they have occurred.

A ________ exists if one or more control deficiencies exist that are less severe than a material weakness,but are important enough to merit attention by those responsible for oversight of the company's financial reporting.

Tests of controls

In some cases,management can correct deficiencies and material weaknesses before the auditor does significant testing,which may permit a reduction in control risk.

When testing manual or automated controls,

When assessing control risk,

An auditor traces the sales prices to the authorized price list in effect at the date of the transaction.Which of the following procedures has the auditor performed?

A design deficiency exists if the person performing the control is not qualified.

If the results of tests of controls support the design and operations of controls as expected,the auditor uses ________ control risk as the preliminary assessment.

Which of the following is True regarding the relationship between tests of controls and procedures to obtain an understanding?