Question 1

Assessing control risk at less than high involves all of the following except:
A) identifying specific controls to rely on.
B) concluding that controls are ineffective.
C) performing tests of controls.
D) analysing the achieved level of control risk after performing tests of controls.

Accepted Answer

Assessing control risk at less than high involves identifying specific controls to rely on, performing tests of controls, and analyzing the achieved level of control risk after performing tests of controls. Concluding that controls are ineffective would result in a higher level of control risk and thus, would not be an appropriate step for assessing control risk at less than high.

Question 2

Of the following statements about an internal control, which one is not valid?
A) No one person should be responsible for the custodial responsibility and the recording responsibility for an asset.
B) Transactions must be properly authorised before such transactions are processed.
C) Because of the cost-benefit relationship, a client may apply control procedures on a test basis.
D) Control procedures reasonably ensure that collusion among employees cannot occur.

Accepted Answer

Control procedures can deter or prevent collusion, but they cannot guarantee that it will not occur. Collusion among employees is a potential risk that should be considered and addressed with appropriate controls, but it cannot be completely eliminated.

Question 3

When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to:
A) assess the risk of material misstatement and plan the audit.
B) provide suggestions for improvement to the client.
C) serve as a basis for setting audit risk and materiality.
D) comply with the Corporations Act 2001.

Accepted Answer

The primary objective of obtaining an understanding of internal controls is to assess the risk of material misstatement and plan the audit accordingly. This allows the auditor to identify areas of the financial statements that are more likely to have material misstatements, and design audit procedures that are appropriate to address those risks. While providing suggestions for improvement to the client may be a secondary benefit of the process, it is not the primary objective. Internal controls also serve as a basis for setting audit risk and materiality, but again, this is a secondary objective in relation to assessing risk and planning the audit. Compliance with the Corporations Act 2001 may be a requirement for the audit, but it is not the purpose of obtaining an understanding of internal controls.

Question 4

Peter Budd, the purchasing officer of Lake Hardware Wholesalers Pty Ltd (Lake), has a relative who owns a retail hardware store. Peter Budd arranged for hardware to be delivered by manufacturers to the retail store on a COD basis, thereby enabling his relative to buy at Lake's wholesale prices. Budd was probably able to accomplish this because of Lake's poor internal control for:
A) purchase requisitions.
B) cash receipts.
C) perpetual inventory records.
D) purchase orders.

Accepted Answer

Peter Budd was able to arrange deliveries directly to his relative's store likely due to poor internal control over purchase orders, which would allow him to manipulate or create orders without proper oversight.

Question 5

How does the extent of substantive tests required to constitute sufficient appropriate audit evidence vary with the auditor's assessment of control risk?
A) Randomly.
B) Disproportionately.
C) Directly.
D) Inversely.

Accepted Answer

The answer of How does the extent of substantive tests...

Question 6

For effective internal control purposes, which of the following individuals should be responsible for mailing signed cheques?
A) Computer operator.
B) Financial controller.
C) Accounts payable clerk.
D) Payroll clerk.

Accepted Answer

The financial controller should be responsible for mailing signed cheques as part of their role in overseeing the financial operations of the organization and ensuring effective internal controls. The other options listed do not have the appropriate level of responsibility or authority for this task.

Question 7

An auditor assesses the level of control risk to:
A) determine the extent of tests of controls to be performed.
B) determine the extent of substantive tests to be performed.
C) ascertain whether irregularities are probable.
D) ascertain whether any employees have incompatible duties.

Accepted Answer

The level of control risk helps the auditor determine the extent of substantive tests needed; higher control risk means more substantive testing is required.

Question 8

The conclusion reached as a result of assessing control risk is referred to as the:
A) assurance provided by internal control.
B) determined level of acceptable detection risk.
C) product of the understanding of internal control.
D) assessed level of control risk.

Accepted Answer

The conclusion reached as a result of assessing control risk is referred to as the assessed level of control risk.

Question 9

Tests of controls are performed to determine whether or not:
A) control policies and procedures are functioning as designed.
B) necessary controls are absent.
C) incompatible functions exist.
D) material dollar misstatements exist.

Accepted Answer

Tests of controls are performed to determine whether control policies and procedures are functioning as designed. This helps auditors assess the risk of material misstatement in the financial statements. Testing controls can also help auditors identify weaknesses in the control environment and recommend improvements. Tests of controls are not specifically designed to determine whether necessary controls are absent, whether incompatible functions exist, or whether material dollar misstatements exist, although these issues may be identified during the testing process.

Question 10

For internal control purposes, which of the following individuals should preferably be responsible for the distribution of payroll cheques?
A) Bookkeeper.
B) Payroll clerk.
C) Cashier.
D) Receptionist.

Accepted Answer

The answer of For internal control purposes, which of the...

Question 11

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the:
A) factors that raise doubts about the auditability of the financial report.
B) operating effectiveness of internal control policies and procedures.
C) risk that material misstatements exist in the financial report.
D) possibility that the nature and extent of substantive tests may be reduced.

Accepted Answer

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that material misstatements exist in the financial report. This assessment helps the auditor to determine the nature, timing, and extent of substantive testing that will be required to detect material misstatements. Assessing control risk also helps the auditor to identify areas of the financial report where risks are high, and additional testing may be required.

Question 12

The basic concept of internal control which recognises that the cost of internal control should not exceed the benefits expected to be derived is known as:
A) reasonable assurance.
B) management responsibility.
C) limited liability.
D) management by exception.

Accepted Answer

The basic concept of internal control which recognises that the cost of internal control should not exceed the benefits expected to be derived is known as reasonable assurance. This means that the cost of implementing internal control measures should not be higher than the benefits that are expected from having these controls in place. This principle helps to ensure that internal controls are cost-effective and efficient, and that organisations do not spend more than is necessary on internal control measures.

Question 13

Which of the following statements about internal control is correct?
A) The establishment and maintenance of internal control is an important responsibility of the internal auditor.
B) Properly maintained internal control reasonably ensures that collusion among employees cannot occur.
C) The cost-benefit relationship is a primary criterion that should be considered in designing internal control.
D) Exceptionally strong internal control is enough for the auditor to eliminate substantive tests on a significant account balance.

Accepted Answer

The cost-benefit relationship is a fundamental principle in designing internal control systems. It emphasizes that the benefits of any control should outweigh its costs. This principle ensures that resources are used efficiently and that controls are both effective and economical.

Question 14

Obtaining an understanding of the internal control and assessing control risk:
A) may be performed concurrently in an audit.
B) needs to be documented only if the assessed level is less than high.
C) is possible but not necessary in performing an audit.
D) is necessarily sequential audit steps.

Accepted Answer

Obtaining an understanding of the internal control and assessing control risk are often performed concurrently in an audit. This is because the auditor needs to understand the internal control in order to assess control risk, and vice versa. It is also important to note that documenting the assessment of control risk is required regardless of the level assessed. While the steps may be sequential in some cases, they can also occur at the same time. Therefore, choice A is the best answer.

Question 15

After obtaining an understanding of internal control in an audit engagement, the auditor should perform tests of controls on:
A) those control activities for which reportable conditions were identified.
B) a random sample of the control activities that were identified.
C) those control activities that have a material effect upon the financial report balances.
D) those control activities that the auditor identified to reduce the assessed level of control risk.

Accepted Answer

The purpose of performing tests of controls is to obtain evidence about the operating effectiveness of specific controls in reducing the assessed level of control risk. Therefore, the auditor should test those control activities that they identified to reduce the assessed level of control risk in order to gain assurance about their operating effectiveness. Testing controls that have a material effect upon the financial report balances may be necessary, but it is not the primary focus of tests of controls.

Question 16

In assessing control risk, the auditor is basically concerned that the system provides reasonable assurance that:
A) controls have not been circumvented by collusion.
B) misstatements have been prevented or detected.
C) operational efficiency has been achieved in accordance with management plans.
D) management cannot override the system.

Accepted Answer

The main concern of assessing control risk is to ensure that the system has controls in place that can prevent or detect misstatements in the financial statements. This provides reasonable assurance that the financial statements are accurate and reliable. The other options listed are also important aspects of internal control, but they are not the primary concern when assessing control risk.

Question 17

Assessing control risk as less than high would most likely involve:
A) changing the timing of substantive tests by omitting interim testing and performing the tests at year-end.
B) identifying specific internal controls relevant to specific assertions.
C) performing more extensive substantive tests with larger sample sizes than originally planned.
D) reducing inherent risk for most of the assertions relevant to significant account balances.

Accepted Answer

Identifying specific internal controls relevant to specific assertions can help assess control risk as less than high by providing evidence that the internal controls are operating effectively and can be relied upon to prevent or detect material misstatements. Changing the timing of substantive tests, performing more extensive substantive tests, or reducing inherent risk do not necessarily provide evidence regarding the effectiveness of internal controls.

Question 18

Which of the following would be least likely to suggest to an auditor that the client's management may have overridden the internal control?
A) Differences are always disclosed on a computer exception report.
B) Management does not correct internal control deficiencies that it knows about.
C) There have been two new controllers this year.
D) There are numerous delays in preparing timely internal financial reports.

Accepted Answer

Option A suggests that differences are disclosed, which indicates transparency and adherence to internal controls, making it least likely to suggest management override.

Question 19

A primary purpose of internal controls is to:
A) form a basis for evaluating employees.
B) monitor production quality.
C) avoid clerical errors.
D) meet objectives of maintaining sound documents and records and accurate financial reporting.

Accepted Answer

The primary purpose of internal controls is to ensure accurate financial reporting and maintain sound documents and records. While internal controls may help evaluate employees and monitor production quality, these are not the primary reasons for implementing internal controls. Avoiding clerical errors may be a secondary benefit of internal controls, but again, it is not the primary purpose.

Question 20

Which of the following is one of the overriding principles of internal control?
A) Responsibility for accounting and financial duties should be assigned to one responsible officer.
B) Responsibility for the performance of each duty must be fixed.
C) Responsibility for the accounting duties must be borne by the audit committee of the company.
D) All of the options listed here are correct

Accepted Answer

The principle that responsibility for the performance of each duty must be fixed is an important aspect of internal control. This means that each individual within the organization should have a clear understanding of their duties and responsibilities, and be held accountable for carrying them out effectively. This helps to ensure that tasks are completed efficiently and accurately, and reduces the risk of errors, fraud, and other issues. The other options listed are not accurate principles of internal control - while it is important to assign responsibility for accounting and financial duties, this should not be limited to one individual or officer (A); the audit committee may be involved in oversight of financial reporting, but should not be solely responsible for accounting duties (C); and D is not a valid option as it suggests that all options are correct, when in fact only B is a valid principle of internal control.

Quiz 8: Understanding and Assessing Internal Control Part Three: Tests of Control and Tests of Details

Assessing control risk at less than high involves all of the following except:

Of the following statements about an internal control, which one is not valid?

When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to:

How does the extent of substantive tests required to constitute sufficient appropriate audit evidence vary with the auditor's assessment of control risk?

For effective internal control purposes, which of the following individuals should be responsible for mailing signed cheques?

An auditor assesses the level of control risk to:

The conclusion reached as a result of assessing control risk is referred to as the:

Tests of controls are performed to determine whether or not:

For internal control purposes, which of the following individuals should preferably be responsible for the distribution of payroll cheques?

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the:

The basic concept of internal control which recognises that the cost of internal control should not exceed the benefits expected to be derived is known as:

Which of the following statements about internal control is correct?

Obtaining an understanding of the internal control and assessing control risk:

After obtaining an understanding of internal control in an audit engagement, the auditor should perform tests of controls on:

In assessing control risk, the auditor is basically concerned that the system provides reasonable assurance that:

Assessing control risk as less than high would most likely involve:

Which of the following would be least likely to suggest to an auditor that the client's management may have overridden the internal control?

A primary purpose of internal controls is to:

Which of the following is one of the overriding principles of internal control?