Question 1

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 of a specific characteristic or attribute within a population, such as the rate of errors in a population of invoices. It is not specifically designed to estimate the total dollar amount of misstatement in an account balance.

Question 2

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

Accepted Answer

Tests of account balances can help determine whether controls are effective in maintaining the accuracy of financial information. If account balances are accurate and consistent with expectations, it suggests that controls are in place and functioning properly. On the other hand, discrepancies or inconsistencies may indicate weaknesses or failures in control procedures.

Question 3

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

Accepted Answer

Narratives involve describing the flow of transactions in words, including each step from start to finish.

Question 4

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 designed to ensure the overall effectiveness and efficiency of an organization's IT environment, regardless of the specific applications or systems in use.

Question 5

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

Accepted Answer

Control risk refers to the risk that a misstatement that could occur in an account balance or class of transactions and that could be material, either individually or when aggregated with misstatements in other balances or classes, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

Question 6

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

Accepted Answer

Transaction-level controls are indeed implemented by businesses for the stated purposes.

Question 7

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 8

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 duties is known as segregation of incompatible duties.

Accepted Answer

This statement accurately describes the concept of segregation of incompatible duties, which is a key principle in internal controls and risk management. By separating the responsibilities for different aspects of a process, it becomes much more difficult for any one individual to engage in misconduct or cover up mistakes or misdeeds. This helps promote transparency, accountability, and ethical behavior within an organization.

Question 9

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 statement is true. The internal control objective of 'real' is to ensure that only real and legitimate transactions are recorded in the books and records of the organization, and that fictitious or duplicate transactions are detected and prevented. This helps to maintain the accuracy, reliability and integrity of the financial information and prevent fraud or errors.

Question 10

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

Accepted Answer

The internal control objective referred to is 'timeliness', which ensures transactions are recorded in the correct accounting period. 'Valuation' relates to ensuring transactions are recorded at the correct amounts.

Question 11

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 would require a physical key or combination to unlock, making it a purely manual control.

Question 12

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 13

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 considered key components of an entity's control environment. These factors set the tone for the organization and influence the behavior of its employees, affecting how they carry out their responsibilities and make decisions. Therefore, it is important for management to establish a positive, ethical, and accountable culture within the organization.

Question 14

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 placed on an internal control, the more rigorous the testing should be to provide sufficient assurance.

Question 15

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 current performance with past performance and can help identify areas of improvement and carry forward the benefit of successful testing into future audit periods.

Question 16

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

Accepted Answer

Auditors must focus on testing controls that are relevant to their audit objectives and that have the potential to significantly affect the financial statements. This approach improves the efficiency of the audit process, as auditors do not waste time and resources testing controls that are not critical.

Question 17

Checklists and preformatted questionnaires are particularly helpful in industries that the
auditor may not personally be familiar with auditing.

Accepted Answer

Checklists and preformatted questionnaires can provide a systematic approach and guidance for the auditor when auditing unfamiliar industries or businesses, reducing the risk of missing important audit steps or areas.

Question 18

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 incorrect opinion on financial statements that contain material misstatements, not specifically related to the entity's internal control system's ability to prevent or detect such misstatements.

Question 19

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

Accepted Answer

This is a true statement. Internal control measures are put in place by organizations to provide reasonable assurance that their objectives are being achieved. This includes safeguarding of assets, ensuring the accuracy and reliability of financial reporting, and ensuring compliance with applicable laws and regulations.

Question 20

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

Accepted Answer

Collusion is considered a weakness in internal control as it involves two or more individuals working together to bypass or manipulate a control, which can result in fraudulent or unethical activities going undetected.

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

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

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

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

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

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

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

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

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 duties is known as segregation of incompatible duties.

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.

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

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

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

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

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

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

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

Checklists and preformatted questionnaires are particularly helpful in industries that the auditor may not personally be familiar with auditing.

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

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

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