Question 1

Most companies design detection controls _______.

Accepted Answer

Detection controls are designed to detect errors or fraud that may have occurred despite prevention controls being in place. They are meant to provide a safety net to ensure that any errors or fraud are caught and corrected in a timely manner.

Question 2

Transaction-level controls are _______.

Accepted Answer

Transaction-level controls are implemented by businesses to reduce the risk of misstatement due to error or fraud, and to ensure that business processes are operating effectively. They focus on individual transactions and are designed to provide reasonable assurance that transactions are authorized, processed accurately, and recorded correctly. They are different from entity-level controls, which are overarching controls that affect the entire organization, and are tested by both internal and external auditors.

Question 3

If the audit firm is performing an integrated audit for a public company, _______.

Accepted Answer

In an integrated audit for a public company, the auditor is expected to test controls in order to support an opinion on Internal Control over Financial Reporting (ICFR), as well as audit the financial statements to support an opinion on the fairness of the financial statements. Therefore, choice A is the correct answer.

Question 4

Prevention controls are those applied _______.

Accepted Answer

Prevention controls are those applied to each transaction during normal processing and are intended to stop fraud or errors from occurring.

Question 5

Which of the following should be done by the auditor if tests of controls indicate that a key control is not functioning as designed?

Accepted Answer

If tests of controls indicate that a key control is not functioning as designed, the auditor should increase the assessed level of control risk. This is because if the key control is not functioning properly, there is a higher risk that material misstatements may occur in the financial statements, and the auditor cannot rely on the control to mitigate that risk.

Question 6

The technique that involves the auditor using questioning skills to determine how the control is completed and whether it appears to have been carried out properly and on a timely basis is known as _______.

Accepted Answer

Inquiry involves the auditor asking questions to understand the process of control and whether it was carried out effectively. Observation involves physically watching the control being completed, reperformance involves redoing the control and recalculation involves verifying the mathematical accuracy of data. None of these other techniques involve questioning skills to the extent that inquiry does.

Question 7

Preventing errors during processing _______.

Accepted Answer

Preventing errors during processing is an important objective of every accounting system as it ensures the accuracy and reliability of financial information. It helps in maintaining the integrity of financial data and also ensures that the financial statements are free from material misstatements. Therefore, it is a crucial responsibility of the accounting system to prevent errors during processing.

Question 8

Which of the following best defines detection controls?

Accepted Answer

Detection controls are applied after transactions have been processed to identify fraud or errors that may have occurred, and to rectify the fraud or errors on a timely basis. These controls are reactive in nature and their purpose is to detect anomalies in the system. In contrast, preventive controls are implemented to prevent fraud or errors from occurring in the first place.

Question 9

An auditor asking the employee who prepares the bank reconciliation how reconciling items are identified would be an example of _______.

Accepted Answer

Inquiry is the process of asking questions of knowledgeable people within the entity or outside the entity. In this case, the auditor is asking the employee who prepares the bank reconciliation about how reconciling items are identified.

Question 10

Assessing control risk begins with understanding which of the following?

Accepted Answer

Entity-level controls are the controls that are in place over the entire entity, such as the control environment, the accounting system, and the control activities. These controls are important because they provide a foundation for the other controls in the organization.

Question 11

Prevention controls _______.

Accepted Answer

Prevention controls may not always have physical evidence indicating whether the control was performed, as they are proactive measures taken to prevent an event from occurring. Detect controls, on the other hand, are reactive measures taken to detect and address incidents or events that have already occurred. Option A and B are too extreme and cannot be generalized. Option D is incorrect as detect controls are different from prevention controls.

Question 12

Detection controls vary _______.

Accepted Answer

Detection controls are generally less standardized than prevention controls and thus, vary to a greater extent from client to client. Prevention controls, on the other hand, tend to be more uniform across clients. However, it should be noted that within a client, detection controls may also vary from year-to-year depending on changes in the client's operations and systems.

Question 13

Which of the following controls are designed to prevent misstatements from happening (prevent controls) and / or detect and correct misstatements on a timely basis (detect controls)?

Accepted Answer

The answer of Which of the following controls are designed...

Question 14

Absence of effective prevention controls _______.

Accepted Answer

Absence of effective prevention controls increases the risk that errors or fraud may occur, as there are no measures in place to prevent them from happening. This in turn increases the risk of the audit as well, as errors or fraud could lead to misstatements in the financial statements.

Question 15

Which of the following refer(s) to the audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level?

Accepted Answer

Tests of controls are specifically designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. Financial auditing refers to the overall process of auditing financial statements, which includes tests of controls but is not specific to them. External controls and transaction-level controls are not relevant to this question.

Question 16

The two levels of internal control are _______.

Accepted Answer

The two levels of internal control are entity-level controls and transaction-level controls. Entity-level controls are broader controls that operate throughout the organization and affect multiple transactions, while transaction-level controls are specific controls designed for individual transactions. Both levels of internal control are important in ensuring the accuracy and reliability of financial information.

Question 17

If a client has strong entity-level controls, _______.

Accepted Answer

Strong entity-level controls create a strong control environment, which in turn enhances the effectiveness of transaction-level controls. Therefore, it is more likely that transaction-level controls will operate effectively in such an environment.

Question 18

An example of a purely manual control is a _______.

Accepted Answer

A locked inventory cage for high dollar-value items to which only a few authorized staff have a key to access is a purely manual control as it relies solely on physical restrictions and human oversight for its effectiveness. The other options listed involve some level of automated or computerized control.

Question 19

An auditor watching an employee prepare a bank reconciliation would be an example of _______.

Accepted Answer

Watching an employee prepare a bank reconciliation falls under the category of observation. The auditor is physically observing the process being carried out by the employee. Professional skepticism refers to the attitude of the auditor, recalculation involves verifying mathematical accuracy, and inquiry involves asking questions to obtain additional information.

Question 20

Internal controls can _______.

Accepted Answer

Internal controls can include any procedure used and relied upon by the client to prevent or detect errors in processing transactions. They are not limited to specific procedures approved by management and the auditor, nor are they limited to procedures used by the auditor themselves. Also, internal controls can still be subject to senior management override, although this would weaken the overall effectiveness of the control.

Quiz 8: Risk Responseperforming Tests of Controls