Question 1

When the lower assessed level of control risk approach is used, the final assessment of control risk is made after completing:
A) the procedures to obtain an understanding.
B) the documentation of the understanding.
C) all the planned tests of controls.
D) all the above.

Accepted Answer

The final assessment of control risk when using the lower assessed level of control risk approach is made after completing all the steps listed: obtaining an understanding of the entity's internal control, documenting this understanding, and performing all the planned tests of controls. These steps are necessary to accurately assess the effectiveness of the entity's internal controls and thus determine the appropriate level of control risk.

Question 2

For a particular assertion, control risk is the risk that:
A) a material misstatement will occur in the accounting process.
B) audit procedures will fail to detect a weak control system.
C) control procedures will not detect a material misstatement that occurs.
D) the prescribed control procedures will not be applied uniformly.

Accepted Answer

Control risk is specifically the risk that a company's internal controls will fail to prevent or detect a material misstatement in its financial statements.

Question 3

Which of these is one of the three components of audit risk?
A) deception risk.
B) control risk.
C) rejection risk.
D) acceptance risk.

Accepted Answer

Control risk is one of the three components of audit risk, alongside inherent risk and detection risk. It refers to the risk that a misstatement that could occur in an account balance or class of transactions 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 4

Inherent risk is defined in terms of:
A) a total absence of controls.
B) an ideal set of controls.
C) the existing controls.
D) the standard controls for the client's industry.

Accepted Answer

Inherent risk is defined as the susceptibility of an assertion about a transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. This means it exists independently of the audit and is related to the nature of the business or transaction itself, implying a total absence of controls.

Question 5

Flowcharts should depict all of the following except:
A) all operations performed in processing the class of transactions.
B) the method of processing.
C) the extent of segregation of duties.
D) the audit procedures conducted.

Accepted Answer

Flowcharts are used to depict the process flow and operations within a system, including methods of processing and segregation of duties, but they do not include the audit procedures conducted. Audit procedures are determined by auditors based on the understanding of the system gained, among other things, from the flowchart.

Question 6

The true statement is:
A) Internal controls are more important when companies grow in size and complexity.
B) Effective internal controls are able to provide absolute assurance for an entity's management and board.
C) Auditors have a statutory legal obligation to report on internal controls within the entity.
D) The control environment means the auditor's overall attitude, awareness and actions regarding internal control and its importance in the entity

Accepted Answer

As companies grow in size and complexity, internal controls become more important to manage risks and ensure accurate financial reporting.

Question 7

The control environment means management's overall attitude, awareness and actions regarding internal control and its importance in the entity. Identify and describe four factors that constitute part of the control environment.

Accepted Answer

The answer of The control environment means management's overall attitude,...

Question 8

1. Identify and define the components of the quantified audit risk model.
"2. Indicate which of these components is under the control of the auditor and indicate the relationship of this component to the other components of audit risk.
"

Accepted Answer

The answer of 1. Identify and define the components of...

Question 9

Identify what category of control activity each of the following belong to:
1.Management reviews the sales of each salesperson on a monthly basis.
2.Access to the cash office is restricted by entry code.
3.There is an automated stop placed on payroll if the amounts entered exceed a certain reasonable amount.
4.Authority to approve credit is the responsibility of the cash office, not the sales department.
5.All sales are processed on a cash register which produces receipts and a journal roll for the office.
6.Before new information systems are approved they are extensively tested for weaknesses.
7.When entering data the system will prompt for an entry if there is an empty or incomplete field.
8.Management reviews the actual versus budget report each week.

Accepted Answer

The answer of Identify what category of control activity each...

Question 10

1.Explain what an internal control questionnaire is and why it is used.
2.List three advantages of using questionnaires.

Accepted Answer

The answer of 1.Explain what an internal control questionnaire is...

Question 11

For a given assertion, the relationship between the level of detection risk (DR) and assessed control risk (CR) and inherent risk (IR) is shown correctly in which of the following, where + means increase, - means decrease:
A) +DR if +CR and +IR.
B) +DR if -CR and -IR.
C) +DR if +CR and -IR.
D) +DR if -CR and +IR.

Accepted Answer

Detection risk (DR) increases when control risk (CR) and inherent risk (IR) decrease, as auditors can afford to accept a higher detection risk when the assessed risks are lower.

Question 12

Control activities are detailed policies and procedures that management establishes to help ensure that its directives are carried out. List the four different categories of control activities and give an example of each.

Accepted Answer

The answer of Control activities are detailed policies and procedures...

Question 13

If inherent risk and control risk are both assessed as low, detection risk will be:
A) low.
B) high.
C) the same as audit risk.
D) medium.

Accepted Answer

When inherent risk and control risk are both assessed as low, the auditor can accept a higher detection risk because the overall risk of material misstatement is lower. This means the auditor can reduce the extent of substantive testing.

Question 14

Internal control can only provide reasonable assurance as there are inherent limitations within an entity's control structure. Identify and describe three of these limitations.

Accepted Answer

The answer of Internal control can only provide reasonable assurance...

Question 15

1. List the four procedures necessary to obtain an understanding of the entity's internal control.
2. Explain what a transaction walk-through review consists of.

Accepted Answer

The answer of 1. List the four procedures necessary to...

Question 16

List the fundamental concepts that are embodied in the definition of internal control as per the COSO report: …a process, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: -reliability of financial reporting; -compliance with applicable laws and regulations; -effectiveness and efficiency of operations.

Accepted Answer

The answer of List the fundamental concepts that are embodied...

Question 17

The assessment of inherent risk requires consideration of matters that have a pervasive effect on the entity as a whole and matters that may affect only specific accounts. Which of the following is an example of a "pervasive effects" matter?
A) industry of operation.
B) susceptibility to misappropriation.
C) sensitivity of valuations to economic factors.
D) all of the above.

Accepted Answer

Pervasive effects matters are those that can impact the entity as a whole rather than just specific accounts. The industry of operation, susceptibility to misappropriation, and sensitivity of valuations to economic factors are all examples of matters that can have a widespread impact on an entity, affecting its overall risk profile.

Quiz 9: Audit Risk Assessment

When the lower assessed level of control risk approach is used, the final assessment of control risk is made after completing:

For a particular assertion, control risk is the risk that:

Which of these is one of the three components of audit risk?

Inherent risk is defined in terms of:

Flowcharts should depict all of the following except:

The true statement is:

The control environment means management's overall attitude, awareness and actions regarding internal control and its importance in the entity. Identify and describe four factors that constitute part of the control environment.

1. Identify and define the components of the quantified audit risk model. "2. Indicate which of these components is under the control of the auditor and indicate the relationship of this component to the other components of audit risk. "

1.Explain what an internal control questionnaire is and why it is used. 2.List three advantages of using questionnaires.

For a given assertion, the relationship between the level of detection risk (DR) and assessed control risk (CR) and inherent risk (IR) is shown correctly in which of the following, where + means increase, - means decrease:

Control activities are detailed policies and procedures that management establishes to help ensure that its directives are carried out. List the four different categories of control activities and give an example of each.

If inherent risk and control risk are both assessed as low, detection risk will be:

Internal control can only provide reasonable assurance as there are inherent limitations within an entity's control structure. Identify and describe three of these limitations.

1. List the four procedures necessary to obtain an understanding of the entity's internal control. 2. Explain what a transaction walk-through review consists of.

The assessment of inherent risk requires consideration of matters that have a pervasive effect on the entity as a whole and matters that may affect only specific accounts. Which of the following is an example of a "pervasive effects" matter?