Question 1

In the audit of a private company, the auditor will test internal controls when control risk is initially assessed at:

Accepted Answer

The answer of In the audit of a private company,...

Question 2

Control risk is generally set at minimum for most private companies.

Accepted Answer

Control risk is a risk that exists because a company's internal controls may not be sufficient to prevent or detect errors or fraud in a timely manner. While private companies may have less regulatory oversight than public companies, they still face financial and reputational risks if they do not have adequate control mechanisms in place. As a result, it is generally not advisable for private companies to set control risk at minimum levels.

Question 3

The scope of the auditor's report on internal control is limited to obtaining reasonable assurance that significant weaknesses in internal control are identified.

Accepted Answer

The answer of The scope of the auditor's report on...

Question 4

A company's size should have no impact on the nature of internal control and the controls that are implemented.

Accepted Answer

The size of a company can impact the nature of internal control and the controls that are implemented. Smaller companies may have less complex processes and require fewer controls, while larger companies with more complex processes may require more controls to ensure accuracy and consistency. Additionally, larger companies may have more resources to dedicate to internal control functions, while smaller companies may need to prioritize which controls to implement based on their budget and staffing limitations.

Question 5

The auditor's consideration of a private company's internal control is:

Accepted Answer

The consideration of a private company's internal control is required by generally accepted auditing standards (GAAS) to assess the risk of material misstatement in the financial statements. It is not required by GAAP, the IRS or recommended by the SEC.

Question 6

In an audit of a non-public company, the less control risk there is, the smaller the amount of planned substantive evidence that is required.

Accepted Answer

When there is less control risk, it means that the company's internal controls are effective and reliable. This allows the auditor to rely on those controls and perform fewer substantive procedures to gather evidence. Therefore, the planned substantive evidence required will be smaller.

Question 7

If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably reassess whether the client is auditable.

Accepted Answer

If the auditor identifies no control activities in a small client, it could indicate that the client lacks proper controls or that the controls are not appropriately documented. This could raise concerns about the reliability of the financial statements and may require the auditor to reassess whether the client is auditable.

Question 8

If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably set a high assessment of control risk.

Accepted Answer

If the auditor identified no control activities, there would be a lack of controls to rely on to mitigate risks, resulting in a higher level of control risk.

Question 9

A control available in a small company, which may be necessitated because of lack of competent personnel, is:

Accepted Answer

In a small company with a lack of competent personnel, the owner-manager's direct involvement in the control process can be an effective control measure. The owner-manager can oversee and monitor the activities of the few employees in the company, ensuring that they comply with company policies and procedures, and preventing errors and fraud. This can help to mitigate the risks associated with lack of competence, and can help the company to maintain proper controls without the need for a larger staff or more sophisticated control systems. Therefore, option D is the best choice.

Question 10

Which of the following may represent the biggest challenge smaller public companies face in implementing effective internal control?

Accepted Answer

Smaller public companies often face a challenge of limited resources when implementing effective internal control measures. Due to their size, they may not have the financial capability to invest in advanced systems or hire specialized personnel. This can make it difficult to establish and maintain strong internal controls, leaving the company vulnerable to fraud or errors. While options A, B, and D may also present challenges, limited resources are likely to be the most significant factor impacting smaller public companies.

Question 11

To issue an unqualified opinion on internal control over financial reporting, there must be no identified material weaknesses and no restrictions on the scope of the audit.

Accepted Answer

An unqualified opinion on internal control over financial reporting indicates that the auditor found no material weaknesses and was able to perform the audit without any restrictions on scope. If there are material weaknesses or scope limitations, the opinion would be qualified or adverse.

Question 12

Which of the following is most correct for audits of non-public companies?

Accepted Answer

An audit of internal control is not required for non-public companies, although auditors may still assess internal control risk as part of their financial statement audit. However, management of non-public companies may decide to have a separate internal control audit performed for their own purposes.

Question 13

The auditor of a private company is not required by auditing standards to issue a written report on significant deficiencies in internal control.

Accepted Answer

Auditing standards require auditors to communicate significant deficiencies in internal control in writing to management and those charged with governance.

Question 14

When auditing a private company, the auditor should obtain an understanding of internal control sufficient to:

Accepted Answer

When auditing a private company, obtaining an understanding of internal control is necessary to assess control risk. Control risk is the risk that the client's internal control will not prevent or detect material misstatements in the financial statements. While options A, C, and D are also considerations for understanding internal control, they are not the primary reason and are therefore not the best choice.

Question 15

Auditors of private companies may rely on prior periods' tests of controls.

Accepted Answer

Auditors of private companies are allowed to rely on prior periods' tests of controls if there have been no significant changes to the controls being tested in the current period. This is because the effectiveness of the controls is likely to remain the same unless there have been significant changes in the operating environment or business processes. However, auditors should still perform some level of testing in the current period to ensure that the controls are still operating effectively.

Question 16

Match between columns
                        Premises: Management's identification and analysis of risks relevant to the preparation of financial statements in accordance with an applicable accounting framework.
Segregation of the following activities in an organization: custody of assets, accounting, authorization, and operational responsibility.
A process designed to provide reasonable assurance regarding the achievement of management's objectives in the following categories: (1)reliability of financial reporting, (2)effectiveness and efficiency of operations, and (3)compliance with applicable laws and regulations.
Company-wide policies for the approval of all transactions within stated limits.
Policies and procedures that help ensure that necessary actions are taken to address risks in the achievement of the entity's objectives.
Management's ongoing and periodic assessment of the quality of internal control performance to determine that controls are operating as intended and are modified when needed.
The actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal control and its importance to the entity.

Accepted Answer

The Answer of Independent checks on performance and Control environment is...

Quiz 10: Internal Control, Control Risk, and Section 404 Audits