Question 1

A significant internal control deficiency is always considered a material weakness.

Accepted Answer

A significant internal control deficiency may or may not be considered a material weakness, depending on factors such as the likelihood of financial statement misstatements and the significance of the deficiency to the overall system of internal control. Material weaknesses are those deficiencies that are reasonably likely to result in a material misstatement in the financial statements.

Question 2

When a client uses a service center for processing transactions,

Accepted Answer

Auditing standards necessitate that the auditor assesses and, if deemed necessary, tests the controls of a service center if it processes significant financial data for the client. This is because the service center's controls are integral to the client's financial reporting reliability.

Question 3

Which of the following is true regarding the relationship between tests of controls and procedures to obtain an understanding?

Accepted Answer

The answer of Which of the following is true regarding...

Question 4

If the results of tests of controls support the design and operations of controls as expected, the auditor uses ________ control risk as the preliminary assessment.

Accepted Answer

The answer of If the results of tests of controls...

Question 5

An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls. Which of the following would generally not be used?

Accepted Answer

Inspecting design documents may be useful in understanding the design of internal controls but it does not directly support the operating effectiveness of internal controls. The other three procedures (making inquiries, examining documents, and reperforming client procedures) are commonly used to evaluate the operating effectiveness of internal controls.

Question 6

In some cases, management can correct deficiencies and material weaknesses before the auditor does significant testing, which may permit a reduction in control risk.

Accepted Answer

If management takes corrective measures to address deficiencies and material weaknesses, it can improve the effectiveness of internal controls and reduce the risk of misstatements in the financial statements. This can enable the auditor to reduce control risk and perform less extensive testing. However, the auditor must still obtain sufficient audit evidence to support their opinion on the financial statements.

Question 7

In a small business, the daily involvement of the owner in the business is not sufficient to overcome significant deficiencies or material weaknesses in internal controls.

Accepted Answer

The answer of In a small business, the daily involvement...

Question 8

The text suggested a five-step approach to identify deficiencies, significant deficiencies, and material weaknesses. Describe this approach.

Accepted Answer

The answer of The text suggested a five-step approach to...

Question 9

You are the audit manager for a new audit client. Your staff auditors are unsure of what constitutes a control deficiency. Discuss the terms control deficiency, design deficiency, and operating deficiency.

Accepted Answer

The answer of You are the audit manager for a...

Question 10

If the likelihood that a material misstatement would be prevented, detected, or corrected by the controls in place, then the control risk is low in the revenue transaction cycle.

Accepted Answer

If controls in place are effective in preventing, detecting, or correcting material misstatements, then the control risk is low.

Question 11

In order for the auditor to determine whether a significant internal control deficiency is a material weakness, the deficiency should be evaluation along one of the following two dimensions: likelihood or significance.

Accepted Answer

The deficiency should be evaluated along both dimensions: likelihood and significance, not just one.

Question 12

If there is more than a reasonable possibility that a material misstatement could result from a significant deficiency found during the audit, then that deficiency is considered a material weakness in internal control.

Accepted Answer

According to Auditing Standard No. 220, a significant deficiency in internal control is considered to be a material weakness if there is a reasonable possibility that a material misstatement could occur and not be prevented or detected in a timely manner. Therefore, if there is more than a reasonable possibility that a material misstatement could result from a significant deficiency, it is considered a material weakness in internal control.

Question 13

An auditor traces the sales prices to the authorized price list in effect at the date of the transaction. Which of the following procedures has the auditor performed?

Accepted Answer

Reperformance involves the auditor independently executing procedures or controls that were originally performed as part of the entity's internal control. By tracing the sales prices back to the authorized price list, the auditor is reperforming the process of verifying that the sales transactions were executed at the correct prices.

Question 14

Tests of controls

Accepted Answer

Tests of controls are specifically performed to test the effectiveness of controls in a company's internal control system to support a reduced assessed control risk. They are not used to support ending balances in accounts, performed at the end of the audit, or designed to specifically detect fraud.

Question 15

Which of the following is an accurate statement relating to the extent of procedures?

Accepted Answer

The extent of testing procedures indeed depends on the frequency of the operation of the controls. More frequently operated controls may require more extensive testing to ensure their effectiveness over the period under audit.

Question 16

When testing manual or automated controls,

Accepted Answer

The extent of testing for controls should not depend on whether it is a manual or automated control. Instead, it should be based on the auditor's assessment of the risks associated with the control and the effectiveness of the control in addressing those risks. Both manual and automated controls can be subject to error or manipulation, and both may require larger sample sizes for testing if there are effective general and application controls in place. It is important for the auditor to assess the risks associated with each control and tailor their testing approach accordingly.

Question 17

A design deficiency exists if the person performing the control is not qualified.

Accepted Answer

The answer of A design deficiency exists if the person...

Question 18

An auditor traces the cost of sales entry for a sample of product sales to the inventory unit costs in effect at the date of each transaction. Which of the following procedures has the auditor performed?

Accepted Answer

The auditor has performed the reperformance procedure by tracing the cost of sales entry to the inventory unit costs.

Question 19

Which of the following represents a correct statement regarding internal control testing?

Accepted Answer

Auditors use control risk assessment and results of tests of controls to determine planned detection risk and the related substantive tests for the financial statement audit. Option A is incorrect because auditing standards require auditors to test the controls' effectiveness every year, not every other year. Option B is incorrect because the greater the risk, the more audit evidence the auditor should obtain that controls are operating effectively. Option D is incorrect because testing of internal controls can be performed throughout the year, not just at the end of the fiscal year.

Question 20

Key controls are not sufficient to achieve the transaction-related audit objectives.

Accepted Answer

Key controls are designed to ensure that transaction-related audit objectives are met by preventing or detecting errors and fraud in financial reporting.

Quiz 12: Assessing Control Risk and Reporting on Internal Controls