Question 1

When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to:
A)assess the risk of material misstatement and plan the audit.
B)provide suggestions for improvement to the client.
C)serve as a basis for setting audit risk and materiality.
D)comply with the Corporations Act 2001.

Accepted Answer

Obtaining an understanding of internal controls is primarily done to assess the risk of material misstatement and plan the audit, as it helps the auditor to identify areas of the financial statements that may have a higher risk of material misstatement and to design audit procedures accordingly. Providing suggestions for improvement to the client and setting audit risk and materiality are secondary objectives of obtaining an understanding of internal controls. Compliance with the Corporations Act 2001 is important, but it is not the primary purpose of obtaining an understanding of internal controls.

Question 2

An auditor assesses the level of control risk to:
A)determine whether the entity is a going concern.
B)determine the extent of substantive tests to be performed.
C)ascertain whether irregularities are probable.
D)ascertain whether any employees have incompatible duties.

Accepted Answer

The level of control risk assessment is used by auditors to determine the extent of substantive tests that need to be performed. The lower the level of control risk, the higher the reliance an auditor can place on the entity's internal controls, and the lower the extent of substantive tests required. Therefore, the auditor uses the level of control risk to determine the scope of substantive tests to be performed. Choices A, C, and D are not related to the auditor's assessment of the level of control risk.

Question 3

Which of the following statements about internal control is correct?
A)The establishment and maintenance of internal control is an important responsibility of the internal auditor.
B)Properly maintained internal control reasonably ensures that collusion among employees cannot occur.
C)The cost-benefit relationship is a primary criterion that should be considered in designing internal control.
D)Exceptionally strong internal control is enough for the auditor to eliminate substantive tests on a significant account balance.

Accepted Answer

The cost-benefit relationship is a fundamental principle in designing internal control systems. It emphasizes that the benefits of any control should outweigh its costs. This principle ensures that resources are used efficiently and that controls are both effective and economical.

Question 4

An effective internal control for the payroll function would generally include which of the following?
A)Total time recorded on time-clock cards should be reconciled to job reports by employees responsible for those specific jobs.
B)Payroll department employees should be supervised by the management of the personnel department.
C)Payroll department employees should be responsible for maintaining employee personnel records.
D)Total time spent on jobs should be compared with total time indicated on time-clock cards.

Accepted Answer

An effective internal control in the payroll function involves ensuring that the total time employees report spending on jobs matches the total time recorded on their time-clock cards. This comparison helps in verifying the accuracy of payroll calculations and prevents time theft or inaccurate payroll reporting.

Question 5

Assessing control risk at less than high involves all of the following except:
A)identifying specific controls to rely on.
B)concluding that controls are ineffective.
C)performing tests of controls.
D)analysing the achieved level of control risk after performing tests of controls.

Accepted Answer

Assessing control risk at less than high involves identifying specific controls to rely on, performing tests of controls, and analyzing the achieved level of control risk after performing tests of controls. Concluding that controls are ineffective would result in a high level of control risk, which is not less than high. Therefore, option B is the correct answer as it is not a step in assessing control risk at less than high.

Question 6

In assessing control risk, the auditor is basically concerned that the system provides reasonable assurance that:
A)controls have not been circumvented by collusion.
B)misstatements have been prevented or detected.
C)operational efficiency has been achieved in accordance with management plans.
D)management cannot override the system.

Accepted Answer

When assessing control risk, the auditor is concerned with the effectiveness of the system's internal control in preventing, detecting, and correcting material misstatements in the financial statements. The other options, such as collusion, operational efficiency, and management override, may also be risks that need to be evaluated, but they are not the primary focus of control risk assessment.

Question 7

A company policy should clearly indicate that defective merchandise returned by customers is to be delivered to the:
A)sales clerk.
B)receiving clerk.
C)inventory control clerk.
D)accounts receivable clerk.

Accepted Answer

Defective merchandise should be delivered to the receiving clerk, who is responsible for inspecting and documenting the condition of returned items. The inventory control clerk is responsible for managing the overall inventory, while the sales clerk and accounts receivable clerk are not directly involved in the process of handling returned items.

Question 8

The conclusion reached as a result of assessing control risk is referred to as the:
A)assurance provided by internal control.
B)determined level of acceptable detection risk.
C)product of the understanding of internal control.
D)assessed level of control risk.

Accepted Answer

The conclusion reached as a result of assessing control risk is referred to as the assessed level of control risk. This is the level of risk that auditors determine that the client's internal controls may not prevent or detect material misstatements in the financial statements.

Question 9

Which of the following statements is one of the overriding principles of internal control?
A)Responsibility for accounting and financial duties should be assigned to one responsible officer.
B)Responsibility for the performance of each duty must be fixed.
C)Responsibility for the accounting duties must be borne by the audit committee of the company.
D)All of the options listed here are correct

Accepted Answer

Responsibility for the performance of each duty must be fixed is one of the overriding principles of internal control. This means that each employee should be assigned specific tasks and responsibilities, and they should be held accountable for the proper completion of those tasks. This helps to prevent errors, fraud, and other types of financial misconduct. While it is also important to assign accounting and financial duties to a responsible officer, and to ensure that the audit committee oversees these functions, these are not overarching principles of internal control. Therefore, option D is incorrect.

Question 10

Virginia Samuels, the purchasing officer of Handyman Wholesalers Pty Ltd (Handyman), has a relative who owns a retail hardware store.Virginia arranged for hardware to be delivered by manufacturers to the retail store on a COD basis, thereby enabling her relative to buy at 'wholesale prices in Handyman's name.Virginia was probably able to accomplish this because of Handyman's poor internal control for:
A)sales returns.
B)cash receipts.
C)perpetual inventory records.
D)purchase orders.

Accepted Answer

Virginia was able to accomplish this by exploiting weaknesses in Handyman's internal control over purchase orders. By arranging for hardware to be delivered directly to her relative's store on a COD basis, she bypassed the controls that would normally ensure purchases are for the company's benefit, not for personal gain.

Question 11

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:
A)external policies established by parties outside the entity affect its accounting practices.
B)management is dominated by one individual.
C)internal auditors have direct access to the board of directors and the entity's management.
D)the audit committee is active in overseeing the entity's financial reporting policies.

Accepted Answer

Management dominated by one individual can significantly influence an entity's control environment, especially in terms of aggressive financial reporting and emphasis on meeting profit goals, due to the concentration of decision-making power and potential lack of checks and balances.

Question 12

Obtaining an understanding of the internal control and assessing control risk:
A)may be performed concurrently in an audit.
B)needs to be documented only if the assessed level of control risk is less than high.
C)is possible but not necessary in performing an audit.
D)are necessarily sequential audit steps.

Accepted Answer

Obtaining an understanding of internal control and assessing control risk are often performed at the same time in an audit. This allows auditors to determine the level of control risk and adjust their audit procedures accordingly. While it is possible to perform an audit without assessing control risk or understanding internal control, this would not be a thorough or effective audit. The documentation of these steps is required regardless of the final assessed level of control risk. Therefore, Option A is the correct choice.

Question 13

The control environment component of internal controls includes all of the following except:
A)management's operating style.
B)access to computer programs.
C)organisational structure.
D)human resource policies and practices.

Accepted Answer

Access to computer programs falls under the information and communication component of internal controls, not the control environment component. The control environment component includes management's operating style, organisational structure, and human resource policies and practices.

Question 14

Which of the following would be least likely to suggest to an auditor that the client's management may have overridden the internal control?
A)Differences are always disclosed on a computer exception report.
B)Management does not correct internal control deficiencies that it knows about.
C)There have been two new financial controllers this year.
D)There are numerous delays in preparing timely internal financial reports.

Accepted Answer

Differences always being disclosed on a computer exception report suggests that the system is identifying and reporting discrepancies as expected, which is a sign of functioning internal controls rather than an indication of management overriding those controls.

Question 15

An auditor reviews a client's payroll procedures.The auditor would consider the internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:
A)reviewing and approving time reports for subordinate employees.
B)distributing payroll cheques to employees.
C)hiring subordinate employees.
D)initiating requests for salary adjustments for subordinate employees.

Accepted Answer

Distributing payroll cheques to employees by a payroll department supervisor could compromise the segregation of duties principle. This task should ideally be separated from the payroll preparation and authorization functions to prevent potential fraud or errors.

Question 16

How does the extent of substantive tests required to constitute sufficient appropriate audit evidence vary with the auditor's assessment of control risk?
A)Randomly.
B)Disproportionately.
C)Directly.
D)Inversely.

Accepted Answer

The answer of How does the extent of substantive tests...

Question 17

A primary purpose of internal controls is to:
A)form a basis for evaluating employees.
B)monitor production quality.
C)avoid clerical errors.
D)meet objectives of maintaining sound documents and records and accurate financial reporting.

Accepted Answer

The primary purpose of internal controls is to meet objectives of maintaining sound documents and records and accurate financial reporting. Internal controls are designed to ensure the reliability of financial reporting, compliance with laws and regulations, and the effective and efficient use of resources. While internal controls may help evaluate employee performance and avoid clerical errors, these are not their primary purpose.

Question 18

Of the following statements about an internal control, which one is not valid?
A)No one person should be responsible for the custodial responsibility and the recording responsibility for an asset.
B)Transactions must be properly authorised before such transactions are processed.
C)Because of the cost-benefit relationship, a client may apply control procedures on a test basis.
D)Control procedures reasonably ensure that collusion among employees cannot occur.

Accepted Answer

Control procedures cannot completely prevent collusion among employees, but they can mitigate the risk of it occurring. Therefore, the statement that control procedures reasonably ensure that collusion among employees cannot occur is not valid.

Question 19

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the:
A)factors that raise doubts about the auditability of the financial report.
B)operating effectiveness of internal control policies and procedures.
C)risk that material misstatements exist in the financial report.
D)possibility that the nature and extent of substantive tests may be reduced.

Accepted Answer

The ultimate purpose of assessing control risk is to evaluate the risk that material misstatements exist in the financial report. This evaluation helps the auditor to determine the nature, timing, and extent of substantive tests to be performed. The assessment of control risk also considers the effectiveness of internal control policies and procedures in preventing or detecting material misstatements. Factors that raise doubts about the auditability of the financial report may also be considered, but the primary focus is on evaluating the risk of material misstatements.

Question 20

Assessing control risk at less than high would most likely involve:
A)changing the timing of substantive tests by omitting interim testing and performing the tests at year-end.
B)identifying specific internal controls relevant to specific assertions.
C)performing more extensive substantive tests with larger sample sizes than originally planned.
D)reducing inherent risk for most of the assertions relevant to significant account balances.

Accepted Answer

Assessing control risk at less than high would involve identifying specific internal controls relevant to specific assertions, such as performing tests of controls to determine the effectiveness of those controls in preventing or detecting material misstatements. This would allow the auditor to rely on those controls and reduce substantive testing, resulting in a more efficient audit. Changing the timing of substantive tests (A) by omitting interim testing and performing the tests at year-end would not necessarily reduce control risk. Performing more extensive substantive tests (C) would not affect control risk, but rather inherent risk. Reducing inherent risk (D) would not necessarily result in reduced control risk.

Quiz 7: Understanding and Assessing Internal Control

When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to:

An auditor assesses the level of control risk to:

Which of the following statements about internal control is correct?

An effective internal control for the payroll function would generally include which of the following?

Assessing control risk at less than high involves all of the following except:

In assessing control risk, the auditor is basically concerned that the system provides reasonable assurance that:

A company policy should clearly indicate that defective merchandise returned by customers is to be delivered to the:

The conclusion reached as a result of assessing control risk is referred to as the:

Which of the following statements is one of the overriding principles of internal control?

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:

Obtaining an understanding of the internal control and assessing control risk:

The control environment component of internal controls includes all of the following except:

Which of the following would be least likely to suggest to an auditor that the client's management may have overridden the internal control?

An auditor reviews a client's payroll procedures.The auditor would consider the internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:

How does the extent of substantive tests required to constitute sufficient appropriate audit evidence vary with the auditor's assessment of control risk?

A primary purpose of internal controls is to:

Of the following statements about an internal control, which one is not valid?

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the:

Assessing control risk at less than high would most likely involve: