Question 1

Internal controls in large and medium sized entities can only provide an entity with reasonable assurance in achieving its financial reporting objectives. Which of the following is
Not an inherent limitation of internal control?
A) human error that results in a breakdown in internal control
B) collusion by two or more individuals to circumvent a control
C) a control within a software program being overridden or disabled
D) changing audit risk parameters

Accepted Answer

Changing audit risk parameters is not an inherent limitation of internal control. The other options provided are examples of inherent limitations, such as the potential for human error, collusion, and software control overrides.

Question 2

One of the elements of an entity's control environment is management's philosophy and
operating style.

Accepted Answer

Management's philosophy and operating style are important components of an entity's control environment. They influence the organization's values, behavior and attitudes towards risk, and can impact the effectiveness of internal controls. Therefore, it is essential for management to set a tone at the top that promotes ethical behavior and compliance with laws and regulations.

Question 3

Checklists and preformatted questionnaires are particularly helpful in industries that the
auditor may not personally be familiar with auditing.

Accepted Answer

Checklists and preformatted questionnaires provide a standardized and systematic approach to auditing in industries that may be unfamiliar to the auditor. They ensure that important audit steps and procedures are not missed and provide a level of consistency in the audit process.

Question 4

Control risk refers to the risk that the auditor's testing procedures will not be effective in
detecting a material misstatement.

Accepted Answer

Control risk refers to the risk that a company's internal controls will not prevent or detect a material misstatement in its financial statements.

Question 5

Narratives involve the auditor describing in words each step of the flow of transactions from
start to finish.

Accepted Answer

Narratives involve the auditor providing a written description of each step in the flow of transactions.

Question 6

In larger entities, there are often limitations surrounding the entity's ability to put effective
internal controls in place.

Accepted Answer

The answer of In larger entities, there are often limitations...

Question 7

An internal control exception is an observed condition that provides evidence that the control
being tested did not operate as intended.

Accepted Answer

An internal control exception is indeed an observed condition that shows that the control being tested did not operate as intended.

Question 8

Internal control is intended to provide reasonable assurance about the achievement of an
entity's objectives.

Accepted Answer

Internal control is designed to help an entity achieve its goals and objectives, so it does provide reasonable assurance about their achievement.

Question 9

The internal control objective of 'valued' refers to controls in place to ensure that transactions
are recorded in the correct accounting period.

Accepted Answer

The internal control objective of 'valued' refers to controls in place to ensure that transactions are recorded accurately and at the correct amounts. It does not specifically relate to the timing of recording transactions in the correct accounting period, which is a separate internal control objective of 'timely.'

Question 10

The purpose of an auditor's management letter is to inform the client of the auditor's
recommendations for improving its internal controls.

Accepted Answer

The purpose of an auditor's management letter is to provide recommendations for improving the client's internal controls and other areas where the auditor believes the client could benefit from improvements, such as financial reporting processes or information systems. The letter is typically issued at the end of an audit and is intended to assist management in addressing any weaknesses or inefficiencies identified during the audit process.

Question 11

The internal control objective of 'real' refers to controls in place to ensure that fictitious or
duplicate transactions are not included in the books and records of the organization.

Accepted Answer

The statement is true. The internal control objective of 'real' is to ensure that only legitimate transactions are recorded in the organization's books and records, and that fictitious or duplicate transactions are prevented from being included.

Question 12

Stanley Morgan has learned that it is important to be aware of the attitude and actions of management and those charged with governance concerning the entity's internal control and its
Importance in the entity. This best describes dealing with
A) a key control objective.
B) the control environment.
C) mitigation of audit risk.
D) financial statement assertions.

Accepted Answer

The concept of being aware of the attitude and actions of management and those charged with governance pertains to the control environment, which is one of the components of internal control. The control environment sets the tone for the organization and influences the effectiveness of the entity's other components of internal control.

Question 13

The concept that no one employee should be in a position both to perpetrate and hide errors
or fraud in the normal course of their duties is known as segregation of incompatible duties.

Accepted Answer

Segregation of incompatible duties is a fundamental principle of internal controls, which ensures that no single employee can perform multiple key duties that could result in fraud or errors going undetected or unreported.

Question 14

Audit risk is the risk that an entity's internal control system will not prevent or detect material
misstatements.

Accepted Answer

Audit risk is the risk that an auditor may issue an unqualified opinion on financial statements that contain a material misstatement, not specifically related to the entity's internal control system's ability to prevent or detect such misstatements.

Question 15

Thea Lisowski decided to list several questions for herself about factors that influence management's attitudes towards internal control so as to assure herself that she could have
More confidence in management's abilities and integrity. When she was finished, which control
Environment element did she tick off on her working papers?
A) management's philosophy and operating style
B) communication and enforcement of integrity and ethical values
C) commitment to competence
D) participation by those charged with governance

Accepted Answer

The control environment element that Thea Lisowski ticked off on her working papers is management's philosophy and operating style. This includes their attitudes towards internal control, which influence the effectiveness of the control environment. By asking questions about these factors, Thea is assessing the strength of management's commitment to internal control and their ability to effectively implement it.

Question 16

As part of her annual review Roma Lazor reviews her client's draft financial statements for proper disclosures and compliance to accounting standards. This best describes which control
Objective(s)?
A) posting
B) classification and understandability
C) valuation
D) timeliness

Accepted Answer

The review of financial statements for proper disclosures and compliance to accounting standards falls under the control objective of classification and understandability, which involves ensuring that information presented in the financial statements is properly classified and understandable for users of the statements. None of the other control objectives (posting, valuation, timeliness) are directly related to this task.

Question 17

The inherent limitations of internal control include the possibility of collusion by two or more
individuals to circumvent a control.

Accepted Answer

Collusion among individuals can undermine the effectiveness of internal controls. Therefore, this statement is true.

Question 18

Internal control weaknesses decrease the risk of material misstatements being undetected
by management's processes and controls.

Accepted Answer

Internal control weaknesses increase the risk of material misstatements being undetected by management's processes and controls.

Question 19

A partner and his team performed an audit and issued an unqualified audit report. A year later his firm was sued when a shareholder found out the financial statements were misstated.
This situation best describes:
A) poor internal controls.
B) human error.
C) unethical behaviour.
D) audit risk.

Accepted Answer

This situation best describes audit risk, which is the risk that an auditor may issue an unqualified audit report despite material misstatements in the financial statements. Despite the auditor's best efforts, there is always a risk that they may miss significant errors or incorrect information in the financial statements, leading to potential lawsuits or other legal action. This highlights the importance of thorough and effective audit procedures, as well as ensuring that clients maintain accurate and transparent financial records.

Question 20

Significant professional judgment is never required to decide whether an identified internal
control weakness is significant enough to warrant communicating to management.

Accepted Answer

Significant professional judgment is often required to determine whether an identified internal control weakness is significant enough to communicate to management. Factors such as likelihood and potential impact of the weakness need to be considered.

Quiz 7: Gaining an Understanding of the Clients System of Internal Controls

Internal controls in large and medium sized entities can only provide an entity with reasonable assurance in achieving its financial reporting objectives. Which of the following is Not an inherent limitation of internal control?

One of the elements of an entity's control environment is management's philosophy and operating style.

Checklists and preformatted questionnaires are particularly helpful in industries that the auditor may not personally be familiar with auditing.

Control risk refers to the risk that the auditor's testing procedures will not be effective in detecting a material misstatement.

Narratives involve the auditor describing in words each step of the flow of transactions from start to finish.

In larger entities, there are often limitations surrounding the entity's ability to put effective internal controls in place.

An internal control exception is an observed condition that provides evidence that the control being tested did not operate as intended.

Internal control is intended to provide reasonable assurance about the achievement of an entity's objectives.

The internal control objective of 'valued' refers to controls in place to ensure that transactions are recorded in the correct accounting period.

The purpose of an auditor's management letter is to inform the client of the auditor's recommendations for improving its internal controls.

The internal control objective of 'real' refers to controls in place to ensure that fictitious or duplicate transactions are not included in the books and records of the organization.

Stanley Morgan has learned that it is important to be aware of the attitude and actions of management and those charged with governance concerning the entity's internal control and its Importance in the entity. This best describes dealing with

The concept that no one employee should be in a position both to perpetrate and hide errors or fraud in the normal course of their duties is known as segregation of incompatible duties.

Audit risk is the risk that an entity's internal control system will not prevent or detect material misstatements.

As part of her annual review Roma Lazor reviews her client's draft financial statements for proper disclosures and compliance to accounting standards. This best describes which control Objective(s) ?

The inherent limitations of internal control include the possibility of collusion by two or more individuals to circumvent a control.

Internal control weaknesses decrease the risk of material misstatements being undetected by management's processes and controls.

A partner and his team performed an audit and issued an unqualified audit report. A year later his firm was sued when a shareholder found out the financial statements were misstated. This situation best describes:

Significant professional judgment is never required to decide whether an identified internal control weakness is significant enough to warrant communicating to management.