AUD 2018

Question 1

When can the audit program be finalized? What consideration has to be given?

Answer 1

Consideration of the Entity’s Internal Control Structure must be completed, before the audit program can be finalized.

Question 2

What is the primary objective of assessing control risk?

Answer 2

To determine the risk that material misstatements exists in the Financial Statements.

Question 3

If Control Risk is high, what happens to the Financial Statements?

Answer 3

The Financial Statements are more likely to be misstated.

Question 4

What kind of relationship is there between the risk of material misstatement and detection risk?

Answer 4

Inverse Relationship

Question 5

How does Inherent Risk and Control Risk differ from Detection Risk?

Answer 5

Inherent Risk and Control Risk exists independently of the FS Audit.

Question 6

Define Inherent Risk.

Answer 6

Inherent Risk is the risk of misstatement due to factors other than a failure of relevant controls.

Question 7

Define Control Risk.

Answer 7

Control Risk is the risk that Internal Control will not prevent or detect a misstatement.

Question 8

If Control Risk is assessed below the maximum level, what does an auditor do?

Answer 8

They tend to rely on internal control and reduce the amount of substantive testing.

Question 9

Why does an auditor assess Control Risk?

Answer 9

It affects the level of detection risk that the auditor may accept.

Question 10

As the acceptable level of detection risk decreases, what happens to substantive tests?

Answer 10

The assurance directly provided from substantive tests should increase.

Question 11

The distribution of the report on Internal Control in conjunction with an audit report is restricted to who? (3)

Answer 11

• Management
• Audit Committee
• Board of Directors

Question 12

A signed check is equivalent to what? What steps must this person take? (3)

Answer 12

A signed check is equivalent to cash and the last person to handle it should execute the final signature, seal the check in an envelope and immediately arrange the mailing.

Question 13

If Control Risk is assessed at a low level what does this imply?

Answer 13

The auditor intends to rely on the client’s Internal Controls and in order to rely on the controls the auditor must rest the controls.

Question 14

A Report on Internal Controls includes: (6)

Answer 14

• Acknowledgement of management’s responsibility for Internal Control
• Description of what aspects of the system of Internal Control were examined
• The criteria used for performing the evaluation
• Management’s assertion regarding the effectiveness of Internal Control
• Description of any material weakness
• Date of the assertion

Question 15

Who should be responsible for negotiating terms with vendors?

Answer 15

The Purchasing Manager

Question 16

How often should an auditor communicate a control deficiency?

Answer 16

A control deficiency that is either a significant deficiency or a material weakness should be re-communicated every year with the client’s governance until the deficiency is corrected.

Question 17

Accounts Payable Clerk Responsibilities: (5)

Answer 17

• Verifying the attachments on the vendor invoice
• comparing the vendor invoice to the recruiting report and purchase order
• processing the payment of the invoice
• sending the check elsewhere for Signature and Mailing
• filing all of the supporting documentation after payment

Question 18

The authority to accept incoming goods in receiving should be based on? (which document)

Answer 18

An approved purchase order

Question 19

Internal Control Components

Answer 19

• Control Environment
• Risk Assessment
• Control Activities
• Information/Communication
• Monitoring

Question 20

Why should an auditor obtain an understanding of control activities in an audit?

Answer 20

Control activities can be utilized to determine areas that need attention

Question 21

Who should control the mailing of disbursement checks and remittance advice’s?

Answer 21

The employee who signs the checks last.

Question 22

In obtaining an understanding of an entity’s Internal control, an auditor is required to obtain knowledge about the:

Answer 22

• Design of policies and procedures

- NOT, the operating effectiveness of policies and procedures

Question 23

Application Controls (3)

Answer 23

• Input Controls
• Processing Controls
• Output Controls

Question 24

General Controls

Answer 24

• Program Change Controls

- Apply to all systems computers, processes, and data for an organization or IT environment

Question 25

To assess control risk at a low level what is needed? (Application vs. General Controls)

Answer 25

-There is an effective functioning of application controls, thus the auditor would initially focus on general controls

Question 26

Which department completes the write off of un-collectible accounts

Answer 26

The treasurer’s department; the proper authorization of write offs of un-collectible accounts would be an example of asset accountability and authorization

Question 27

Do Ineffective controls cause misstatements?

Answer 27

Ineffective controls by themselves do not cause misstatements; however, they can permit application controls to operate improperly and allow misstatements to occur.

Question 28

Objectives of Internal Control (COR)

Answer 28

• Compliance with laws and regulations
• Effective and Efficient Operations
• Accurate and Reliable Financial Reporting

Question 29

What does the concept of Reasonable Assurance recognize?

Answer 29

The cost of an entity’s internal control should not exceed the benefits derived.

Question 30

7 Factors of Control Environment (I-C-HAM-BO(NE)

Answer 30

• Integrity
• Commitment to Competence
• Human resource policies and practices
• Assignment of authority and responsibility
• Management’s philosophy and operating style
• BoD or Audit Committee
• Organization

Question 31

Who is the appropriate recipient of communication regarding internal control related matters?

Answer 31

The audit committee

Question 32

What is Design Deficiency?

Answer 32

It exists if a necessary control is missing or not properly formulated.