AUD 3 Flashcards
To obtain evidential matter about control risk, an auditor ordinarily selects tests from a variety of techniques, including A. Analysis. B. Confirmation. C. Reperformance. D. Comparison.
C. Reperformance.
Explanation - Procedures performed to evaluate control risk include inquiries of personnel; inspection of documents and records; observation of activities and operations; and reperformance of the control procedure.
An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believes
A. Sufficient evidential matter to support the assertions is likely to be available.
B. Evaluating the effectiveness of policies and procedures is inefficient.
C. More emphasis on tests of controls than substantive tests is warranted.
D. Considering the relationship of assertions to specific account balances is more efficient.
B. Evaluating the effectiveness of policies and procedures is inefficient.
Explanation - Control risk may be assessed at the maximum level for certain assertions because the auditor believes that evaluating the effectiveness of the controls would be inefficient.
The auditor considers whether evidence is likely to be available and whether gathering that evidence would be efficient.
The cost of gathering the additional evidence must be less than the benefit derived from being able to reduce substantive tests as a result.
Assessing control risk at below the maximum level most likely would involve
A. Performing more extensive substantive tests with larger sample sizes than originally planned.
B. Reducing inherent risk for most of the assertions relevant to significant account balances.
C. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year end.
D. Identifying specific internal control structure policies and procedures relevant to specific assertions.
D. Identifying specific internal control structure policies and procedures relevant to specific assertions.
Explanation - In order to assess control risk below maximum the auditor must collect evidence to support the reduction. Collecting such evidence involves identifying specific internal controls relevant to specific assertions and then performing tests of controls to evaluate the effectiveness of the controls.
Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control structure? A. Incompatible duties. B. Management override. C. Mistakes in judgment. D. Collusion among employees.
A. Incompatible duties.
Explanation - A system of internal control can provide only reasonable assurance of achieving an entity’s control objectives because of inherent limitations. These include the fallibility of human judgment and performance and the possibility of collusion or management override. The answer which is NOT an inherent limitation is A, “incompatible duties.”
As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because
A. Control risk based on the auditor’s sample is less than the true operating effectiveness of the client’s control activity.
B. The auditor believes that the control activity relates to the client’s assertions when, in fact, it does not.
C. The auditor believes that the control activity will reduce the extent of substantive testing when, in fact, it will not.
D. Control risk based on the auditor’s sample is greater than the true operating effectiveness of the client’s control activity.
D. Control risk based on the auditor’s sample is greater than the true operating effectiveness of the client’s control activity.
Explanation - When the auditor assesses control risk too high, it means that the auditor’s sample indicates that the control is NOT working properly when it really is. Thus, control risk based on the auditor’s sample is higher than the true operating effectiveness of the control would warrant.
When is control risk assessed at the maximum level
(1) controls do not pertain to an assertion,
(2) controls that pertain are unlikely to be effective, or
(3) evaluating the effectiveness of relevant controls would be inefficient.
An auditor uses the assessed level of control risk to:
A. Evaluate the effectiveness of the entity’s internal control policies and procedures.
B. Identify transactions and account balances where inherent risk is at the maximum.
C. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.
D. Determine the acceptable level of detection risk for financial statement assertions.
D. Determine the acceptable level of detection risk for financial statement assertions.
Explanation - The auditor assesses control risk (the risk that the internal control structure will not prevent or detect a material misstatement) and inherent risk (the risk of a material misstatement occurring) in order to determine the acceptable level of detection risk.
Assertions Relating to Classes of Transactions - Occurrence
Transactions recognized in the financial statements have occurred and relate to the entity.
Ex/ Salaries & wages expense has been incurred during the period in respect of the personnel employed by the entity. Salaries and wages expense does not include the payroll cost of any unauthorized personnel.
Assertions Relating to Classes of Transactions - Completeness
All transactions that were supposed to be recorded have been recognized in the financial statements.
Ex/ Salaries and wages cost in respect of all personnel have been fully accounted for.
Assertions Relating to Classes of Transactions - Accuracy
Transactions have been recorded accurately at their appropriate amounts.
Ex/ Salaries and wages cost has been calculated accurately. Any adjustments such as tax deduction at source have been correctly reconciled and accounted for.
Assertions Relating to Classes of Transactions - Cut-off
Transactions have been recognized in the correct accounting periods.
Ex/ Salaries and wages cost recognized during the period relates to the current accounting period. Any accrued and prepaid expenses have been accounted for correctly in the financial statements.
Assertions Relating to Classes of Transactions -Classification
Transactions have been classified and presented fairly in the financial statements.
Ex/ Salaries and wages cost has been fairly allocated between:
-Operating expenses incurred in production activities;
-General and administrative expenses; and
-Cost of personnel relating to any self-constructed assets other than inventory.
Assertions Relating to Assets, Liabilities and Equity Balances at the Period End - Existence
Assets, liabilities and equity balances exist at the period end.
Ex/ Inventory recognized in the balance sheet exists at the period end.
Assertions Relating to Assets, Liabilities and Equity Balances at the Period End - Completeness
All assets, liabilities and equity balances that were supposed to be recorded have been recognized in the financial statements.
Ex/ All inventory units that should have been recorded have been recognized in the financial statements. Any inventory held by a third party on behalf of the audit entity has been included in the inventory balance.
Assertions Relating to Assets, Liabilities and Equity Balances at the Period End - Rights & Obligations
Entity has the right to ownership or use of the recognized assets, and the liabilities recognized in the financial statements represent the obligations of the entity.
Ex/ Audit entity owns or controls the inventory recognized in the financial statements. Any inventory held by the audit entity on account of another entity has not been recognized as part of inventory of the audit entity.
