Audit EXAM

Question 1

What are the three main types of audit risks?

Answer 1

1. Inherent Risk – The risk of material misstatement due to the nature of the business or industry.
2. Control Risk – The risk that internal controls fail to prevent or detect material misstatements.
3. Detection Risk – The risk that auditors fail to detect a material misstatement in the financial statements.

Question 2

What are tests of controls, and why are they important?

Answer 2

• Tests of controls evaluate whether an entity’s internal controls are effective in preventing or detecting errors and fraud.
• They help auditors assess control risk and determine the extent of substantive testing needed.

Question 3

What are examples of tests of controls auditors perform?

Answer 3

• Observation – Watching how employees perform control procedures.
• Inspection – Checking documents for proper authorisation.
• Reperformance – Repeating a process to check for accuracy.
• Inquiry – Asking staff about procedures and controls.
• Data Analytics – Reviewing transaction trends for anomalies.

Question 4

What are the different types of modified audit opinions?

Answer 4

1. Qualified Opinion – Financial statements are fairly presented, except for a specific issue.
2. Adverse Opinion – Financial statements do not fairly present financial position due to significant misstatements.
3. Disclaimer of Opinion – The auditor cannot form an opinion due to lack of sufficient audit evidence.

Question 5

What is internal control?

Answer 5

Internal control is a process designed to ensure reliability of financial reporting, effectiveness of operations, and compliance with laws and regulations.

Question 6

What are the five components of internal control? CRIME

Answer 6

1. Control Environment – The organisation’s attitude toward controls and risk management.
2. Risk Assessment – Identifying and analysing risks to achieving business objectives.
3. Control Activities – Specific policies and procedures to address risks.
4. Information & Communication – Ensuring relevant information is shared for decision-making.
5. Monitoring – Ongoing review and evaluation of internal controls.

Question 7

How does internal audit differ from external audit?

Answer 7

1. Internal Audit: Focuses on risk management, process improvement, and ensuring compliance within the organisation.
2. External Audit: Conducted by independent auditors to verify the accuracy and fair presentation of financial statements.