Audit EXAM 3

Question 1

what are the 8 audit risks?

Answer 1

1. Inherent
2. Control
3. Detection
4. Fraud
5. Revenue Recognition
6. Management override
7. Going concern
8. Related party transaction

Question 2

Define Internal control

Answer 2

Internal control means the rules and steps a company uses to make sure its financial reports are accurate, it follows the law, and it runs smoothly. These controls help stop fraud, catch mistakes, and protect the company’s assets.

Question 3

5 components of internal control:

Answer 3

Control Environment – The foundation of internal control, shaped by company values, ethics, governance, and management’s attitude toward controls.

Risk Assessment – Identifying and analyzing internal and external risks that could affect reporting, compliance, or operations, and prioritizing them.

Control Activities – Policies and procedures like segregation of duties, approvals, reconciliations, and physical safeguards to manage risks.

Information and Communication – Sharing relevant information clearly and efficiently within the company and with external parties, including reports and policies.

Monitoring Activities – Ongoing checks like audits, reviews, and whistleblowing to ensure controls work and weaknesses are addressed.

Question 4

Define Internal Audit

Answer 4

• independent function within an organization that evaluates and improves the effectiveness of risk management
• internal controls
• governance processes
• assess broader business processes
• operational efficiency
• regulatory compliance

Question 5

Key functions of internal audit:

Answer 5

• Assessing the effectiveness of internal controls.
• Identifying weaknesses and recommending improvements.
• Ensuring compliance with laws, regulations, and company policies.
• Evaluating operational efficiency and identifying areas for cost savings.
• Investigating fraud risks and unethical behavior.

Question 6

Define various forms of modified opinions in audit

Answer 6

• correct and there are no major problems = clean (unmodified) opinion.
• problems = modified opinion to show something is wrong.

Question 7

Types of Modified Audit Opinions

Answer 7

1. Qualified Opinion – The financial statements are mostly correct, but there is either:

–> A material misstatement that does not pervasively affect the financial statements, or

–> A limitation in audit scope that is material but not pervasive.

–> The auditor uses wording such as “except for” to highlight the issue.

2. Adverse Opinion – The financial statements contain material misstatements that are pervasive, making them unreliable.

–> This means the financial statements do not present a true and fair view.

–> This is a serious opinion that can damage a company’s credibility.

3. Disclaimer of Opinion – The auditor cannot obtain sufficient and appropriate audit evidence and is unable to express an opinion.

–> This occurs when there are significant limitations in audit scope, and the potential misstatements are pervasive.

–> A disclaimer means the auditor is unable to determine whether the financial statements are reliable.