Week 4-1

Question 1

internal control objectives

Answer 1

• Improve effectiveness of management decision making
• Increase reliability of information
• Foster compliance with laws and regulations

Question 2

Levels of control activities

Answer 2

• Management controls (entity-level)
• Process controls (process-level)

Question 3

Control activities;
(are they preventive, detective or corrective?_

Answer 3

o Segregation of duties (preventive, detective)
o Physical controls (preventive)
o Performance reviews (detective, corrective)
o Processing controls (preventive, corrective)

Question 4

Type of controls test

Answer 4

Existence
- Inquiry of client personnel including a walkthrough of at least one type of each significant transaction. What checks and balances are in there for one transaction.
- Inspection of document and reports indicating performance of controls done during walkthrough

Effectiveness
- Re-performance by auditor of controls to a sample of transactions or balances

Question 5

Hypergeometric distribution

Answer 5

Is a probability distribution for sampling with replacement from a population with finite size

he population size and probability of no errors are independent if you use a hypergeometric distribution with low error
expected error rate, this means the audit firms kind of use this hypergeometric distribution to calculate sample sizes.

Question 6

Controls versus substantive tests

Answer 6

• Control testing: does a control work effectively?
  o Achieve: deviation rate does not exceed an acceptable level
• Substantive testing: evidence on audit objective (e.g. completeness, accuracy)
  o Achieve: allowance for sampling risk within materiality

Question 7

Reflections on a decade of SOX – audit production and alternatives – Kinney, Martin, Shepardsonr (2013)

Answer 7

Findings
- Audit of internal controls fundamentally different
- Understanding of risk factors that create pressure points on financial statements
- Greater appreciation for entity level controls
- Audit of internal controls fundamentally different
- Three sources of control audit evidence differ substantially in cost, expertise, and ability to identify IC weaknesses

Question 8

Sox vs. financial audit
- AR = f (IR, ICR, DR)
- SOX –> CAR = g(IR, CDRa, CDRb, CDRc)

Answer 8

o CDR  control risk that exist in the financial statement
o CDRb  Design efficiency
o CDRc  Operationally efficient
o IR  inherent risk
o DR is not in CAR because only test of controls, not account balances

Question 9

Do auditors increase audit fees in the presence of internal control deficiencies – Hogan and Wilkins (2008)

Answer 9

Results  yes, they are available and when they are available they are prices.
Once SOX induced public disclosure of internal control weaknesses, researcher were apple to observes whether auditors
adjusted audit production to these weaknesses. If this is the case higher weakness in this year should result in higher audit fees
in next year.