Internal Control-2

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windgrl
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128982
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Internal Control-2
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2012-01-19 12:27:48
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  1. 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.

    • 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.
  2. After obtaining an understanding of the internal control structure and assessing control risk, an auditor decided to perform tests of controls. The auditor most likely decided that

    A. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.
    B. Additional evidence to support a further reduction in control risk is not available.

    C. An increase in the assessed level of control risk is justified for certain financial statement assertions.

    D. There were many internal control structure weaknesses that could allow errors to enter the accounting system.
    A. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.


    After obtaining an understanding of internal control and assessing control risk, an auditorwill perform tests of controls, if it is believed that such performance will result in a reduction in planned substantive tests. If the performance of tests of controls would not result in a reduction in substantive testing, completing tests of controls would be inefficient and therefore should not be performed.
  3. As part of understanding the internal control structure, an auditor is not required to

    A. Consider factors that affect the risk of material misstatement.

    B. Ascertain whether internal control structure policies and procedures have been placed in operation.

    C. Identify the types of potential misstatements that can occur.

    D. Obtain knowledge about the operating effectiveness of the internal control structure.
    D. Obtain knowledge about the operating effectiveness of the internal control structure.

    In gaining an understanding of internal control, an auditor is required to consider factors that affect the risk of material misstatement, identify the types of potential misstatements that can occur, and ascertain whether internal controls have been placed in operation. The auditor is NOT required to obtain knowledge about the operating effectiveness of internal control (i.e. perform tests of controls).
  4. Control risk should be assessed in terms of

    A. Specific control procedures.

    B. Types of potential irregularities.

    C. Financial statement assertions.

    D. Control environment factors.
    C. Financial statement assertions.


    The auditor assesses control risk for the assertions present in the financial statements. Such assertions may be found in the account balance, transaction class, or disclosure components. Based upon the understanding of internal control and the control risk assessments, the auditor determines the nature, timing, and extent of the auditing procedures to be performed.
  5. Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of
    cash receipts for cash sales at a retail outlet?

    A. Observe the consistency of the employees' use of cash registers and tapes.

    B. Inquire about employees' access to recorded but undeposited cash.

    C. Trace the deposits in the cash receipts journal to the cash balance in the general ledger.

    D. Compare the cash balance in the general ledger with the bank confirmation request.
    A. Observe the consistency of the employees' use of cash registers and tapes.


    • The cardinal rule regarding cash receipts is to ensure that they are recorded. By requiring employees to record all sales in the cash register and to give
    • customers the cash register tape evidencing the sale, companies can ensure that all cash sales are recorded (the completeness of cash receipts for cash sales). The auditor can test controls by observing employees' use of cash registers and tapes.
  6. 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.


    • 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.
  7. When assessing control risk at below the maximum level, an auditor is required to document the auditor's understanding of the

    I. Entity's control activities that help ensure management directives are carried out.

    II. Entity's control environment factors that help the auditor plan the engagement.

    A. I only.

    B. II only.

    C. Both I and II.

    D. Neither I nor II.
    C. Both I and II.

    The auditor is always required to obtain a sufficient understanding of the internal control system in order to plan the audit. This understanding must be documented, regardless of the level at which control risk is to be assessed. Control activities and control environment factors are both components of the internal control system. As a result, they would both be documented.
  8. In assessing control risk, an auditor ordinarily selects from a variety of techniques, including

    A. Inquiry and analytical procedures.

    B. Reperformance and observation.

    C. Comparison and confirmation.

    D. Inspection and verification.
    B. Reperformance and observation.


    • Tests of controls directed toward effectiveness or operation of a control would ordinarily include inquiries, inspections of documents, observation, and
    • reperformance of the application of a control. Thus, both reperformance and observation are used by an auditor to assess control risk.
  9. Which of the following is not a step in an auditor's decision to assess control risk at below the maximum?

    A. Evaluate the effectiveness of the internal control procedures with tests of controls.

    B. Obtain an understanding of the entity's accounting system and control environment.

    C. Perform tests of details of transactions to detect material misstatements in the financial statements.

    D. Consider whether control procedures can have a pervasive effect on financial statement assertions.
    C. Perform tests of details of transactions to detect material misstatements in the financial statements.


    • In assessing control risk below maximum, the auditor must:
    • 1) obtain an understanding of the internal control structure;
    • 2) identify specific controls relevant to specific financial statement assertions; and
    • 3) test the identified controls to determine if they are operating effectively.
  10. 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

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