Audit & Internal Control

Question 1

5 elements of internal control:

Answer 1

• Control Activities
• Risk assessment
• The Control Environment
• Information and Communication
• Monitoring

Question 2

What are control activities?

Answer 2

Procedures and policies that governance put in place to help them achieve the objective of the company and minimise risk to an acceptable level.

Question 3

What does risk assessment involve?

Answer 3

Identify, analyse impact and mitigate risks to an acceptable level.

Question 4

What is the control environment?

Answer 4

Is the set of standards, processes, and structures that establish the tone for an organization and how it conducts its business

Question 5

Why is the control environment the most important internal control?

Answer 5

It’s foundational to every other internal control component as it reflects the organization’s values, including its ethical & behavioral standards

Question 6

Example of control environment:

Answer 6

Commitment to ethical values & board and audit committee oversight.

Question 7

What does information and communication mean?

Answer 7

Relevant information should be identified, captured and communicated to employees to help them discharge their assigned responsibilities.

Question 8

What is monitoring?

Answer 8

The constant assessment of internal controls e.g. internal auditing.

Question 9

Objective of internal auditing:

Answer 9

Provide independent services designed to add value and improve organisation’s operations.

Question 10

What does internal auditing evaluate?

Answer 10

The adequacy of governance, effectiveness of internal controls to protect assets and enhance value, quality of performance in terms of resource efficiency (all to mitigate risks)

Question 11

How do auditing and governance problems relate?

Answer 11

Auditing started because of governance problems caused by agency problems (self-interest).

Question 12

What is governance?

Answer 12

The exercise of economic and administrative authority to manage an entity’s affairs and resources with an objective in mind.

Question 13

Overall objective of the auditor:

Answer 13

“ …to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error…” (ISA 200)

Question 14

What is the agency problem?

Answer 14

Managers may have incentives which influence the truth and fairness of financial reports.

Question 15

What is the nature of an audit?

Answer 15

To review and assess whether an entity’s financial reports are accurately stated and compliant with all regulations and reporting frameworks.

Question 16

What are the 3 levels of audit assurance?

Answer 16

1. Reasonable assurance
2. Limited assurance
3. No assurance

Question 17

How do internal auditors achieve their objective?

Answer 17

• Review whether information has been recorded correctly.
• Review whether systems and employee conduct comply with regulations
• Assess risks
• Review efficiency of resources

Question 18

What is a material misstatement?

Answer 18

A significant error.

Question 19

External auditors review internal auditors based on:

Answer 19

Organisational status and scope of internal auditing

Question 20

3 categories of operational auditing

Answer 20

1. Risk-based auditing
2. Value-for-money approach
3. Process audit (value & non-value adding activities)

Question 21

What is an assurance engagement?

Answer 21

An engagement in which an external auditor makes a conclusion to enhance the degree of confidence of shareholders and other stakeholders about the evaluation financial reports against legal requirements and regulations.

Question 22

What are the 6 different assurance services?

Answer 22

1. Financial report audit
2. Compliance audit
3. Performance audit
4. Comprehensive audit
5. Internal audit
6. CSR assurance

Question 23

What is a financial report audit?

Answer 23

A review on whether whether the report is prepared in accordance with financial reporting frameworks.

Question 24

What is a compliance audit?

Answer 24

Involves gathering evidence to ascertain whether rules, policies, procedures, laws and regulations have been followed e.g. tax audit.

Question 25

What is a performance audit?

Answer 25

Refers to the economy, efficiency and effectiveness of an organisation’s activities.

Question 26

Information in financial statements should be:

Answer 26

1. Relevant
2. Reliable
3. Comparable
4. Understandable
5. True and fair

Question 27

What are auditor’s responsibilities relating to the audit?

Answer 27

1. Professional skepticism
2. Professional judgment
3. Due care

Question 28

What is the information hypothesis?

Answer 28

The idea that auditing reduces information risk which comes from inaccurate financial statements.

Question 29

What is the agency theory?

Answer 29

Due to the remoteness of the owners from the entity, the owners have an incentive to hire an auditor to assess information provided by management.

Question 30

What are the reasons users demand audit services?

Answer 30

1. Remoteness: users do not have access to information themselves.
2. Complexity
3. Competing incentives
4. Reliability