Evaluating Internal Control

Question 1

Auditors Consideration of Internal Control:

4 Phases

Answer 1

1) Obtain an understanding of Internal control and document it
2) Make a preliminary evaluation about reliance on internal control (consider adequacy of internal control and cost benefit issues)
3) Perform the appropriate tests of control if reliance is planed
4) Reevaluate that reliance based on results of the tests of control

Question 2

When assessing control risk at below the maximum level, an auditor is required to document the auditor’s understanding of the

Answer 2

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.

Question 3

The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of th

Answer 3

The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that material misstatements exist in the financial statements.

Question 4

Which of the following statements concerning control risk is correct?

Answer 4

Gaining an understanding of internal control and assessing control risk may be performed concurrently.

Question 5

Control risk should be assessed in terms of

Answer 5

financial statement assertions

Question 6

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

Answer 6

it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests

Question 7

Assessing control risk at below the maximum level most likely would involve

Answer 7

Identifying specific internal control structure policies and procedures relevant to specific assertions

Question 8

After assessing control risk at below the maximum level, an auditor desires to seek a further reduction in the assessed level of control risk. At this time, the auditor would consider whether

Answer 8

additional evidence will be available to support such a reduction. The auditor must also consider whether it would be efficient (cost-effective) to collect such evidence.