First Preboards (General) Flashcards
Define control risk.
The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls.
Define detection risk.
The risk that the auditor will not detect a material misstatement.
Define inherent risk.
The susceptibility of material misstatement assuming there are no related internal controls.
Analyze:
- A well-designed system of internal control environment ensures the achievement of an entity’s control objectives
- An inherent limitation to internal control is the fact that controls can be circumvented by management override.
- A well-designed and operated internal control environment should detect collusion.
- Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.
- False
- True
- False
- False
An internal auditor is prohibited from auditing areas where they were recently assigned. In this case, the auditor may be said to be _______.
Objective
(T/F) Audit risk is a function of the risk of material misstatement and detection risk.
True. RMM = IR x CR
AR = IR x CR x DR or RMM x Dr
(T/F) The company’s F/S include a number of last minute material adjustments would be ordinarily considered a fraud risk factor.
True.
“Further audit procedures” include which of the ff?
Risk assessment procedures?
Substantive testing?
Test of controls?
No. Yes. Yes.
An abnormal fluctuation in gross profit for sales and inventories would most likely be identified in the planning phase by the use of…
Analytical procedures.
(T/F) Inspection of management’s engagement letter is likely to be a test of control.
False.
(T/F) In planning an audit, an auditor’s knowledge about the design of relevant controls should be used to document the assessed level of control risk.
False. Should be used to identify the types of potential misstatements that could occur. Take note na PLANNING PHASE pa lang ituu.
(T/F) Reasonable assurance is a high, but not absolute, level of assurance.
True.
What are the five internal control components of the COSO Framework?
[KEY: CRCIM}
- Control Environment
- Risk Assessment
- Control Activities
- Information and Communication
- Monitoring
What are sub-elements of the Control Environment?
Integrity and Ethical Values
Commitment to Competence
Board of Directors and Audit Committee
Management’s Philosophy and Operating Style
Organizational Structure
Assignment of Authority and Responsibility
Human Resource Policies and Procedures
(T/F) When a purchasing employee and and outside vendor participate in a kickback scheme, this is a failure, rather than a limitation of internal control.
False. This is a limitation, rather than a failure, of internal control.
An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the F/S. How should the audit team address the audit procedures to the increased risk?
- Review client’s procedures over safeguarding of inventory.
- Physical count AT YEAR-END.
(T/F) In a review engagement, the practitioner would most likely inquire of management regarding maturities, interest rates, and collateral on notes payable, rather than performing confirmations with the lender.
True.
(T/F) The amount of audit work would most likely influence the form and extent of the auditor’s documentation of an entity’s internal control environment.
False. The complexity and size of an entity would most likely influence the form and extent of auditor’s documentation of an entity’s internal control environment.
(T/F) For efficiency, the auditor would most likely rely on an internal auditor’s work for F/S amounts judged by the auditor to require little or no subjectively evaluated evidence.
True.
(T/F) The control environment would be considered the foundation for the other components of internal control.
True.
(T/F) For small business clients, emphasizing ethical behavior through oral communication and management example best demonstrates management integrity in the absence of a written code of conduct.
True.
(T/F) Sending confirmations to customers is an appropriate test for existence assertion of A/R.
True.
(T/F) During an audit, an auditor should perform TOC to obtain sufficient appropriate evidence about the operating effectiveness of relevant controls if substantive procedures alone cannot provide sufficient appropriate evidence.
True.
(T/F) Analytical procedures used in planning an audit should focus on enhancing the auditor’s understanding of the client’s business.
True.
