Internal Control- Concepts and Standards

Question 1

When planning an audit, when information would we need to know to not have to understand the internal control structure?

Answer 1

Materiality and inherent risk; if immaterial and inherent risk is low means that the auditor can skip the procedures to obtain an understanding of the internal control structure in an effort to plan an audit

Question 2

When understanding the environment of IC the auditor should focus on substance of control rather than form because?

Answer 2

Management may establish appropriate procedures but not enforce compliance with them.

-IC must be effective and be properly acted upon

Question 3

Decision Table

Answer 3

presents logical relationships between conditions and actions

Question 4

Having budgets and forecasts helps management to supervise more effectively.

Answer 4

true

Question 5

Flowchart

Answer 5

helps to understand the system

provide a visual depiction of client activities

Question 6

Why is it necessary to understand the control system?

Answer 6

necessary for audit planning and one can plan by determining what tests/procedures to be performed by understanding the control system

Question 7

What is an auditors primary concern when it comes to the IC?

Answer 7

determining if it affects the f/s

-cost/benefit

Question 8

What are the inherent limitations of IC?

Answer 8

management override
mistakes in judgement
collusion among employees

Question 9

Management override

Answer 9

ex) CEO can request a check without a purchase order

Question 10

Assessing control risk and obtaining an understanding of an entity’s internal control structure may be performed concurrently.

Answer 10

true

Question 11

Assessing CR below the maximum level

Answer 11

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.

Question 12

Why is assessed level of CR used?

Answer 12

to determine detection risk for f/s assertions and to contribute to the auditor’s evaluation of the risk that material misstatements may exist in the financial statement

Question 13

What does it mean that the CR is too high?

Answer 13

this means that the sample indicates that CR is not working properly when in fact it is which means that the the CR is greater than the operating effectiveness of the control

Question 14

Usually performing tests of controls are considered efficient because it reduces substantive testing but if it doesn’t then it is inefficient and hence performing tests of controls should not be performed

Answer 14

true

Question 15

What techniques does an auditor use when assessing CR?

Answer 15

inspection, reperformance, observation, and inquiries

Question 16

Auditor is not required to obtain knowledge of the operative effectiveness of the IC structure.

Answer 16

true

Question 17

Management integrity is a critical component of internal control

Answer 17

true

Question 18

Control Environment Factors

Answer 18

(1) communication and enforcement of integrity and ethical values;
(2) commitment to competence;
(3) participation of those charged with governance;
(4) management’s philosophy and operating style;
(5) the entity’s organizational structure;
(6) the entity’s assignment of authority and responsibility;
(7) human resource policies and practices

Question 19

What is the objective of tests of controls?

Answer 19

to determine whether IC are designed properly or operated efficiently

1) designed-detects mm in f/s
2) operation- how IC was applied, who applied it, and consistency of which it was applied

Question 20

What is an advantage of electronic form evidence?

Answer 20

attract evidence from client databases

Question 21

Auditors report on significant deficiencies

Answer 21

The auditor’s report on significant deficiencies should indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on the internal control structure.

Question 22

The lack of objectivity can affect f/s. So it would be needed to be communicated as a significant deficiency to the audit committee

Answer 22

true

Question 23

Material weaknesses should be separate from significant deficiencies

Answer 23

true

Question 24

what factors should be considered in evaluating deficiencies?

Answer 24

entity’s size, its complexity, and the nature and diversity of its business activities.

Question 25

Letters on significant deficiencies are restricted as to distribution.

Answer 25

true

Question 26

An auditor is not allowed to issue a report indicating that no significant deficiencies were found. Such a report might be misinterpreted.

Answer 26

true

Question 27

An internal auditor may be used by an auditor to do what?

Answer 27

perform tests of internal controls or substantive tests

Question 28

Evaluating the competence of internal auditor

Answer 28

“quality of paper documentation”

1) educational level and professional experience
2) professional certification and continuing education
3) audit policies, programs, and procedures
4) assignment practices
5) supervision and review
6) quality of working paper documentation, reports, and recommendations
7) performance evaluation

Question 29

Evaluating the objectivity of internal auditor

Answer 29

(1) the organizational status of the internal audit function; (2) the policies affecting the internal auditor’s objectivity about areas audited

Question 30

An independent auditor may NOT share responsibility with an internal auditor in any audit judgment area, regardless of the internal auditor’s competence and objectivity.

Answer 30

true

Question 31

Institute of Internal Auditors

Answer 31

address independence and objectivity

Question 32

When assessing competence and objectivity an independent auditor usually considers information obtained from?

Answer 32

• previous experience with the internal audit function

- discussions with management personnel, and from recent external quality reviews