Lecture 6

Question 1

What are the two methods of gaining audit evidence?

Answer 1

Testing internal controls and substantive procedures

Testing internal controls is one of the two methods of gaining audit evidence.

Question 2

What formula represents the Audit Risk Model?

Answer 2

AR = IR x CR x DR

AR = Audit Risk, IR = Inherent Risk, CR = Control Risk, DR = Detection Risk.

Question 3

What is the primary purpose of understanding internal controls in auditing?

Answer 3

To determine Inherent Risk (IR)

Understanding internal controls is crucial for assessing the risk of material misstatement.

Question 4

What are the two key evaluations performed on internal controls according to ISA 315?

Answer 4

Design and Implementation (D&I)

These evaluations are part of Risk Assessment procedures.

Question 5

What is assessed when testing controls according to ISA 330?

Answer 5

Operating effectiveness

This involves evaluating how controls function throughout the audit period.

Question 6

What is necessary if substantive procedures cannot provide sufficient evidence?

Answer 6

Testing controls

This is mandated by ISA 315 for significant risks.

Question 7

How can an auditor test a control?

Answer 7

Inquiry, Observation, Inspection, Reperformance

Inquiry alone is not considered sufficient for testing controls.

Question 8

Who is responsible for the financial statements and establishing internal controls?

Answer 8

Those charged with governance and management

Their responsibilities are disclosed in the financial statements.

Question 9

Are ‘Those charged with governance’ in the UK required to attest to the effectiveness of internal controls?

Answer 9

No, but they will be in the future

This change is anticipated due to evolving regulatory standards.

Question 10

What significant event led to differences in internal control requirements between the UK and the US?

Answer 10

The Enron scandal

The scandal prompted stricter regulations in the US regarding internal controls.

Question 11

What model is used to manage risks in major companies?

Answer 11

Three lines of defense model

This model outlines the roles of various functions in risk management.

Question 12

What is the definition of Internal Audit according to the ICAEW Study Manual?

Answer 12

Independent assurance that the organisation’s risk management, governance and internal control processes are operating effectively

Internal Audit also considers wider issues beyond financial risks.

Question 13

What does an internal auditor’s work plan typically include?

Answer 13

Monitor internal controls, perform detailed tests, review compliance, undertake investigations

These tasks are agreed upon with the audit committee.

Question 14

What components are typically included in an internal audit report?

Answer 14

Scope, summary of findings, overall conclusion, recommendations, management response

The report should also include a rating of the issues addressed.

Question 15

Why is organizational independence important for internal auditors?

Answer 15

To enable unrestricted evaluation of management activities

Independence allows for unbiased assessments of internal controls.

Question 16

Can external auditors provide internal audit services for Public Interest Entities (PIEs)?

Answer 16

No

This prohibition is in place to maintain independence and objectivity.

Question 17

What is a key difference between internal and external auditors?

Answer 17

Professional qualification requirements

External auditors are required to have professional qualifications, while internal auditors are not.

Question 18

What role does internal audit play in relation to external audit?

Answer 18

Provides access to internal audit work and informs on fraud risk

External audit can utilize internal audit’s findings but cannot receive direct assistance.

Question 19

Fill in the blank: In the UK, directors are not required to attest to the effectiveness of _______.

Answer 19

internal controls

Question 20

True or False: Internal auditors are usually required to have a professional qualification.

Answer 20

False

While often sought by employers, it is not a regulatory requirement.