M3-Identifying, Assessing, and Responding to Risk

Question 1

When the auditor’s risk assessment is based on the effective functioning of internal control, the auditor should identify specific internal controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions. (true or false)

Answer 1

true

Question 2

Although it is helpful when the auditor can review client procedures manuals and organizational flowcharts, not having this documentation simply means that the auditor will need to put forth more effort to obtain an understanding of internal control. As is always the case, the auditor should document his or her understanding of internal control. (true or false)

Answer 2

true

Question 3

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports the planned level of assurance at the relevant assertion level. (true or false)

Answer 3

true

Question 4

Test of controls, NOT test of details, would support the planned level of CONTROL risk. (true or false)

Answer 4

true

Test of controls, not test of details, would help evaluate management’s assertions that internal controls exist and are operating effectively.

The objective of tests of controls is to evaluate whether a control operated effectively.

Question 5

After obtaining an understanding the entity and its environment, including is internal control, the auditor may make a risk assessment that assumes controls are operating effectively. In such cases, the auditor performs tests of controls to obtain evidence supporting this assessment. (true or false)

Answer 5

true

Question 6

Assessing risk based on the effective operation of controls involves:

Answer 6

1) Identifying specific internal controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions, and
2) Performing tests of such controls to evaluate their effectiveness

Question 7

The objective of tests of details used as tests of controls is to evaluate whether an internal control operated effectively. (true or false)

Answer 7

true

Question 8

Risk assessment procedures must be performed to assess the risk of material misstatement and to determine whether and to what extent further audit procedures are necessary. In addition, the planning process and the overall review stage of the audit must include application of analytical procedures. (true or false)

Answer 8

true

Tests of the operating effectiveness of controls, however, are only performed when the auditor’s risk assessment is based on the assumption that controls are operating effectively, or when substantive procedures alone are insufficient.

Question 9

Inquiry alone generally will NOT support a conclusion for a lower assessed level of control risk. (true or false)

Answer 9

true

Question 10

The auditor is not required to evaluate operating effectiveness as part of obtaining an understanding of internal control, and therefore need not document the basis for the decision. (true or false)

Answer 10

true

Question 11

As part of understanding internal control, an auditor is NOT required to obtain knowledge about the operating effectiveness of controls. Operating effectiveness is evaluated later, and only for those controls on which the auditor plans to rely. (true or false)

Answer 11

true

Question 12

Tests of details of transactions are used to detect material misstatements in the F/S after the auditor has assessed risk, not as part of making this assessment. (true or false)

Answer 12

true

Question 13

The examination of client records documenting the use of EDP programs is a test of controls. (true or false)

Answer 13

true

-Obtaining letters of representation corroborating inventory pricing
-confirmations of receivables verifying account balances
-attorney’s responses to the auditor’s inquiries
These are all substantive tests, not a test of controls

Question 14

A dual-purpose test is a test of controls that is performed concurrently with a test of details on the same transaction. The purpose of a test of controls is to evaluate the operating effectiveness of a control, whereas the purpose of a test of details is to support relevant assertions or to detect material misstatements. A dual-purpose test should be designed to accomplish both objectives. (true or false)

Answer 14

true

Question 15

When an entity transmits, processes, maintains, or accesses significant information electronically, factors unique to electronic processing may make it impractical or impossible to reduce detection risk to an acceptable level through substantive testing alone. In such cases, tests of controls should be performed to address the increased potential for unauthorized access, the risk of insufficient paper-based audit evidence, and the fact that appropriateness and sufficiency of evidence may be dependent to some extent on computerized controls. (true or false)

Answer 15

true

Question 16

An account that doesn’t change much from year to year is reasonably predictable with respect to amount, relative significance, and composition, making it a prime candidate for interim testing. (true or false)

Answer 16

true

Question 17

Providing more supervision during an audit of a nonissuer in response to assessed risks of material misstatement at the financial statement level is an example of an overall response. (true or false)

Answer 17

true

Question 18

The control environment is pervasive and relfects the overall tone of the organization. Therefore, the auditor is most likely to focus on the highest level of risk of material misstatement, which is risk assessed at the financial statement level. (true or false)

Answer 18

true

Question 19

An auditor uses the knowledge provided by the understanding of internal control and the final assessed risk of material misstatement primarily to determine the nature, timing, and extent of the substantive tests to be performed. (true or false)

Answer 19

true

Attribute tests, compliance tests, and tests of controls are all tests that assist the auditor in assessing control risk and determining the final assessed risk of material misstatement, not the other way around.

Question 20

When an auditor decides not to perform tests of controls, the auditor most likely concluded that the additional evidence to support a reduction in control risk was NOT cost-beneficial to obtain. In other words, the additional costs that would be incurred to support a lower assessed level of control risk would not be offset by the anticipated cost savings resulting from a lower level of substantive tests. (true or false)

Answer 20

true