Module 3 - Understanding Internal Control and Assessing Control Risk

Question 1

What are the seven control environment factors?

Answer 1

IC-HAMBO

Integrity and ethical values
Commitment to competence
Human resource policies and practices
Assignment of authority and responsibility
Managements philosophy and operating style
Board of directors or audit committee participation
Organizational structure

Question 2

What are the control activities?

Answer 2

PIPS

Performance Reviews
Information Processing
Physical Controls
Segregation of duties

Question 3

What is the formula for Risk of Material Mistatement

Answer 3

Inherent Risk * Control Risk

Question 4

What is the formula for Detection Risk?

Answer 4

Test of Details * Substantive Analytical Procedures Risk

Question 5

What is Test of Details?

Answer 5

Tests of details include tracing figures to supporting documentation to determine if transactions are valid, properly classified, accurate and complete. Tests also include recalculating and confirming recorded information.

Part of ICORRIIA

Question 6

What are Substantive Tests?

Answer 6

SUBSTANTIVE TESTS are those activities performed by the auditor to detect material misstatement or fraud related to transactions or account balances.
There are two categories of substantive tests - analytical procedures and tests of detail.

ICORRIIA

Question 7

What relationship should Detection Risk have with the Risk of Material Mistatement

Answer 7

Inverse Relationship:

The Higher Risk of Material Misstatement, the lower Detection Risk so that it can lower Audit Risk

Question 8

What affect on Substantive Testing is there if RMM goes up?

Answer 8

RMM Goes Up = Detection Risk Go Down = Substantive Testing Goes Up

Question 9

What affect on Substantive Testing is there if RMM goes down?

Answer 9

RMM Goes Down = Detection Risk Go Up = Substantive Testing Goes Down

Question 10

What are all of the parts of Detection Risk?

Formula and Associated Mnemonic with its parts

Answer 10

Detection Risk = Test of Details * Analytical Procedures

ICORRIIA

Inquiry
Confirmation
Observation
Recalculation
Reperformance
Inspection of Tangible Assets
Inspection of Records and Documents
Analytical Procedures

Question 11

What is the Nmemonic for the 10 Generally Accepted Auditing Standards?

Answer 11

TIPPICANOE
TIP-PIC-All Cpas Do Ok

Training and Profeciency
Independence
Professional Care
Planning and Supervision
Internal Controls
Corroborative Appropriate Audit Evidence
Accounting Principles in Accordance with GAAP
No New Principles - Consistency
Omitted Disclosures - None
Express Opinion

Question 12

What are the General Standards?

Answer 12

TIP

Training and Profeciency
Independence
Professional Care

Question 13

What are the Standards of Field Work?

Answer 13

PIC

Planning and Supervision
Internal Controls
Corroborative Appropriate Audit Evidence

Question 14

What are the principals for Reporting?

Answer 14

All CPAs Do Ok

Accounting Principals = GAAP
No New Principals - Consistency
Disclosures - None Omitted
Opinion Expressed

Question 15

When RIIO is used:

Answer 15

Reperformance: Recalculating. Most Effective

Inquiry: Existence of Internal Control Activities

Inspection: Inspect relevent documents

Oberservation: Produces evidence of access of controls, or control leaves no documentary evidence

Question 16

Order of RIIO from least effective to most effective

Answer 16

Inquiry
Observation
Inspection
Reperformance

Question 17

What is required in the understanding of internal controls?

Answer 17

To gain an understanding of the design effectiveness and that they were implementated

Question 18

When does the auditor determine if controls are operating effectivly?

Answer 18

If the auditor plans to plans to rely on controls, then it needs to determine if controls are operating effectively.
The auditor does not do this if it plans to assess control risk at maximum