An auditor's primary consideration regarding an entity's internal control is whether the controls:
Answer(s): A
Choice "a" is correct. An auditor's primary consideration regarding an entity's internal control is whether the controls affect the financial statement assertions (to evaluate the risk that a material misstatement may exist in the financial statements).Choice "b" is incorrect. An inherent limitation of an entity's internal control is that its effectiveness can be reduced by management override, but whether this occurs or not is not the auditor's primary consideration.Choice "c" is incorrect. The control environment is a component of internal control, and the auditor needs to understand it, but it is not the auditor's primary consideration. Choice "d" is incorrect. An auditor needs to determine how management's philosophy and operating style affect internal control, but it is not the auditor's primary consideration.
The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the:
Answer(s): C
Choice "c" is correct. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that material misstatements exist in the financial statements. Choice "a" is incorrect. Sometimes risk assessment procedures may raise doubts about the auditability of the financial statements, but this is not the ultimate purpose of assessing control risk. Choice "b" is incorrect. The auditor is required to obtain knowledge about the operating effectiveness of internal controls, if his or her risk assessment is based on the effective operation of controls. Obtaining such knowledge, however, is not the ultimate purpose of assessing control risk. Choice "d" is incorrect. Although the nature and extent of substantive tests may be reduced based on the results of the control risk assessment, this is not the ultimate purpose of assessing control risk.
In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the:
Answer(s): B
Choice "b" is correct. No - Yes. In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the design of controls and whether they have been implemented.The auditor is not required to obtain knowledge about the "operating effectiveness of controls" as part of obtaining an understanding of internal control. Choices "a", "c", and "d" are incorrect, per the above explanation.
Internal control includes which of the following components:
Choice "c" is correct. Yes - Yes - Yes - Yes. In addition, "control activities" rounds out the five components of internal control.Choices "a", "b", and "d" are incorrect, per the above.
Which of the following statements about internal control is correct?
Choice "b" is correct. Internal control is relevant to the entire entity, or to any of its operating units or business functions.Choice "a" is incorrect. There is a direct relationship between:1. An entity's objectives, which are what the entity strives to achieve, and2. The components of internal control, which represent what is needed to achieve the objectives. Choice "c" is incorrect. Not all of the entity's objectives and related controls are relevant to an audit of the entity's financial statements.Choice "d" is incorrect. Although internal control is relevant to each of the entity's operating units and business functions, an understanding of internal control relevant to each operating unit and business function may not be necessary to plan and perform an efficient audit.
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