Which of the following statements is correct concerning an auditor's assessment of control risk?
Answer(s): A
Choice "a" is correct. Some risk assessment procedures performed to obtain an understanding of internal control may provide evidence about operating effectiveness, even if they were not intended for that purpose. This is possible because the procedures performed to achieve one objective may also provide evidence regarding the other.Choice "b" is incorrect. Audit evidence that was obtained in prior audits about the effective design or operation of internal controls may be considered by the auditor in assessing control risk in the current audit.Choice "c" is incorrect. The auditor is always required to document the assessment of risk and the basis for the assessment.Choice "d" is incorrect. The lower the assessed level of control risk (that is, the greater the reliance placed on the control), the more assurance the auditor must gather that the controls are operating effectively.
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:
Answer(s): C
Choice "c" is correct. Since control risk is assessed at a low level, tests of controls would be required to evaluate the effectiveness of the internal controls to support that assessed level. However, the need for some substantive tests of transactions is never eliminated. Choice "a" is incorrect. Extensive tests of property and equipment balances would not typically be required when control risk is assessed at a low level.Choice "b" is incorrect. Since control risk is to be assessed at a low level, tests of controls would be required. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion.Choice "d" is incorrect. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion. Year-end balances may therefore be unpredictable.
After obtaining an understanding of the entity and its environment, including its internal control, an auditor decided to perform tests of controls. This is likely because:
Choice "a" is correct. After obtaining an understanding the entity and its environment, including its 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. Choice "b" is incorrect. If evidence to support a reduction in control risk is not available, tests of controls would, by definition, not be possible.Choice "c" is incorrect. When auditors decide to perform tests of controls, they have made a preliminary assessment that controls are operating effectively. Accordingly, the performance of tests of controls is not indicative of an increase in the assessed level of control risk. Choice "d" is incorrect. When many internal control weaknesses are identified, the auditor would not be likely to perform tests of controls. The assessed level of control risk is increased, and more reliance would be placed on substantive tests as opposed to tests of controls.
To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including:
Choice "a" is correct. Tests of controls include such procedures as inspecting documentation, inquiry, observation, and reperformance.Choice "b" is incorrect. Analytical procedures are used for planning purposes, as substantive tests, and as an overall final review, but they do not provide evidence about control risk. Choice "c" is incorrect. Calculation is used as a substantive test rather than as a test of controls. Choice "d" is incorrect. Confirmation represents a substantive test rather than a test of controls.
The objective of tests of details of transactions performed as tests of controls is to:
Answer(s): D
Choice "d" is correct. The objective of tests of details used as tests of controls is to evaluate whether an internal control operated effectively.Choice "a" is incorrect. Tests of details of transactions would not typically be used to monitor the design and use of entity documents.Choice "b" is incorrect. Tests of details of transactions would not typically be used to determine whether internal controls have been implemented.Choice "c" is incorrect. The objective of tests of details of transactions performed as substantive tests is to detect material misstatements in the financial statements.
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