Core Principles of Audit Planning and Internal Controls

Key Concepts in Audit Planning and Internal Controls

Understanding and Planning

• In obtaining an understanding of an entity’s internal controls relevant to audit planning, what knowledge is an auditor required to obtain?
  a) The design of relevant internal controls pertaining to financial reporting in each of the five internal control components.
• When can the audit program usually be finalized?
  a) After the consideration of the entity’s internal control has been completed.
• When planning an audit, how should the auditor’s knowledge about the design of relevant internal controls be used?
  b) To identify the types of potential misstatements that could occur.

Risk Assessment and Materiality

• What is the risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist when it actually does?
  b) Detection Risk.
• What is the ordinary relationship between control risk and detection risk?
  b) Inverse.
• Which of the following statements is correct concerning an auditor’s assessment of control risk?
  a) Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity’s internal control.
• In what terms should control risk be assessed?
  c) Financial statement assertions.
• What is the auditor’s primary reason for assessing control risk?
  a) It affects the level of detection risk that the auditor may accept.
• What kind of relatively small misstatement could most likely have a material effect on an entity’s financial statements?
  a) An illegal payment to a foreign official that was not recorded.

Principles and Components of Internal Control

• The concept of reasonable assurance recognizes that:
  d) The cost of an entity’s internal control should not exceed the benefits expected to be derived.
• During a financial statement audit, what is an auditor not obligated to do regarding internal control?
  a) Search for significant deficiencies in the operation of the internal control.
• Which of the following is not a component of an entity’s internal control?
  a) Control risk.
• Proper segregation of functional responsibilities calls for the separation of which functions?
  b) Authorization, recording, and custody.

The Control Environment

• What usually reflects the overall attitude and awareness of an entity’s board of directors concerning the importance of internal control?
  c) Its control environment.
• When would the philosophy and operating style of management most likely have a significant influence on an entity’s control environment?
  c) When management is dominated by one individual.

Audit Procedures and Evidence

• Which procedure would most likely provide an auditor with evidence about whether an entity’s internal control activities are suitably designed to prevent or detect material misstatements?
  d) Observing the entity’s personnel applying the activities.
• What question would an auditor most likely include on an internal control questionnaire for notes payable?
  d) Does the board of directors authorize direct borrowings on notes payable?