Understanding Internal Controls and Audit Planning

PLANNING

In obtaining an understanding of an entity’s internal controls that are relevant to audit planning, an auditor is required to obtain knowledge about the:

• Design of relevant internal controls pertaining to financial reporting in each of the five internal control components.

The risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as:

• Detection Risk

Relationship between control risk and detection risk is ordinarily:

• Inverse.

The audit program usually cannot be finalized until the:

• Consideration of the entity’s internal control has been completed.

Which of the following relatively small misstatements most likely could have a material effect on an entity’s financial statements?

• An illegal payment to a foreign official that was not recorded.

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that:

• The cost of an entity’s internal control should not exceed the benefits expected to be derived.

During the consideration of internal control in a financial statement audit, an auditor is not obligated to:

• 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?

• Control risk

The overall attitude and awareness of an entity’s board of directors concerning the importance of internal control usually is reflected in its:

• Control environment.

The philosophy and operating style of management would most likely have a significant influence on an entity’s control environment when:

• Management is dominated by one individual.

Which of the following statements is correct concerning an auditor’s assessment of control risk?

• Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity’s internal control.

Proper segregation of functional responsibilities calls for separation of the functions of:

• Authorization, recording, and custody.

Which of the following procedures most likely would provide an auditor with evidence about whether an entity’s internal control activities are suitably designed to prevent or detect material misstatements?

• Observing the entity’s personnel applying the activities.

Control risk should be assessed in terms of:

• Financial statement assertions.

When planning an audit, the auditor’s knowledge about the design of relevant internal controls should be used to:

• Identify the types of potential misstatements that could occur.

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?

• Does the board of directors authorize direct borrowings on notes payable?

The auditor’s primary reason for assessing control risk is that control risk assessment:

• Affects the level of detection risk that the auditor may accept.