Internal Control: Class Questions - Review 2 - YouTube

Number four.

Which of the following is not a step in an auditor's assessment of control risk or RMM?

So, which of the following is not a step in the auditor's assessment?

Evaluate the effectiveness of internal control with T of C.

Is Test of Controls part of...?

Yes, B, obtain an understanding of the entity's information system and control environment.

Understanding environment, yes.

C, perform Test of Details of transactions to detect material misstatements?

We just learned the term "Test of Details", which we cover in Audit Evidence.

Test of Details is substantive testing.

We're not gonna do that until substantive testing.

This is internal control.

So, thinking of the chart that we had earlier where we said plan the audit, then go through

internal control, then do substantive testing, then draft the audit report.

We're not there yet.

Consider whether controls have a pervasive effect on the financial statement.

Pervasive, yes, we need to consider that.

Best answer, C, 'cause which of the following is not a step.

Again, keyword, not.

That means one is not, three are.

Number five, after obtaining an understanding of internal control and assessing risk of

material misstatement, the auditor decided to perform tests of controls.

The auditor most likely decided what?

That means we did this, we did this, we did this, we did this, and we said do we think

we can rely?

Yes, we'll do the combined approach.

We're gonna go ahead and do T of C. Why would we normally do this?

Why would we say this?

Because we think there are controls, we think they're going to be reliable, cost benefit.

That's why we're gonna do it.

A, it would be efficient to perform T of C that would result in a reduction in planned

substantive tests, true.

There's no additional evidence to support a...

If there's no evidence, we're not gonna test it.

C, an increase in the assessed level of RMM is justified?

No, no, no.

A decrease.

If it was an increase, we would do more substantive testing and less Test of Controls.

D, there were many internal control weaknesses that could allow misstatements to enter the

system.

If there's a lot of weaknesses, then we're not gonna rely.

We're not gonna do T of C. So, the best answer, the basically, when would we do T of C?

Answer A. Number six, in assessing the risk material

misstatement control risk, an auditor ordinarily selects from a variety of techniques, including...

So, what are we gonna test for?

We're gonna test ARCC by looking at RIIO, so performance, inquiry, inspection, observation.

Remember, we're not looking at dollars.

We're looking at frequency or percentages.

So, inquiry and recalculation as dollars, no.

Performance and observation?

Performance, observation, maybe.

Remember, kind of like relationships, don't commit, and give it a maybe.

C, comparison, confirmation is what?

Dollars, that's a substantive test.

Inspection, verification is dollars.

Best answer is B. Number seven, which of the following likely

would not be considered an inherent limitation in the potential effectiveness of an entity's

internal control?

All right, so what are inherent limitations?

Now, remember inherent limitations COCO, collusion, override, competency, obsolescence.

These two are examples of fraud.

These two are examples of errors.

Remember we say, because of errors and fraud, things can go wrong, inherent limitations

can occur, and these things can still exist.

So, we have collusion, override, competency, obsolescence.

So again, this question is saying, which of the following is not an inherent limitation?

Incompatible duties, management override, yes.

Mistakes in judgement, that deals with competency, so yes.

Collusion, yes.

Incompatible duties, that's not an inherent limitation.

We don't want that to happen.

We want a segregation between ARCC, authorization, recording, custody, comparison.

So, there, in that particular case, incompatible duties is not an inherent limitation.

It's just something that we want to try to avoid from happening.

Best answer is A. Again, which one is not?

Number eight, when considering internal control, an auditor should be aware of the concept

of reasonable assurance, which recognizes what?

We just said reasonable assurance, that the cost should not exceed the benefit.

Internal control may be ineffective due to mistakes in judgement and personal carelessness.

That's not reasonable assurance.

That's inherent limitations.

Adequate safeguarding over access to assets and records should permit an entity to maintain

proper accountability.

Access to assets that was part of our objectives.

Our objectives were ace in a hole, accurate and reliable statements, safeguarding of assets.

Establishing and maintaining internal control is an important responsibility of management.

Well, but that's not reasonable assurance.

The cost of internal control should not exceed the benefits.

That is the concept