AUDIT THEORY QUESTIONS AND
COMPLETE SOLUTIONS
Test for receipt of payment for A/R ANSW✅✅- Details recorded in cash receipts journal
- Documents that support payment received:
o Cash prelist (restrictive endorsement)
Requires separate personnel
o Remittance advice
List of invoices billed for
- Need to see bank statements are reconciled
- Information from deposit slip should match entries in cash receipts journal
What are the objectives of internal controls? ANSW✅✅1. FAR
- Fair and accurate financial reporting
- Main concern of auditors
2. REG
- Compliance with laws and regulations
3. BEC
- Effective & efficient with business operations
The Internal Control System should: ANSW✅✅- E - Ensure that assets are safeguarded
- C - Create an environment in which efficiency and effectiveness are encouraged and monitored
- G - Generate reliable information for decision making
What are the components of Internal control? ANSW✅✅C - Control Environment & Activities
R - Risk Assessment
,I - Information & Communication
M - monitoring of controls
E - Existence of control activities
What components are included within the existence of control activities section for Internal
controls? ANSW✅✅1. Business performance reviews
2. Information Processing
3. Physical controls
4. Segregation of duties
What are the limitations of internal controls? ANSW✅✅C- Competence, human errors or
mistakes
- Can still create material misstatements
- Unintentional
O - Obsolescence
- Old internal controls
- May become outdated due to rapid change or growth
C - Collusion
- Can break down ARCC
O - Override by management
- Large inherent risk of internal controls
C - Cost -Benefit constraints
The auditor's assessment of internal controls is comprised of what components/steps?
ANSW✅✅R - Risk assessment procedures
U - Understanding the entity and its internal controls
C -Control risk assessment
P - Perform test of controls
, A - assess the results
S - substantive testing
Principle 11 of internal controls identifies what two main categories of IT controls?
ANSW✅✅General & application
How does an auditor gain an understanding of internal controls? ANSW✅✅\O - Observe
personnel performing procedures (Required by the PCAOB)
T - Talk with the client about changes (PCAOB)
T - Trace transactions through the information system, process relevant to financial reporting
(perform a walkthrough)
I - Interview with personnel on how they process transactions
R - Interview/ Review work of Internal Audit Function
R - Read Prior year control procedure documentation (repeat engagement)
- R- Read & Review policy & procedure manuals
- U - Use an internal control questionnaire
- I - Inspect company documents (Required by the PCAOB)
What are the steps in the assessment of control risk? ANSW✅✅1. Identify specific controls that
will be relied upon
2. Perform test of controls, key controls (areas with higher inherent risk)
3. Conclude the achieved level of control risk
An effectiveness of design deficiency is primarily concerned with? ANSW✅✅Preventive,
detective, corrective controls
COMPLETE SOLUTIONS
Test for receipt of payment for A/R ANSW✅✅- Details recorded in cash receipts journal
- Documents that support payment received:
o Cash prelist (restrictive endorsement)
Requires separate personnel
o Remittance advice
List of invoices billed for
- Need to see bank statements are reconciled
- Information from deposit slip should match entries in cash receipts journal
What are the objectives of internal controls? ANSW✅✅1. FAR
- Fair and accurate financial reporting
- Main concern of auditors
2. REG
- Compliance with laws and regulations
3. BEC
- Effective & efficient with business operations
The Internal Control System should: ANSW✅✅- E - Ensure that assets are safeguarded
- C - Create an environment in which efficiency and effectiveness are encouraged and monitored
- G - Generate reliable information for decision making
What are the components of Internal control? ANSW✅✅C - Control Environment & Activities
R - Risk Assessment
,I - Information & Communication
M - monitoring of controls
E - Existence of control activities
What components are included within the existence of control activities section for Internal
controls? ANSW✅✅1. Business performance reviews
2. Information Processing
3. Physical controls
4. Segregation of duties
What are the limitations of internal controls? ANSW✅✅C- Competence, human errors or
mistakes
- Can still create material misstatements
- Unintentional
O - Obsolescence
- Old internal controls
- May become outdated due to rapid change or growth
C - Collusion
- Can break down ARCC
O - Override by management
- Large inherent risk of internal controls
C - Cost -Benefit constraints
The auditor's assessment of internal controls is comprised of what components/steps?
ANSW✅✅R - Risk assessment procedures
U - Understanding the entity and its internal controls
C -Control risk assessment
P - Perform test of controls
, A - assess the results
S - substantive testing
Principle 11 of internal controls identifies what two main categories of IT controls?
ANSW✅✅General & application
How does an auditor gain an understanding of internal controls? ANSW✅✅\O - Observe
personnel performing procedures (Required by the PCAOB)
T - Talk with the client about changes (PCAOB)
T - Trace transactions through the information system, process relevant to financial reporting
(perform a walkthrough)
I - Interview with personnel on how they process transactions
R - Interview/ Review work of Internal Audit Function
R - Read Prior year control procedure documentation (repeat engagement)
- R- Read & Review policy & procedure manuals
- U - Use an internal control questionnaire
- I - Inspect company documents (Required by the PCAOB)
What are the steps in the assessment of control risk? ANSW✅✅1. Identify specific controls that
will be relied upon
2. Perform test of controls, key controls (areas with higher inherent risk)
3. Conclude the achieved level of control risk
An effectiveness of design deficiency is primarily concerned with? ANSW✅✅Preventive,
detective, corrective controls
