Question

Which of the following is false when obtaining and documenting an understanding of internal control?

		It is acceptable to simply update internal control information from the prior year audit.
		The level of understanding internal control and extent of testing required for the audit of internal controls is less than what is required for the audit of only the financial statements.
		Auditors often use narratives, flow charts and checklists to help document internal control.
		Many auditors use a control risk matrix to assist in the control risk assessment.

Which of the following is false regarding audit risk?

		The audit risk model formula can be written: PDR = ARR/IRxCR.
		The combination of inherent risk and control risk is referred to as the risk of material misstatement.
		Inherent risk measures the susceptibility to material misstatement before considering the effectiveness of related internal controls.
		Engagement risk is the risk that the auditor will incur liability if the business fails.

Which of the following is false when assessing control risk?

		A material weakness exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis in the normal course of business.
		A compensation control is one elsewhere in the system that offsets the absence of a key control.
		The integrity of management and the adequacy of accounting records determine auditability.
		The auditor is required to report material weaknesses to those charged with governance.

Which of the following is false regarding the concept of materiality?

		Determining materiality requires professional judgment.
		The phrase free of material misstatement is intended to inform users that the auditor's responsibility is limited to material financial information.
		Materiality is a major consideration in determining the appropriate audit report to issue.
		It is practical for auditors to provide absolute assurance due to materiality.

Answer 1

1. It is acceptable to simply update internal control information from the prior year audit - The auditor is required to assess internal controls each time he is assigned with an audit and such assessment should be independent of previous audit

2. Engagement risk is the risk that the auditor will incur liability if the business fails - Engagement risk is the risk that considers overall risk of audit engagement of which business risk (risk that the company's business may fail is one of the 3 components)

3. A material weakness exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis in the normal course of business - Such inability of control to permit company personnel to prevent or detect misstatement is Control deficiency and not material weakness

4. It is practical for auditors to provide absolute assurance due to materiality - materiality achieves reasoable assurance only