Question

1. Which of the following controls is least likely to be tested on an interim basis?
a control that has historically been ineffective
a control that relates to an account with low inherent risk   
a control that is performed by competent personnel
a control that has historically been effective

2. A key advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to:
A. minimize nonsampling risk
B. quantify sampling risk
C. reduce the level of audit risk
D. promote consistency throughout audits of different accounts and different engagements

3. Even very sophisticated systems of internal control are still subject to certain inherent limitations. Examples of such limitations include:
Management override
Employee incompetence
Collusion
All of the above
None of the above

4.We discussed in class that both management and the auditor follow a “top-down, risk-based approach” when performing their respective assessments of the effectiveness of ICFR. Why did Auditing Standard (AS) No. 5 emphasize the “top-down, risk-based approach” to such an extent?
A. This approach ultimately directs auditor’s time and energy to areas, accounts, and assertions that have the highest possibility of being materially misstated.
B. This approach represented a shift from the former approach to ICFR assessment prescribed by AS No. 2. Under AS2, 404 assessments generally consisted of treating all controls as equally important, and spending equal time and energy testing each control.
C. Both A&B
D. Neither A nor B

5.In an audit of financial statements, an auditor’s primary consideration regarding a control is whether it:
enhances management’s decision-making processes
reflects management’s philosophy and operating style
affects management’s financial statement assertions   
provides adequate safeguards over access to assets

Answer 1

Answer 1 : Option D is correct i.e. control that has historically been effective.

During interim period if control is historically effective then its testing can be avoided and done in later period.

But if controls were historically ineffective then its must to test it. And controls should be tested relating to account with low inherent risk or controls performed by competent personnel if its required.

Answer 2 : Option C is correct i.e. reduce the level of audit risk.

As it measure the sufficiency of the audit evidence obtained which is the audit procedure to reduce the audit risk to an acceptable leve. By obtaining sufficient and appropriate audit evidence audit risk can be reduced.

Answer 3 : Option C is correct i.e. all of above.

As internal controls can be override by top management of organisation which is one of limitation of internal controls. Moreover internal control fails when the accountable personnel who is performing it, is incompetent or collusion among employees could increase the risk that internal controls may not detect or correct the misstatement within reasonable period.

Answer 4 : Option C both A&C is correct.

Auditing Standard (AS) No. 5 emphasize the “top-down, risk-based approach which directs auditor’s time and energy to areas, accounts, and assertions that have the highest possibility of being materially misstated. and shift from the former approach to ICFR assessment prescribed by AS No. 2. Under AS2, 404 assessments generally consisted of treating all controls as equally important, and spending equal time and energy testing each control. IT leads to better quality of audit reports.

Answer 5 : Option C i.e. affects management’s financial statement assertions.

audit of financial statements, an auditor’s primary consideration regarding a control is whether financial statements are true and fair, assets are safeguarded and organisation has better internal controls on all the assertion in the financial statements.