MIDTERMS (AUDIT) PART 2

These are the operational approaches by which management intends to achieve its objectives

• Strategies

• Planning methods

• Business risk approaches

• Operational plans

These result from significant conditions, events, circumstances, actions or inactions that could adversely affect the entity ability to achieve its objectives and execute its strategies

• Business failure

• Information risk

• Business risk

• Business obstacles.

The following statements relate to business risks. Select the incorrect statement:

• Business risk is broader than the risk of material misstatement

• Most business risks do not have financial consequences, though they may have an effect on the financial statements of the entity

• Usually management identifies business risks and develops approaches to address them

• Smaller entities often do not set their objectives and strategies, or manage the related business risks through formal plans or processes.

In obtaining an understanding of a client's objectives, strategies and related business risks, the auditor would most likely consider the following as business risks, except:

• The entity does not have the personnel or expertise to deal with the changes in the industry

• There is increased product liability

• Demand has not been accurately estimated

• The entity relies more on equity financing rather than debt financing.

The auditor's understanding of entity's selection and application of accounting policies encompasses the following:

I. The methods the entity uses to account for significant and unusual transactions

II. The effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus

III. The changes in the entity's accounting policies

• I and II only

• II and III only

• I and III only

• All of them

The following statements relate to performance measurement and review. Which of these statements is incorrect

• The auditor should obtain an understanding of the measurement and review of the entity's financial performance

• Performance measures and their review indicate to the auditor aspects of the entity's performance that management and others consider to be not of importance

• Management's measurement and review of the entity's financial performance is different from the monitoring of controls, though their purposes may overlap

• The sources of information used in measuring and reviewing financial performance may be internal or external in nature.

Examples of matters an auditor may consider under measurement and reyiew of the entity's financial performance. include the following, except:

• Key ratios and operating statistics

• Competitor analysis

• Use of information technology

• Employee performance measures and incentive compensation policies.

Internally generated information used by management may include the following:

A. Key performance indicators (financial and non-financial)

B. Budgets and variance analysis;

C. Analyst's reports and credit rating agency reports

• ABC

• AB

• BC

• AC

This is the process designed and effected by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of the entity's objectives on financial reporting, operations and compliance.

• Strategies

• Operating plans

• Internal controls

• Risk assessment

A reason to establish internal control is to:

• Have a basis for planning the audit

• Provide reasonable assurance that the objectives of the organization are achieved

• Encourage compliance with organizational objectives

• Ensure the accuracy, reliability and timeliness of information.