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WorksheetsAudit: Understanding the Entity and Its Environment
Total questions: 25
Worksheet time: 21mins
Which of the following is not an example of internally-generated information that management uses for the measurement of the company’s financial performance?
Budgets
Segment information
Credit rating agency reports
Variance analysis
Which of the following is not part of the matters that should be communicated with those charged with governance according to ISA 260?
The Auditor’s Responsibilities in Relation to the Financial Statement Audit
Planned Scope and Timing of the Audit
Auditor Independence
Type of Audit Opinion to be Issued
Person(s) or organization(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity.
Management
Those Charged With Governance
Board of Directors
Accounting Department
I. General IT controls are procedures that relate to many applications and support the effective functioning of application controls.
II. Application controls are procedures that operate at a business process level and apply to the processing of individual applications. These controls are automated procedures only.
Only statement I is true
Only statement II is true
Both statements are true
Both statements are false
A set of quantifiable metrics taken from various sources that together with an appropriate analytical process, allows the management of a business to track and assess the current status of a specific business, project, or process.
Key Performance Indicators
Performance Indicators
Performance Measures
Key Ratios and Operating Statistics
KRI
Which of the following statements are false?
An understanding of the business risks facing the entity increases the likelihood of identifying risks of material misstatement
Management objectives may be influenced by concerns regarding public accountability
The auditor does not have a responsibility to identify or assess all business risks because all business risks give rise to risks of material misstatements.
The auditor must understand the control environment, the accounting system, and all control procedures
The auditor shall use their professional judgment in determining whether a control, individually, is relevant to the audit and obtain an understanding thereof.
True
False
The auditor shall obtain an understanding of the information system, related business process relevant to financial reporting, including the following areas but one.
Classes of transactions in the entity’s operations that are significant to the financial statements
Procedures, within both information technology and manual systems
Controls surrounding journal entries, including non-standard journal entries
How the information system only captures events and conditions that are significant to the financial statements
When obtaining an understanding of an entity's control environment, why should an auditor concentrate on the substance of controls rather than their form?
The auditor may believe that the controls are inappropriate for that particular entity
The board of directors may not be aware of management's attitude toward the control environment
Management may establish appropriate controls but not act on them
The controls may be so ineffective that the auditor may assess control risk at the maximum level
An auditor needs to obtain knowledge about the entity and its environment to:
Make constructive suggestions concerning improvements to the client’s internal control.
Understand the events and transactions that may affect the financial statements and give rise to risks of material misstatements
Develop an attitude of professional skepticism concerning management’s financial statement assertions.
Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated.
Which of the following matters is not included under “regulatory environment”?
Taxation
Accounting principles and industry-specific practices
Environmental requirements
General level of economic activity
When the continuing auditor intends to use information about the entity and its environment obtained in prior periods, the auditor should
Determine whether changes have occurred that may affect the relevance of such information in the current audit.
Seek permission with the client in using the prior period information obtained by the auditor.
Assess control risk as “high” for the assertions affected by the prior-period information.
Determine whether to equitably reduce the audit fee due to lower audit effort expended during the engagement.
The division of internal control into 5 components is:
A guide as to how an entity should design and implement their internal control system
Only to assist the auditor in determining how different aspects of an internal control system affect the audit
All of the above
None of the above
Risk of material misstatement may be greater for risks relating to significant non-routine transactions arising from the following matters, except:
Greater manual intervention for data collection and processing
Differing interpretation of the accounting principles for accounting estimates
Enhanced management intervention to specify accounting treatment
Complex calculations or accounting principles
Internal control provides
absolute assurance about achieving financial reporting objectives
reasonable assurance about achieving internal reporting objectives
reasonable assurance about achieving financial reporting objectives
reasonable assurance about achieving financial accounting objectives
An entity’s information system, whether manual or automated, includes infrastructure, people, input or data, and output or meaningful information.
True
False
Which is not a procedure typically found in information systems?
Initiate, record, process, and report entity transactions
Fix incorrect processing of transactions
Transfer data from information systems to the general ledger
Process and account for system overrides or bypasses to controls
Give one possible management response in the event of a significant risk arising from non-routine transactions or judgmental matters:
(a)
When auditor’s use their judgment when identifying which risks are significant risks, the effects of identified controls related to the risk are included
True
False
I. Auditors make use of auditor’s judgment when determining whether any of the identified risks are significant risks.
II. Significant risks often relate to either routine transactions or judgmental matters
III. If management appears to not have appropriate responses to significant risks, this indicates that there is a material weakness in the entity’s internal control
IV. There are some risks wherein an auditor may judge that it is not possible nor practicable to obtain sufficient appropriate audit evidence solely from substantive procedures. In such cases, the auditor has to obtain an understanding of the entity’s controls over those risks.
Statements I, II, and III are true
Statements II, III, and IV are true
Statements I, III, and IV are true
Statements I, II, III, and IV are true
Risks of material misstatement may be greater for significant non-routine transactions arising from the following, EXCEPT:
Greater management intervention to specify the accounting treatment
Calculations or accounting principles that are simple
The nature of non-routine transactions
Greater manual intervention for data collection and processing
After risk assessment procedures, discussions among the engagement team regarding the overall response should include:
Legal requirements and other government agencies’ pronouncements
Degree of knowledge and expertise required by the engagement
Disagreements with management as to auditing procedures
The need for an expert in certain areas within the audit
The auditor’s risk assessment procedures
By themselves, do not provide sufficient appropriate evidence on which to base the audit opinion.
Should not consider information obtained from the auditor’s previous experience with the entity.
Are designed to detect material misstatements at the assertion level for classes of transactions, account balances, and disclosures.
Are designed to test the effectiveness of the entity’s controls.
In an instance wherein fraud is detected, an auditor’s responsibility is to address the risks brought about by fraud through the performance of appropriate audit procedures.
True
False
In your own words, briefly explain the 3 risk assessment procedures.
