Internal controls

AAA – L3 – SA – Q5.5 – The audit approach

Why use a business risk approach for auditing large companies?

Question

What is the main justification for the use of a business risk approach to an audit of large companies?

A A systems-based approach and a substantive testing approach are unlikely to detect material misstatements in the financial statements of large companies.

B This approach forces the auditors to understand the client’s business in depth.

C It is more effective than other approaches to audit in detecting deficiencies in internal control.

D Major audit problems in large companies are more likely to result from business-related problems than from deficiencies in internal control.

Answer

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Tags: Business Risk Approach, Financial Statements, Internal controls, Large Companies
Level: Level 3

Topic: The audit approach

AAA – L3 – SA – Q4.6 – Audit evidence

Which factors contribute to inherent risk in an audit?

Question

Which of the following may be factors contributing to inherent risk?

1 Number of customers

2 Strength of internal controls

3 Number of products

4 Rate of staff turnover

A 1,2 and 3 only

B 1,3 and 4 only

C 2,3 and 4 only

D 1,2 and 4 only

Answer

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Tags: Customers, Inherent Risk, Internal controls, Products, Risk Assessment, Staff turnover
Level: Level 3

Topic: Audit Evidence

AAA – L3 – SA – Q4.5 – Audit evidence

How does an auditor verify understanding of a transaction process and its controls?

Question

An auditor checks his understanding of a transaction process and its internal controls by means of:

A ATTs

B tests of controls

C substantive tests

D walk-through tests

Answer

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Tags: Audit Procedures, Evidence collection, Internal controls, Transaction process, Walk-through tests
Level: Level 3

Topic: Audit Evidence

AAA – L3 – SA – Q2.3 – Audit Committee Functions

Function of audit committee per 2020 Code.

Question

According to the Code of Corporate Governance for Listed Companies 2020, which ONE of the following is a function of the audit committee:

A To make recommendations to the Board with respect to the effectiveness of internal controls

B To review the risks facing the company

C To make recommendations on induction and training to the Board

D To recommend a remuneration policy for directors to the Board.

Answer

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Tags: Audit committee, Corporate Governance, ICAG, Internal controls
Level: Level 3

Topic: The regulatory environment

AA – L2 – SA – Q5.6 – Internal Control Components

Components of internal control system.

Question

Select the appropriate component of a system of internal controls for each of the below examples.

The authorizing of inventory write-offs prior to inventory being scrapped.
The preparation of a reconciliation between the receivable’s ledger control account and the receivables ledger
A Control environment
B Control activity
C Information system and communication
D Information system and communication
E Control environment
F Control activity

Answer

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Tags: Control Components, ICAG, Internal controls, Inventory, Receivables
Level: Level 2

Topic: Planning and Approach for Audit and Assurance Engagements

AA – L2 – SA – Q4.6 – Fraud Prevention Controls

Control to prevent supplier fraud.

Question

A supplier fraud has just been identified by the management of Coral Ltd. The supplier had developed the technique of delivering goods that had not been ordered by Coral Ltd. and then subsequently raised invoices for the unordered goods which Coral Ltd. then paid. Which of the following controls would have prevented this fraud?

A All invoices received are agreed to goods received notes

B All goods received are agreed to purchase orders

C All purchase orders are kept in a locked box in the purchases department office

D All orders are authorized by the purchase’s director

Answer

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Tags: Fraud Prevention, ICAG, Internal controls, Purchase Controls
Level: Level 2

Topic: Planning and Approach for Audit and Assurance Engagements

AA – L2 – SA – Q4.5 – Internal Controls

Identifying non-internal control activity.

Question

Which of the following is NOT an internal control?

A Authorizing purchase orders

B Ensuring cash is locked away

C Performing external confirmation of receivables

D The opening of the post should not be the same person who banks the cheques

Answer

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Tags: Audit Planning, Control Procedures, ICAG, Internal controls
Level: Level 2

Topic: Planning and Approach for Audit and Assurance Engagements

AA – L2 – SA – Q3.6 – Revenue System Deficiencies

Consequences of revenue system shortcomings.

Question

The following shortcomings have been identified in Apex Ltd’s revenue system. For each deficiency select the most likely consequence.
Invoices are not checked for arithmetic accuracy before being issued to customers
A Company may process loss-making sales orders
B Cash receipts are not recorded correctly in the cashbook
C Increased risk of client dissatisfaction
Sales discounts are not authorized prior to being given
D Company may process loss-making sales orders
E Cash receipts are not recorded correctly in the cashbook
F Increased risk of client dissatisfaction

Answer

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Tags: Client Dissatisfaction, ICAG, Internal controls, Revenue System
Level: Level 2

Topic: Audit and Assurance Evidence

AA – L2 – SA – Q2.10 – Directors’ Responsibilities

Identify non-responsibility of directors.

Question

Which of the following is NOT a responsibility of the directors in practice?

A Establishment of internal controls

B The supply of information and explanations to the auditor

C Drafting a written representation letter, if needed

D Safeguarding of a company’s assets

Answer

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Tags: Directors Responsibilities, ICAG, Internal controls, Written Representation
Level: Level 2

Topic: Regulatory Framework and Audit Responsibilities

AA – L2 – SA – Q2.4 – Auditor Roles

Roles of internal vs. external auditors in fraud and controls.

Question

Internal and external auditors perform a variety of roles for companies.
For each of the below examples, select whether the service could be provided by external auditors only, internal auditors only, or by either.

Investigation into a material fraud committed in the entity
A External auditors only
B Internal auditors only
C Either
Preparation of a report on the operating effectiveness of internal controls
D External auditors only
E Internal auditors only
F Either

Answer

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Tags: External Audit, Fraud Investigation, ICAG, Internal Audit, Internal controls
Level: Level 2

Topic: Internal Audit and Its Relationship with External Audit

Tag (SQ): Internal controls

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AAA – L3 – SA – Q5.5 – The audit approach

Why use a business risk approach for auditing large companies?

AAA – L3 – SA – Q4.6 – Audit evidence

Which factors contribute to inherent risk in an audit?

AAA – L3 – SA – Q4.5 – Audit evidence

How does an auditor verify understanding of a transaction process and its controls?

AAA – L3 – SA – Q2.3 – Audit Committee Functions

Function of audit committee per 2020 Code.

AA – L2 – SA – Q5.6 – Internal Control Components

Components of internal control system.

AA – L2 – SA – Q4.6 – Fraud Prevention Controls

Control to prevent supplier fraud.

AA – L2 – SA – Q4.5 – Internal Controls

Identifying non-internal control activity.

AA – L2 – SA – Q3.6 – Revenue System Deficiencies

Consequences of revenue system shortcomings.

AA – L2 – SA – Q2.10 – Directors’ Responsibilities

Identify non-responsibility of directors.

AA – L2 – SA – Q2.4 – Auditor Roles

Roles of internal vs. external auditors in fraud and controls.

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AAA – L3 – SA – Q5.5 – The audit approach

Why use a business risk approach for auditing large companies?

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AAA – L3 – SA – Q4.6 – Audit evidence

Which factors contribute to inherent risk in an audit?

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AAA – L3 – SA – Q4.5 – Audit evidence

How does an auditor verify understanding of a transaction process and its controls?

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AAA – L3 – SA – Q2.3 – Audit Committee Functions

Function of audit committee per 2020 Code.

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AA – L2 – SA – Q5.6 – Internal Control Components

Components of internal control system.

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AA – L2 – SA – Q4.6 – Fraud Prevention Controls

Control to prevent supplier fraud.

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AA – L2 – SA – Q4.5 – Internal Controls

Identifying non-internal control activity.

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AA – L2 – SA – Q3.6 – Revenue System Deficiencies

Consequences of revenue system shortcomings.

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AA – L2 – SA – Q2.10 – Directors’ Responsibilities

Identify non-responsibility of directors.

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AA – L2 – SA – Q2.4 – Auditor Roles

Roles of internal vs. external auditors in fraud and controls.

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