AA-Ch-8 (Systems and Controls)

Based on your understanding of the nature of EuKaRe you have identified that income is primarily in the form of cash. Which element of audit risk is increased by this fact?

• Detection risk

• Inherent risk

• Control risk

• Business risk

Your audit partner has highlighted to you that it is imperative that TEY & Co acts in line with ISA 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment. This means it must identify and assess the risks of material misstatement at both the financial statements level and at the assertion level, for classes of transactions, events and their related disclosures, and account balances and their related disclosures.
Which of the following statements is NOT an explanation of why ISA 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment requires a risk assessment to be carried out at the planning stage?

• The risk assessment will help the audit team gain an understanding of the entity for audit purposes

• The risk assessment will enable the audit senior to produce an accurate budget for the audit assignment

• The risk assessment will form the basis of the audit strategy and the detailed audit plan

• Once the risks have been assessed, TEY & Co can select audit team members with sufficient skill and experience to maximise the chance of those risks being addressed

You have identified several audit risks which you feel your team will need to address. One such audit risk relates to the risk that income may be understated in the financial statements. You are concerned that not all income may be recorded.
Which of the following statements is NOT a valid response to this audit risk?

• Obtain a breakdown of the income recorded from the cash that was collected in buckets, and vouch a sample of entries back to the volunteer in order to determine which volunteer collected the relevant donations

• Perform analytical procedures on the level of donations in shopping areas per volunteer

• Review the internal controls relating to cash collected in buckets to determine whether buckets are sealed, sequentially numbered and signed in and out by EuKaRe's volunteers

• Observe the counting and recording of proceeds from collections, to determine whether appropriate segregation of duties is in place

Another identified audit risk is the susceptibility of EuKaRe's business to fraud due to the high levels of cash involved. Which of the following statements correctly describes the auditor's responsibilities in accordance with ISA 240 The auditor's responsibilities relating to fraud in an audit of financial statements?

• The auditor is responsible for the prevention and detection of fraud and error

• The auditor is not responsible for the prevention of fraud and error but is responsible for detection

• The auditor is responsible for obtaining reasonable assurance that the financial statements are free from material misstatement whether caused by fraud or error

• The auditor is responsible for detecting all errors and should attempt to detect fraud where information comes to light as a result of standard audit procedures

The audit manager has noted in the detailed audit plan that EuKaRe's control environment may be weak. Which TWO of the following statements are valid reasons as to why EuKaRe may have a weak control environment?

• EuKaRe has a detailed constitution which explains how the charity's income can be spent

• EuKaRe's finance department relies on volunteers who may not have accounts experience

• A high proportion of the income of EuKaRe is cash

• Understaffing in the finance department at certain times is due to the ad hoc nature of volunteer working hours

Which of the following correctly summarises the order in which the steps required by the firm's policy for first year audits would take place?

• 1, 2, 3, 4

• 3, 2, 1, 4

• 1, 2, 4, 3

• 2, 1, 4, 3

The audit junior has asked you whether internal control questionnaires (ICQs) should be completed as well as internal control evaluation questionnaires (ICEQs).
Which of the following statements is correct in relation to ICQs and ICEQs?

• ICEQs determine whether controls exist which meet specific control objectives; ICQs determine whether there are controls which prevent or detect specified errors or omissions

• ICEQs are generally easier to apply to a variety of different systems than ICQs

• ICQs are likely to overlook how internal controls deal with unusual transactions; this will normally have to be recorded using ICEQs

• ICQs can give the impression that all controls are of equal weight; this issue is resolved by using ICEQs

Which of the internal control activities identified in the audit junior's notes above would satisfy the objective of preventing/detecting a material misstatement if it is operating effectively?

• 1 only

• 3 only

• 1 and 2

• 3 and 4

You instruct the audit junior to confirm whether the post is opened by more than one individual.
Over which of the following internal control objectives would this provide assurance?

(1) Cash receipts are not misappropriated

(2) All cash receipts that occurred are recorded

(3) Cash receipts are recorded at the correct amounts in the ledger

(4) Cash receipts are posted to the correct receivables accounts and to the general ledger

• 1 only

• 2 only

• 3 and 4

• 1 and 4

During the course of the audit, the audit team identified numerous deficiencies in internal control relating to the sales system. The amounts exposed to the deficiencies were high and you have concluded that it is likely that the deficiencies would result in material misstatements in the financial statements. A deficiency was also identified in the purchases system but further investigation showed this to be a minor, isolated issue.
Which of the following statements is correct regarding the deficiencies which must be included in the report to management?

• The deficiencies identified in the sales system only

• The deficiencies identified in the purchases system only

• The deficiencies identified in the sales and purchases system

• Neither the deficiencies identified in the sales system nor the purchases system