When a Compensating Control Exists,a Weakness in the System

question 23

Multiple Choice

When a compensating control exists,a weakness in the system

• A)is no longer a concern because the potential for misstatement has been sufficiently reduced.
• B)is reduced but not removed;therefore,it is still of concern to the auditor.
• C)could cause a material loss,so it must be tested using substantive procedures.
• D)is magnified and must be removed from the sampling process and examined in its entirety.

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Definitions:

Contribution Margin Ratio

The proportion of sales revenue that exceeds variable costs, typically expressed as a percentage, indicating how much contributes to covering fixed costs and generating profits.

Fixed Expenses

Costs that do not vary with the level of production or sales over a short period, such as rent, salaries, and insurance.

Break-Even

The point at which total costs and total revenues are equal, meaning there is no net loss or gain.

Absorption Costing

A costing method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product.