After Obtaining an Understanding of the Entity and Its Environment

question 641

Multiple Choice

After obtaining an understanding of the entity and its environment, including its internal control, an auditor decided to perform tests of controls. This is likely because:

• A) The auditor's risk assessment is based on the effective operation of controls.
• B) Evidence to support a reduction in control risk is not available.
• C) An increase in the assessed level of control risk is justified for certain financial statement assertions.
• D) There were many internal control weaknesses that could allow errors to enter the accounting system.

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Definitions:

Velocity of Circulation

The rate at which money is exchanged in an economy, reflecting the frequency with which money is spent on goods and services.

Rational Expectations Theory

The hypothesis that individuals form forecasts about the future based on all available information, including the understanding of economic policies, thus acting optimally on these expectations.

Aggregate Demand

The total demand for goods and services within a particular market or economy at a given price level and in a given time period.

Oil Price Shocks

Sudden and significant changes in the global price of oil, which can lead to economic instability and affect global markets.