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:

Journal

A detailed record where all financial transactions of a business are initially recorded before transfer to accounts in the general ledger.

Ledger

A book or other collection of financial accounts of a particular type.

Prepaid Insurance

The portion of insurance premiums that have been paid in advance and are recorded as an asset on the balance sheet until the coverage period expires.

Umbrella Insurance Policy

An insurance policy designed to provide additional coverage beyond the limits of the insured's homeowners, auto, and watercraft personal insurance policies. It supplements existing insurance by offering protection against claims that may exceed other policies' limits.