When Obtaining an Understanding of the Entity and Its Environment,the

question 7

Multiple Choice

When obtaining an understanding of the entity and its environment,the auditor should obtain an understanding of internal controls primarily to

• A) Identify areas of relatively high risk of misstatement and plan the audit accordingly.
• B) Provide suggestions for improvement to the company.
• C) Serve as a basis for setting audit risk and materiality.
• D) Decide whether to perform an audit for the company.

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Definitions:

Depletable Resource

A natural resource that can be diminished or exhausted by use, such as fossil fuels, minerals, or forests.

Extraction Cost

The expenses associated with the removal of raw materials from their natural setting for use or sale.

Non-Monetary Benefits

Advantages or perks associated with a job or situation that are not in the form of money, such as health insurance or flexible working hours.

Hotelling Rule

A theory in economics that states the net price (price minus extraction costs) of a non-renewable resource should increase at the rate of interest over time.