When Considering Internal Control, an Auditor Should Be Aware of the Concept

question 72

Multiple Choice

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the:

• A) segregation of incompatible functions is necessary to ascertain that internal control is effective.
• B) employment of competent personnel provides assurance that the objectives of internal control will be achieved.
• C) establishment and maintenance of internal control is an important responsibility of the management and not of the auditor.
• D) concept allows for only a remote likelihood that material misstatements will not be prevented or detected on a timely basis.

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Definitions:

Call Option

A financial contract giving the buyer the right, but not the obligation, to purchase a stock or other asset at a specified price within a specified time.

Risk-free Rate

Often considered as the return on government securities, it represents the interest an investor would expect from an absolutely risk-free investment over a specified period.

Put Option

A financial contract that gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified period.

Exercise Price

The price at which the holder of an option can buy (in case of a call option) or sell (in case of a put option) the underlying asset.