ABA ABA Internal Controls & Risk Management 2 — Questions and Answers
Question 1: What is 'inherent risk' in risk management?
- Risk that remains after applying internal controls
- The natural risk of error or fraud before any controls are applied (Correct answer)
- Risk caused by poor employee training
- Risk from external market conditions only
Correct answer: The natural risk of error or fraud before any controls are applied
Inherent risk is the susceptibility of an activity or assertion to material misstatement assuming no related controls are in place.
Question 2: What does a risk assessment involve in internal control planning?
- Calculating insurance premiums for business assets
- Identifying and evaluating risks that could prevent organizational objectives (Correct answer)
- Auditing all vendor invoices for accuracy
- Setting employee performance goals
Correct answer: Identifying and evaluating risks that could prevent organizational objectives
Risk assessment involves identifying potential risks to achieving organizational objectives and evaluating their likelihood and potential impact.
Question 3: Which of the following is an example of a preventive internal control?
- Monthly bank reconciliation
- Reviewing variance reports after period close
- Requiring purchase orders before any inventory purchase (Correct answer)
- Investigating customer complaints
Correct answer: Requiring purchase orders before any inventory purchase
Requiring purchase orders before inventory purchases is a preventive control because it stops unauthorized purchases from occurring in the first place.
Question 4: What is 'control risk' in the context of internal auditing?
- The risk that the auditor will fail to detect a material misstatement
- The risk that internal controls will fail to prevent or detect a material misstatement (Correct answer)
- The risk that management will override controls
- The risk that external auditors charge too much
Correct answer: The risk that internal controls will fail to prevent or detect a material misstatement
Control risk is the risk that a company's internal controls will fail to prevent or detect a material misstatement in the financial statements.
Question 5: What is the purpose of a whistleblower policy in internal controls?
- To track employee absences and tardiness
- To provide a safe channel for reporting suspected fraud or misconduct (Correct answer)
- To manage customer complaints about products
- To document environmental compliance activities
Correct answer: To provide a safe channel for reporting suspected fraud or misconduct
A whistleblower policy establishes a confidential process for employees to report suspected fraud, misconduct, or ethics violations without fear of retaliation.
Question 6: In a small business with limited staff, which compensating control can substitute for full segregation of duties?
- Purchasing more accounting software
- Owner or manager review of transactions and reconciliations (Correct answer)
- Hiring temporary employees during busy periods
- Outsourcing all payroll processing
Correct answer: Owner or manager review of transactions and reconciliations
When segregation of duties is impractical, having the owner or manager independently review transactions and reconciliations serves as a compensating control.
ABA ABA Internal Controls & Risk Management 2
What is 'inherent risk' in risk management?