ACCA Audit and Assurance (F8) Practice Exam

What is considered a control risk for Not for Profit organizations?

1. Capability of auditors

2. The skill level of trustees

3. Fundraising effectiveness

4. Public transparency

The correct answer is: The skill level of trustees

In the context of not-for-profit organizations, control risk refers to the likelihood that internal controls may not prevent or detect material misstatements in financial reporting. The skill level of trustees is a crucial aspect of control risk because trustees are responsible for overseeing the governance and management of the organization, including its internal control systems. If trustees lack the necessary skills or knowledge, they may not be able to effectively supervise financial activities, ensuring compliance with the necessary regulations and standards. Trustees with a low skill level may not adequately understand the complexities of financial reporting, regulatory requirements, or risk management, leading to potential lapses in internal controls. This could increase the risk of errors or fraud going unnoticed, thereby raising the overall control risk for the organization. While capability of auditors, fundraising effectiveness, and public transparency are important elements in the functioning of a not-for-profit organization, they do not directly reflect the internal controls in place nor the risks associated specifically with management oversight. The trustees' skill level directly impacts how these other factors are managed, making it a key component of assessing control risk in this context.