CH 18 Smartbook

Place the following tests of controls in order of decreasing persuasiveness (e.g. most persuasive first, least persuasive last):

1. reperformance 2. observation 3. inspection 4. inquiries

Which of the following statements are correct?1. The types of tests of control performed for an internal control audit are the same as those performed for a financial statement audit.2. The evidence from tests performed for an internal control audit may be used for the financial statement audit.

Both 1. and 2.

True or false: Major classes of transaction exclude those that indirectly affect significant financial statement accounts through the creation of rights or obligations that are not recorded in the general ledger.

False

Section 404(b) of the Sarbanes-Oxley Act of 2002 requires that public companies with market capitalization in excess of $75,000,000 are required to have ______ audit the effectiveness of internal controls.

a CPA firm

After providing an adverse opinion on an internal control, auditors may be engaged to report on whether the material weakness continues to exist. In this case, management must provide ______ that the material weakness has been eliminated.

a written assertion sufficient evidence

As operationalized by the SEC management is required to ______ internal control.

accept responsibility for the effectiveness of evaluate the effectiveness of provide a report on

If auditors obtain knowledge of subsequent events that materially and adversely affect the effectiveness of internal control, they should issue a(n) ______ opinion.

adverse

If the auditors identify a material weakness in internal controls after year-end, a(n) ______ opinion must be issued, even if the weakness is corrected.

adverse

When management does not disclose a material weakness properly, the auditors will issue a(n) ______ opinion.

adverse

When performing tests of controls that operate only periodically, it may be necessary to test the controls ______ the date of the management's report.

after

In the audit of internal control, the focus is whether internal control is effective ______.

at a point in time, usually the last day of the fiscal year

Section 404(a) of the Sarbanes-Oxley Act requires management's report on internal controls to include a statement that the company's auditors have issued a(n) ______ report on management's assessment.

audit

PCAOB Standard No. 5 states that ineffective oversight by the company's ______ is an indicator of material weakness.

audit committee

PCAOB AC 2201 emphasizes entity-level controls relating to ______.

audit-committee effectiveness period-end financial reporting processing fraud

Management's report on internal control must ______.

be based on the SEC's definition of internal control

The project that involves evaluating and improving a company's internal control may be performed by the ______.

company itself company with help from consultants

A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a control objective is called a(n) control.

compensating

Management's evaluation of an identified deficiency should include analysis of whether a ______ control exists to either prevent or detect the possible misstatement.

compensating

Walk-throughs provide the auditors with evidence to ______.

confirm whether controls have been placed in operation evaluate the effectiveness of the design of control

The objective of tests of controls for a financial statement audit is to assess risk.

control

Management's report on internal control must result from an evaluation using an accepted

control framework

Using knowledge obtained during past audits of internal controls, called ______ audit knowledge, the auditors may be able to reduce the amount of work performed.

cumulative

Auditors specifically consider whether the controls, if functioning, would reduce the risks to an appropriately low level when evaluating the effectiveness of internal controls.

design

The SEC guidance on management's evaluation of internal control is structured around evaluating the ______.

design of controls to identify controls and risks operations of the controls

Auditors gather evidence on both the ______ and ______ of the internal control as of the date specified in management's assessment.

design; operating effectiveness

If auditors obtain knowledge of subsequent events but are unable to determine the effect on internal control, they should issue a(n) ______ opinion.

disclaimer of

Redundant control Preventative control Detective control Complementary control

duplicate control that achieves the same control objective as another control procedures designed to stop an error or fraud policies and procedures designed to identify errors or fraud after they have occurred controls that function together to achieve the same control objective

The portions of the control environment dealing with integrity and ethical values are examples of - level controls.

entity

The pervasiveness of - controls distinguishes them from other controls that are designed to achieve specific objectives.

entity-level

True or false: The first step in the internal control evaluation process is to evaluate the operating effectiveness of controls in areas that pose a high risk to reliable financial reporting.

false

The auditors' objective in an audit of internal control is to express an opinion on the company's internal control over

financial reporting

A top-down approach to auditing internal controls starts with ______.

financial statements and entity-level controls

PCAOB AC 2201 emphasizes the need for controls specifically intended to address the risk of

fraud

Management's evaluation process of internal controls begins with ______.

identifying and assessing the risks to reliable financial reporting

Transactions that materially affect significant financial statement accounts are referred to as of transactions.

major classes

A top-down approach to auditing internal controls ends with ______.

major classes of transactions

Section 404(a) of the Sarbanes-Oxley Act requires the management's report on internal control to identify ______ framework for evaluating internal control.

management's

The objective of tests of controls in an audit of internal control is to obtain evidence about the effectiveness of controls to support the auditors' opinion on whether ______ assessment of the effectiveness of internal control, taken as a whole, is fairly stated as of a point in time.

management's

Tests of controls should be performed over a period of time sufficient to determine whether, as of the date specified in the ______, the controls were operating effectively.

management's report

PCAOB Standard No. 5 states that any identification of fraud on the part of senior management is an indicator of a(n)

material weakness

The overall objective of management's evaluation of internal control is to provide a reasonable basis for its annual assessment as to whether there are any in internal control at the end of the fiscal year.

material weaknesses

A positive tone at the top of the organization ______.

may allow the auditor to decrease testing of lower level controls

Sufficient evidence to support the operating effectiveness of a control ______ be obtained through inquiry alone.

may not

A company's external auditors ______.

may only provide limited assurance to management in their assessment of internal control

Controls to prevent management override are ______.

more important in small companies than large ones

When deciding how to design tests of operating effectiveness of internal controls, the auditors must focus on the , , and extent of the tests.

nature timing

Auditors test the design effectiveness of controls by performing ______.

observation of the company's operations inspection of relevant documentation inquiry of appropriate personnel

After evaluating the design effectiveness of controls, management then evaluates effectiveness of controls in areas that pose a high risk to reliable financial reporting.

operating

Whether the control functions as designed and whether the person performing the control possesses the necessary authority and qualifications is determined by tests of the effectiveness of controls.

operating

In an integrated audit, the auditors are more likely to use an approach that includes testing of both and controls.

preventive detective

When selecting controls to test, auditors may decide to test ______ controls, ______ controls, or a combination of both.

preventive; detective

In an integrated audit, the scope of substantive procedures will likely be ______.

reduced

Factors auditors consider in deciding whether an account is significant include ______.

reporting complexity changes from prior periods existence of related party transactions

A transaction for a recurring financial activity recorded in the accounting records in the normal course of business, such as sales, is considered a ______ transaction.

routine

Auditors should either withdraw from the engagement or disclaim an opinion when circumstances impose a(n) limitation.

scope

In audits subsequent to the first year auditors ______.

should incorporate knowledge obtained from past audits of internal control

A control deficiency in internal control over financial reporting is a deficiency that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting is a(n) deficiency.

significant

A deficiency in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting is called a(n) ______ deficiency.

significant

If there is a reasonable possibility that it could contain a misstatement that, individually or when aggregated with others, has a material effect on the financial statements, an account is ______.

significant

The auditors must evaluate whether identified control deficiencies, individually or in combination, are deficiencies or .

significant material weaknesses

When planning and performing the audit of internal controls, auditors should realize control to prevent management override are more important in ______ companies.

small

During an integrated audit, procedures may provide evidence of the effectiveness or ineffectiveness of internal control over financial reporting, and reduce the extent necessary to test controls.

substantive

Auditors plan and perform the audit of internal control in five stages. The step that comes after testing and evaluating design effectiveness of internal control is ______.

test and evaluate operating effectiveness of internal control

In the audit of internal control, the focus is whether internal control is effective at a point in time—the as of date—which is ordinarily the last day of ______.

the fiscal year

In forming an opinion on internal control over financial reporting, the auditors evaluate all evidence, including ______.

the results of their evaluation of the design negative results of substantive procedures

Under PCAOB AS 2201, when auditors use the work of others in the audit of internal control ______.

they remain responsible for their opinion

Auditors plan and perform the audit of internal control in five stages. The step that comes before testing and evaluating design effectiveness of internal control is ______.

use a top-down approach to identify controls to test

Tracing a transaction from its origination through the company's information system until it is reflected in the company's financial reports is called a(n) - .

walk-through

Section 404 of the Sarbanes-Oxley Act of 2002 requires that ______.

all public companies file an internal control report annually with the SEC management prepare an internal control report assessing the effectiveness of internal controls public companies with a certain threshold must have a CPA firm audit the effectiveness of internal control

In considering entity-level controls, auditors should be aware controls may have either a(n) or effect on the likelihood of misstatement.

direct indirect

In the event of a scope limitation, the auditors should withdraw from the engagement or ______ opinion.

disclaim an

A transaction involving management's judgments or assumption, such as establishing warranty reserves is an example of an accounting ______.

estimate

Section 404(a) of the Sarbanes-Oxley Act requires the management's report on internal control to ______.

identify management's framework for evaluating internal control state it is management's responsibility to establish and maintain adequate internal control

When management's report on internal control is found to be inadequate, the auditors should ______.

include an explanatory paragraph in their report

The Sarbanes-Oxley Act of 2002 ______.

increased management's responsibilities for demonstrating the effectiveness of internal control

If auditors are engaged to report on whether a material weakness continues to exist, and they uncover an additional material weakness, PCAOB AS 6115 states that the auditors should ______.

inform the audit committee about the matter

An audit that includes audit reports on both a company's internal control over financial reporting and the financial statements is a(n) ______ audit.

integrated

An enhanced consideration of internal control is part of a(n) audit.

integrated

Auditors gather evidence on both the design and operating effectiveness of internal control as of the date specified in management's assessment, which is usually the ______.

last day of the fiscal year

PCAOB Standard No. 5 allows auditors to use the work of others; however, it is expected that the work of others will be related to ______ areas.

low risk

A transaction that occurs only periodically, such as determining prepaid expenses, is considered a(n) transaction.

nonroutine

In evaluating whether identified control deficiencies, individually or in combination, are significant deficiencies or material weaknesses, the auditors must consider both and factors.

quantitative qualitative

Evidence of the effectiveness or ineffectiveness of internal control over financial reporting may be provided by the findings obtained while performing ______ procedures in the financial statement audit.

substantive

In forming an opinion on internal control over financial reporting, the auditors evaluate all evidence, including the negative results of procedures performed during the financial statement audit.

substantive

In evaluating the design effectiveness of internal controls, management ordinarily uses a ______ approach.

top-down

If management fixes a material weakness in internal controls prior to year-end, the auditors may issue a(n) ______ opinion on internal controls as long as they have sufficient evidence to provide reasonable assurance that the new control is operating effectively.

unqualified