Chapter 11 Audit

Who is responsible for establishing a private company's internal control? A) senior management B) internal auditors C) FASB D) audit committee

senior management

Control activities help assure that the necessary actions are taken to address risks to the achievement of the company's objectives. List the five types of control activities.

1. adequate separation of duties 2. proper authorization of transactions and activities 3. adequate documents and records 4. physical control over assets and records 5. independent checks on performance

a. Application controls b. Error listing c. General controls d. Hardware controls e. Input controls f. Output controls g. Parallel simulation h. Parallel testing i. Pilot testing j. Processing controls ___ Controls such as proper authorization of documents, check digits, and adequate documentation, designed to assure that the information to be entered into the computer is authorized, complete, and accurate.

Input controls

The internal control framework used by most U.S. companies is the ________ framework. A) FASB B) PCAOB C) COSO D) SEC

COSO

a. Application controls b. Error listing c. General controls d. Hardware controls e. Input controls f. Output controls g. Parallel simulation h. Parallel testing i. Pilot testing j. Processing controls _____ The new and old systems operate simultaneously in all locations.

Parallel testing

What tools do companies use to limit access to sensitive company data? a. Encryption techniques - yes Digital signatures - yes Firewall - yes b. Encryption techniques - yes Digital signatures - no Firewall - no c. Encryption techniques - no Digital signatures - yes Firewall - yes d. Encryption techniques - yes Digital signatures - yes Firewall - no

Encryption techniques - yes Digital signatures - yes Firewall - yes

A(n) ________ is a computer resource deployment and procurement model that enables an organization to obtain IT resources and applications from any location via an Internet connection. A) application service provider B) firewall C) cloud computing environment D) local area network

cloud computing environment

When auditing a client who uses a database management system, the auditor is principally aware of elevated risk due to the fact that _____ A) multiple users can access and update data files. B) the accounting information is only in one place. C) the database administrator may lack appropriate accounting knowledge. D) multiple users could all access the data simultaneously causing a system shutdown.

multiple users can access and update data files.

Firewalls are used to protect from ____ A) erroneous internal handling of data. B) insufficient documentation of transactions. C) illogical programming commands. D) unauthorized external users.

unauthorized external users.

Which of the following is correct with respect to the design and use of business documents? A) The documents should be in paper format. B) Documents should be designed for a single purpose to avoid confusion in their use. C) Documents should be designed to be understandable only by those who use them. D) Documents should be prenumbered consecutively to facilitate control over missing documents.

Documents should be prenumbered consecutively to facilitate control over missing documents

________ protect(s) the security of electronic communication when information is transmitted and when it is stored. A) Firewalls B) Digital signatures C) Encryption D) A database

Encryption

From an internal control perspective, what challenges arise when a company outsources computer functions?

Management is responsible for the design and operating effectiveness of internal controls, and this includes controls that are outsourced to a service provider. The ethics and integrity of service providers, as well as the design and functioning of their internal controls, need to be considered by management when selecting a service provider, and evaluated regularly.

When the auditor is obtaining an understanding of the independent computer service center's internal controls, the auditor should ________ A) use the same criteria used to evaluate the client's internal controls. B) use different criteria because the service center resides outside the company. C) use the same criteria used to evaluate the client's internal controls but omit tests of transactions. D) use different criteria for the service center by including substantive tests of balances.

use the same criteria used to evaluate the client's internal controls.

If a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll IT application?A) gross wages earned B) employee numbers C) total hours worked D) total debit amounts and total credit amounts

employee numbers

Rather than maintain an internal IT center, many companies outsource their basic IT functions such as payroll to an _________ A) external general service provider. B) independent computer service center. C) internal control service provider. D) internal auditor.

independent computer service center.

The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on A) the company's board of directors. B) the audit committee of the board of directors. C) management. D) the CFO and the independent auditors.

management

Which of the following controls prevent and detect errors while transaction data are processed? A) software B) application C) processing D) transaction

processing

Which of the following is not a general control? A) separation of IT duties B) systems development C) processing controls D) hardware controls

processing controls

General controls include all of the following except A) systems development. B) online security. C) processing controls. D) hardware controls.

processing controls.

Which of the following is not an example of an applications control? A) Back-up of data is made to a remote site for data security. B) There is a preprocessing authorization of the sales transactions. C) There are reasonableness tests for the unit selling price of a sale. D) After processing, all sales transactions are reviewed by the sales department.

Back-up of data is made to a remote site for data security.

Proper segregation of functional responsibilities calls for separation of A) authorization, execution, and payment. B) authorization, recording, and custody. C) custody, execution, and reporting. D) authorization, payment, and recording.

authorization, recording, and custody

Which of the following is a component of general controls? A) processing controls B) output controls C) back-up and contingency planning D) input controls

back-up and contingency planning

An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as A) collusion. B) a material weakness. C) a control deficiency. D) a significant deficiency.

collusion

Which of the following activities would be least likely to strengthen a company's internal control? A) separating accounting from other financial operations B) maintaining insurance for fire and theft C) fixing responsibility for the performance of employee duties D) carefully selecting and training employees

maintaining insurance for fire and theft

To obtain an understanding of an entity's control environment, an auditor should concentrate on the substance of management's policies and procedures rather than their form because _________ A) management may establish appropriate policies and procedures but not act on them. B) the board of directors may not be aware of management's attitude toward the control environment. C) the auditor may believe that the policies and procedures are inappropriate for that particular entity. D) the policies and procedures may be so weak that no reliance is contemplated by the auditor.

management may establish appropriate policies and procedures but not act on them.

To promote operational efficiency, the internal audit department would ideally report to A) line management. B) the PCAOB. C) the Chief Accounting Officer. D) the audit committee.

the audit committee

Name five of the specific responsibilities specifically directed by the SEC under the Sarbanes-Oxley Act requiring companies listed on the national stock exchanges to strengthen their audit committee requirements.

1. The audit committee must not be comprised solely of independent directors 2. The audit committee must not be solely responsible for hiring and firing the company's auditors 3. The audit committee must establish policies and procedures for complaints regarding accounting, internal controls, or other auditing matters 4. The audit committee must have the ability to engage its own legal counsel and advisors 5. The audit committee must be adequately funded

What are the four underlying principles related to risk assessment every organization should consider?

1. The organization should have clear objectives in order to be able to identify and assess the risks relating to those objectives 2. The organization should determine how the risks should be managed 3. The organization should consider the potential for fraudulent behavior 4. The organization should monitor changes that could impact internal controls

Separation of duties is essential in preventing errors and intentional misstatements on the financial statements. List below the four general guidelines.

1. separation of custody of the assets from accounting 2. separation of the authorization of transactions from custody of related assets 3. separation of operational responsibility from record keeping responsibility 4. separation of IT duties from user departments

Which of the following is an accurate statement regarding control activities? A) As the level of complexity of IT systems increases, the separation of duties often becomes blurred. B) Segregation of duties would be violated if the same person authorizes the payment of a vendor's invoice and also approves the disbursement of funds to pay the bill. C) The most important type of protective measure for safeguarding assets and records is the use of physical precautions. D) All of the above.

All of the above

a. Application controls b. Error listing c. General controls d. Hardware controls e. Input controls f. Output controls g. Parallel simulation h. Parallel testing i. Pilot testing j. Processing controls ___ Controls that apply to processing of transactions.

Application controls

Which of the following best explains the relationship between general controls and application controls? A) Application controls are effective even if general controls are extremely weak. B) Application controls are likely to be effective only when general controls are effective. C) General controls have no impact on application controls. D) None of the above.

Application controls are likely to be effective only when general controls are effective.

Identify the three categories of application controls, and give one example of each.

Application controls fall into three categories: • Input controls — preformatted screens which prompt the data input personnel for the information to be entered • Processing controls — a reasonableness test for the unit selling price of a sale • Output controls — postprocessing review of sales transactions by the sales department

Which of the following statements related to application controls is correct? A) Application controls relate to various aspects of the IT function including software acquisition and the processing of transactions. B) Application controls relate to various aspects of the IT function including physical security and the processing of transactions in various cycles. C) Application controls relate to all aspects of the IT function. D) Application controls relate to the processing of individual transactions.

Application controls relate to the processing of individual transactions.

What are the two software testing strategies that companies typically use? Which strategy is more expensive?

Companies may use pilot testing and parallel testing to test new software. Pilot testing involves operating the new software at a limited number of facilities, while continuing to operate the old software at all other locations. Parallel testing involves operating the new and old software simultaneously.

Which of the following is not a general control? A) Computer performed validation tests of input accuracy. B) Equipment failure causes error messages on monitor. C) There is a separation of duties between programmer and operators. D) There are adequate program run instructions for operating the computer.

Computer performed validation tests of input accuracy.

Of the following statements about internal controls, which one is least likely to be correct? A) No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. B) Transactions must be properly authorized before such transactions are processed. C) Because of the cost-benefit relationship, a client may apply controls on a test basis. D) Control procedures reasonably ensure that collusion among employees cannot occur.

Control procedures reasonably ensure that collusion among employees cannot occur.

________ is the information technology and internal control processes an organization has in place to protect computers, networks, programs, and data from unauthorized access. A) Encryption B) A firewall C) Cybersecurity D) A processing

Cybersecurity

When management is evaluating the design of internal control, management evaluates whether the control can do which of the following? a. Detect material misstatements - yes Correct material misstatements - yes b. Detect material misstatements - no Correct material misstatements - no c. Detect material misstatements - yes Correct material misstatements - no d. Detect material misstatements - no Correct material misstatements - yes

Detect material misstatements - yes Correct material misstatements - no

Which of the following statements is most correct with respect to separation of duties? A) A person who has temporary or permanent custody of an asset should account for that asset. B) Employees who authorize transactions should not have custody of the related assets. C) Employees who open cash receipts should record the amounts in the subsidiary ledgers. D) Employees who authorize transactions should have recording responsibility for these transactions.

Employees who authorize transactions should not have custody of the related assets.

39) The internal control framework developed by COSO includes five so-called "components" of internal control. Discuss each of these five components.

Five components of internal control are: • The control environment. The control environment consists of the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal control and its importance to the company. • Risk assessment. This is management's identification and analysis of risks relevant to the preparation of financial statements in accordance with appropriate accounting frameworks such as GAAP or IFRS. • Information and communication. These are the methods used to initiate, record, process, and report the entity's transactions and to maintain accountability for the related assets. • Control activities. These are the policies and procedures that management has established to meet its objectives for financial reporting. • Monitoring. This is management's ongoing and periodic assessment of the quality of internal control performance to determine whether controls are operating as intended and are modified when needed.

a. Application controls b. Error listing c. General controls d. Hardware controls e. Input controls f. Output controls g. Parallel simulation h. Parallel testing i. Pilot testing j. Processing controls ____ Controls that relate to all aspects of the IT system.

General controls

Define control for general controls and application controls. Also list the categories of controls included under general controls and application controls.

General controls are those that relate to all aspects of the IT function. They include controls related to administration, separation of IT duties, systems development, physical and on- line security, backup and contingency planning, and hardware controls. Application controls relate to the processing of individual transactions. Application controls are specific to certain software applications and typically do not affect all IT functions. They include input controls, processing controls, and output controls.

Which of the following factors may increase risks to an organization? a. Geographic dispersion of company operations - yes Presence of new information technologies - yes b. Geographic dispersion of company operations - no Presence of new information technologies - no c. Geographic dispersion of company operations - yes Presence of new information technologies - no d. Geographic dispersion of company operations - no Presence of new information technologies - yes

Geographic dispersion of company operations - yes Presence of new information technologies - yes

Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies? a. Management - yes Financial statement auditors - yes b. Management - no Financial statement auditors - no c. Management - yes Financial statement auditors - no d. Management - no Financial statement auditors - yes

Management - yes Financial statement auditors - yes

Which of the following best describes an entity's accounting information and communication system? a. Monitor transactions - yes Record and process transactions - yes Initiate transactions - yes b. Monitor transactions - no Record and process transactions - no Initiate transactions - no c. Monitor transactions - yes Record and process transactions - no Initiate transactions - no d. Monitor transactions - no Record and process transactions - yes Initiate transactions - yes

Monitor transactions - no Record and process transactions - yes Initiate transactions - yes

a. Application controls b. Error listing c. General controls d. Hardware controls e. Input controls f. Output controls g. Parallel simulation h. Parallel testing i. Pilot testing j. Processing controls __ Controls such as review of data for reasonableness, designed to assure that data generated by the computer is valid, accurate, complete, and distributed only to authorized people.

Output controls

One category of general controls is physical and online access controls. Describe the control and give at two examples of implementation of the control.

Physical controls over computer equipment restrict access to hardware, software, and backup data files on magnetic tapes or disks, hard drives, CDs, and external disks. Examples of physical controls include: •keypad entrances •badge-entry systems •security cameras and security personnel •employee fingerprints or retina scanning and matching to database before access is allowed •monitoring of cooling and humidity •installing fire-extinguishing equipment Online access controls restrict access to software and related data files, reducing the likelihood that unauthorized changes are made to software applications and data files. Examples include: •proper user IDs and passwords •separate add-on security software packages •firewalls •encryption programs

a. Application controls b. Error listing c. General controls d. Hardware controls e. Input controls f. Output controls g. Parallel simulation h. Parallel testing i. Pilot testing j. Processing controls ___ A new system is implemented in one part of the organization while other locations continue to rely on the old system.

Pilot testing

Which of the following is not an underlying principle related to risk assessment? A) The organization should have clear objectives in order to be able to identify and assess the risks relating to the objectives. B) The auditors should determine how the company's risks should be managed. C) The organization should consider the potential for fraudulent behavior. D) The organization should monitor changes that could impact internal controls.

The auditors should determine how the company's risks should be managed.

Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes-Oxley Act? A) The audits of internal control and the financial statements provide reasonable assurance as to misstatements. B) The audit of internal control provides absolute assurance of misstatement. C) The audit of financial statements provides absolute assurance of misstatement. D) The audits of internal control and the financial statements provide absolute assurance as to misstatements.

The audits of internal control and the financial statements provide reasonable assurance as to misstatements.

Discuss what is meant by the term "control environment" and identify four control environment subcomponents that the auditor should consider.

The control environment consists of the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about control and its importance to the entity. Subcomponents include: -integrity and ethical values -commitment to competence -board of director or audit committee participation -accountability -organizational structure

Discuss the four areas of responsibility under the IT function that should be segregated in large companies.

The responsibilities for IT management, systems development, operations, and data control should be separated: • IT management. Oversight of the IT function should be segregated from the systems development, operations, and data control functions. Oversight of IT should be the responsibility of the Chief Information Officer or IT manager. The CIO or IT manager should be responsible for oversight of the IT function to ensure that activities are carried out consistent with the IT strategic plan. A security administrator should monitor both physical and online access to hardware, software, and data files and investigate all security breaches.• • Systems development. Systems analysts are responsible for the overall design of each application system. They also coordinate the development, acquisition, and changes to IT systems by the IT personnel and the primary system users outside of IT. Programmers develop flowcharts for each new application, prepare computer instructions, test the programs, and document the results. Programmers and analysts should not have access to input data or computer operations to avoid using their knowledge of the system for personal benefit. • Operations. Computer operators are responsible for the day-to-day operations of the computer. They also monitor computer consoles for messages about computer efficiency and malfunction. • Data control. Data control personnel independently verify the quality of input and the reasonableness of output. Database administrators are responsible for the operation and access security of shared databases.

Describe each of the three broad objectives management typically has for internal control. With which of these objectives is the auditor primarily concerned?

The three objectives are:• - Reliability of financial reporting. Management has both a legal and professional responsibility to be sure that the information is fairly presented in accordance with reporting requirements such as U.S. GAAP and IFRS. - Efficiency and effectiveness of operations. Controls within an organization are meant to encourage efficient and effective use of its resources to optimize the company's goals. - Compliance with laws and regulations. Public, non-public, and not-for-profit organizations are required to follow many laws and regulations. Some relate to accounting only indirectly, such as environmental protection and civil rights laws. Others are closely related to accounting, such as income tax regulations and anti-fraud legal provisions. The auditor's focus in both the audit of financial statements and the audit of internal controls is on the controls over the reliability of financial reporting plus those controls over operations and compliance with laws and regulations that could materially affect financial reporting.

List the four underlying principles of risk assessment per the COSO framework.

The underlying principles of risk assessment per the COSO framework are - have clear objectives in order to identify risks related to those objectives - determine how risks should be managed - consider the potential for fraud - monitor changes

Management's identification and analysis of risk is an ongoing process and is a critical component of effective internal control. An important first step is for management to identify factors that may increase risk. Identify at least five factors, observable by management, which may lead to increased risk in a typical business organization.

There are many factors that may lead to increased risk in an organization. Some examples include: - failure to meet prior objectives - quality of personnel - geographic dispersion of company operations - significance and complexity of core business processes - introduction of new information technologies - entrance of new competitors - economic downturns - rapid technology changes

Which of the following is an accurate statement regarding the auditor's responsibility for understanding internal control? A) Transaction-related audit objectives typically have no impact on the rights and obligations objectives. B) Transaction-related audit objectives typically have a significant impact on the balance-related audit objective of realizable value. C) Auditors generally emphasize internal control over account balances rather than classes of transactions. D) Auditors and management are both equally concerned about controls that affect the efficiency and effectiveness of company operations.

Transaction-related audit objectives typically have no impact on the rights and obligations objectives.

Processing controls include the following tests: Validation Sequence Data Reasonableness Completeness Describe what each control is designed to do.

Validation: ensures that a particular type of transaction is appropriate for processing Sequence: determines that the data submitted for processing are in the correct order Data Reasonableness: determines whether the data exceeds prespecified amounts Completeness: determines that every field in a record has been completed

Authorizations can be either general or specific. Which of the following is not an example of a general authorization? A) automatic reorder points for raw materials inventory B) a sales manager's authorization for a sales return C) credit limits for various classes of customers D) a sales price list for merchandise

a sales manager's authorization for a sales return

Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements? A) a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting B) a statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting C) a statement that management, the board of directors, and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting D) a statement that the external auditors are solely responsible for establishing and maintaining an adequate system of internal control

a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting

When purchasing software or developing in-house software, A) cost should be the only factor. B) extensive testing of the software is generally not required. C) a team of both IT and non-IT personnel should be involved in the decision process. D) the librarian and the IT manager should be the only ones involved in the decision process.

a team of both IT and non-IT personnel should be involved in the decision process.

It is important for the CPA to consider the competence of the clients' personnel because their competence has a direct impact upon the A) cost/benefit relationship of the system of internal control. B) achievement of the objectives of internal control. C) comparison of recorded accountability with assets. D) timing of the tests to be performed.

achievement of the objectives of internal control.

Which of the following is not one of the subcomponents of the control environment? A) management's philosophy and operating style B) organizational structure C) adequate separation of duties D) commitment to competence

adequate separation of duties

Internal controls are not designed to provide reasonable assurance that A) all frauds will be detected. B) transactions are executed in accordance with management's authorization. C) the company's resources are used efficiently and effectively. D) company personnel comply with applicable rules and regulations.

all frauds will be detected

External financial statement auditors must obtain evidence regarding what attributes of an internal audit (IA) department if the external auditors intend to rely on IA's work? A) integrity B) objectivity C) competence D) all of the above

all of the above

Typical controls developed for manual systems which are still important in IT systems include A) management's authorization of transactions. B) competent personnel. C) adequate preparation of input source documents. D) all of the above.

all of the above.

The Sarbanes-Oxley Act requires A) all public companies to issue reports on internal controls. B) all public companies to define adequate internal controls. C) the auditor of public companies to design effective internal controls. D) the auditor of public companies to withdraw from an engagement if internal controls are weak.

all public companies to issue reports on internal controls.

A database management system _____ A) allows clients to create databases that include information that can be shared across multiple applications. B) stores data on different files for different purposes, but always knows where they are and how to retrieve them. C) allows quick retrieval of data, but at a cost of inefficient use of file space. D) allows quick retrieval of data, but it needs to update files continually.

allows clients to create databases that include information that can be shared across multiple applications.

Controls that are designed for each software application and are intended to help a company satisfy the transaction-related audit objectives are ______ A) user controls. B) general controls. C) audit controls. D) application controls.

application controls

Which of the following is not one of the three primary objectives of effective internal control? A) reliability of financial reporting B) efficiency and effectiveness of operations C) compliance with laws and regulations D) assurance of elimination of business risk

assurance of elimination of business risk

When considering internal controls, A) auditors can ignore controls affecting internal management information. B) auditors are concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements. C) management is responsible for understanding and testing internal control over financial reporting. D) companies must use the COSO framework to establish internal controls.

auditors are concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements.

Security controls should require that users enter a(n) ________ before being allowed access to software and other related data files. A) echo check B) parity check C) self-diagnosis test D) authorized password

authorized password

The ________ is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account. A) general ledger B) general journal C) trial balance D) chart of accounts

chart of accounts

The primary emphasis by auditors is on controls over A) classes of transactions. B) account balances. C) both A and B, because they are equally important. D) both A and B, because they vary from client to client.

classes of transactions

Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the A) adequacy of the computer system. B) proper implementation by management. C) ability of the internal audit staff to maintain it. D) competency and dependability of the people using it.

competency and dependability of the people using it.

Which of the following tests determines that every field in a record has been completed? A) validation B) sequence C) completeness D) programming

completeness

Which of the following is a risk assessment principle? A) accountability B) use relevant, quality information to support the functioning of internal controls C) consider the potential for fraud D) develop general controls over technology

consider the potential for fraud

Internal controls _____ A) are implemented by and are the responsibility of the auditors. B) consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals. C) guarantee that the company complies with all laws and regulations. D) only apply to SEC companies.

consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals.

Without an effective ________, the other components of the COSO framework are unlikely to result in effective internal control, regardless of their quality. A) risk assessment policy B) monitoring policy C) control environment D) system of control activities

control environment

In an IT system, automated equipment controls or hardware controls are designed to A) correct errors in the computer programs. B) monitor and detect errors in source documents. C) detect and control errors arising from the use of equipment. D) arrange data in a logical sequential manner for processing purposes.

detect and control errors arising from the use of equipment.

Output controls need to be designed for which of the following data integrity objectives? A) detecting errors after the processing is completed B) preventing errors before the processing is completed C) detecting errors in the general ledger adjustment process D) preventing errors in separation of duties for IT personnel

detecting errors after the processing is completed

A control that relates to all parts of the IT system is called a(n) A) general control. B) systems control. C) universal control. D) applications control.

general control.

Controls which are built in by the manufacturer to detect equipment failure are called A) input controls. B) data integrity controls. C) hardware controls. D) manufacturer's controls.

hardware controls.

A(n) ________ total represents the summary total of codes from all records in a batch that do not represent a meaningful total. A) record B) hash C) output D) financial

hash

When dealing with the administration of the IT function and the segregation of IT duties __________ A) in large organizations, management should assign technology issues to outside consultants. B) programmers should investigate all security breaches. C) the board of directors should not get involved in IT decisions since it is a routine function handled by middle management. D) in complex environments, management may establish IT steering committees.

in complex environments, management may establish IT steering committees.

When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is A) insufficient. B) inadequate. C) ineffective. D) inefficient.

ineffective.

Two key concepts that underlie management's design and implementation of internal control are A) costs and materiality. B) absolute assurance and costs. C) inherent limitations and reasonable assurance. D) collusion and materiality.

inherent limitations and reasonable assurance.

Controls which are designed to assure that the information entered into the computer is authorized, complete, and accurate are called A) input controls. B) processing controls. C) output controls. D) general controls.

input controls.

If a company has an effective internal audit department, A) the internal auditors can express an opinion on the fairness of the financial statements. B) their work cannot be used by the external auditors per PCAOB Standard 5. C) it can reduce external audit costs by providing direct assistance to the external auditors. D) the internal auditors must be CPAs in order for the external auditors to rely on their work.

it can reduce external audit costs by providing direct assistance to the external auditors.

A ________ is responsible for controlling the use of computer programs, transaction files and other computer records and documentation and releases them to the operators only when authorized. A) software engineer B) chief computer operator C) librarian D) data control operator

librarian

Which of the following is not an application control? A) reprocessing authorization of sales transactions B) reasonableness test for unit selling price of sale C) post-processing review of sales transactions by the sales department D) logging in to the company's information systems via a password

logging in to the company's information systems via a password

Reasonable assurance allows for A) low likelihood that material misstatements will not be prevented or detected by internal controls. B) no likelihood that material misstatements will not be prevented or detected by internal control. C) moderate likelihood that material misstatements will not be prevented or detected by internal control. D) high likelihood that material misstatements will not be prevented or detected by internal control.

low likelihood that material misstatements will not be prevented or detected by internal controls.

Which of the following deals with ongoing or periodic assessment of the quality of internal control by management? A) verifying activities B) monitoring activities C) oversight activities D) management activities

monitoring activities

Which of the following components of the control environment define the existing lines of responsibility and authority? A) organizational structure B) management philosophy and operating style C) human resource policies and practices D) management integrity and ethical values

organizational structure

An internal control deficiency occurs when computer personnel ______ A) participate in computer software acquisition decisions. B) design flowcharts and narratives for computerized systems. C) originate changes in customer master files. D) provide physical security over program files.

originate changes in customer master files.

Old and new systems operating simultaneously in all locations is a test approach known as A) pilot testing. B) horizontal testing. C) integrative testing. D) parallel testing.

parallel testing.

Which of the following describes the process of implementing a new system in one part of the organization, while other locations continue to use the current system? A) parallel testing B) online testing C) pilot testing D) control testing

pilot testing

Hanlon Corp. maintains a large internal audit staff that reports directly to the accounting department. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably A) eliminate tests of controls. B) increase the depth of the study and evaluation of administrative controls. C) avoid duplicating the work performed by the internal audit staff. D) place limited reliance on the work performed by the internal audit staff.

place limited reliance on the work performed by the internal audit staff.

With which of management's assertions with respect to implementing internal controls is the auditor primarily concerned? A) efficiency of operations B) reliability of financial reporting C) effectiveness of operations D) compliance with applicable laws and regulations

reliability of financial reporting

The most important output control is _____ A) distribution control, which assures that only authorized personnel receive the reports generated by the system. B) review of data for reasonableness by someone who knows what the output should look like. C) control totals, which are used to verify that the computer's results are correct. D) logic tests, which verify that no mistakes were made in processing.

review of data for reasonableness by someone who knows what the output should look like.

Controls specific to IT include all of the following except for ______ A) adequately designed input screens. B) pull-down menu lists. C) validation tests of input accuracy. D) separation of duties.

separation of duties.

In performing the audit of internal control over financial reporting, the auditor emphasizes internal control over classes of transactions because A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing. B) the class of transaction is where most fraud schemes occur. C) account balances are less important to the auditor then the changes in the account balances. D) classes of transactions tests are the most efficient manner to compensate for inherent risk.

the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.

An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are A) the effectiveness and efficiency of the controls. B) the frequency and effectiveness of the controls. C) the design and operating effectiveness of the controls. D) the implementation and operating effectiveness of the controls.

the design and operating effectiveness of the controls.

An example of a physical control is _____ A) a hash total. B) a parallel test. C) the matching of employee fingerprints to a database before access to the system is allowed. D) the use of backup generators to prevent data loss during power outages.

the matching of employee fingerprints to a database before access to the system is allowed.

Which of the following best describes the purpose of control activities? A) the actions, policies and procedures that reflect the overall attitudes of management B) the identification and analysis of risks relevant to the preparation of financial statements C) the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity's objectives D) activities that deal with the ongoing assessment of the quality of internal control by management

the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity's objectives

The auditor's primary purpose in auditing the client's system of internal control over financial reporting is A) to prevent fraudulent financial statements from being issued to the public. B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements. C) to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements. D) to efficiently conduct the Audit of Financial Statements.

to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements.

Identify the six categories of general controls and give one example of each.

• Administration of the IT function. The chief information officer (CIO) should report to senior management and board of directors. • Separation of IT duties. There should be separation of duties between the computer programmers, operators, and the data control group. • Systems development. Users, analysts, and programmers develop and test software. • Physical and online security. Access to hardware is restricted, passwords and user IDs limit access to software and data files, and encryption and firewalls protect data and programs from external parties. • Backup and contingency planning. Written backup plans should be prepared and tested on a regular basis throughout the year.• • Hardware controls. Uninterruptible power supplies should be used to avoid loss of data in the event of a power blackout.

Certain principles dictate the proper design and use of documents and records. Briefly describe several of these principles.

• Documents should be prenumbered consecutively to facilitate control over missing documents and as an aid in locating documents when they are needed at a later date. • Documents and records should be prepared at the time a transaction takes place, or as soon as possible thereafter, to minimize timing errors.• Documents and records should be designed for multiple uses, when possible, to minimize the number of different forms. • Documents and records should be constructed in a manner that encourages correct preparation. This can be done by providing internal checks within the form or record.