Exam 2

d

Question 1 0.25 / 0.25 pts An auditor's primary consideration regarding an entity's internal controls is whether they a. Prevent management override. b. Relate to the control environment. c. Reflect management's philosophy and operating style. d. Affect the financial statement assertions.

d

Question 1 0.25 / 0.25 pts The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false? a. The auditor should evaluate whether internal controls are effective in accurately and fairly reflecting the firm's transactions. b. Management's report should state its responsibility for establishing and maintaining an adequate internal control system. c. Management should identify material weaknesses in its report. d. The auditor should provide recommendations for improving internal control in the audit report.

d

Question 1 1 / 1 pts The concept of reasonable assurance as it applies to the design and implementation of internal controls is that a. auditors will have limited liability for their actions. b. the public requires the auditor to act as a reasonable person when providing assurance. c. management may override virtually all internal controls. d. the cost of the control should not exceed the benefit derived. Question 2 0 / 1 pts Substantive audit procedures are those procedures which You Answered provide substantial evidence to the auditor. relate to the planning of the audit engagement. Correct Answer test the transactions and balances reported by the client. test the substantial internal controls of the entity. Question 3 1 / 1 pts A properly organized and effective audit committee of a publicly held company regularly communicates with the internal audit department. is composed of outside members of the board of directors. Correct! is described by all of these. engages an independent auditor to perform financial audits. Question 4 0 / 1 pts An audit of internal controls is required to be performed annually by a CPA for Correct Answer none of these. You Answered privately held audit clients. audit clients not subject to regulation by the SEC. all financial audit clients. Question 5 1 / 1 pts A significant deficiency in internal controls is best described as a material weakness in the internal controls. none of these. an inconsequential weakness in the internal controls. Correct! a substantial weakness in internal controls that is less than material. Question 6 1 / 1 pts COSO named several primary objectives of internal control. Which of the following is NOT one of those objectives? Correct! Prevention of fraud. Efficiency and effectiveness of operations. Reliable financial reporting. Compliance with laws and regulations. Question 7 0 / 1 pts The auditor of a publicly held corporation has noted one material weakness present in the internal controls over financial reporting at year end. The most appropriate opinion to be expressed on the internal controls of the corporation is which of the following? A qualified audit opinion. You Answered A disclaimer of opinion. Correct Answer An adverse opinion. An unqualified audit opinion. Question 8 Original Score: 0 / 1 pts Regraded Score: 1 / 1 pts This question has been regraded. In auditing the internal controls of a publicly held audit client the auditor discovers that monthly reconciliations of bank accounts are not being performed by the client. The auditor believes that this audit finding merits the attention of those charged with governance. Considering existing compensating controls of separation of duties, review of documentation prior to making disbursements, and proper authorizations convince the auditor that there is a remote possibility of a material misstatement occurring on the financial statements due to this omitted internal control. In this scenario not performing monthly bank reconciliations most likely would be considered a(n) material weakness in internal control. significant deficiency in internal control. You Answered other control deficiency. Correct Answer none of these. Question 9 1 / 1 pts When auditing the financial statements of a publicly held client the auditor discovers a material misstatement in accounts receivable. What impact is this misstatement most likely to have on the auditor's opinion on the internal controls of the audit client? This misstatement will have no impact on the auditor's opinion on the internal controls since the discovered misstatement was not related to the audit of internal controls. This misstatement likely will result in the auditor issuing a qualified opinion on the internal controls of the client. This misstatement likely will result in a disclaimer of opinion on the internal controls of the client. Correct! This misstatement likely will result in an adverse opinion on the internal controls of the client. Question 10 0 / 1 pts The auditor of a publicly held corporation has the primary responsibility for which of the following activities? You Answered Designing and implementing internal controls. Assuring compliance with internal controls. All of these. Correct Answer Rendering an opinion on internal controls.

c

Question 1 1 / 1 pts The independent auditor performs appropriate tests of internal controls for a privately held client and determines that the internal controls are weaker than expected. The auditor's appropriate response to this finding is to: a. Issue a qualified or adverse opinion on the financial statements taken as a whole. b. Require management to improve the internal controls prior to completing the audit of the financial statements. c. Reduce detection risk by increasing substantive tests of balances. d. Revise the estimate of inherent risk to compensate for the weakness in internal controls.

Significant deficiency

Question 10 0.25 / 0.25 pts A weakness, or a combination of weaknesses, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

a

Question 10 0.25 / 0.25 pts In auditing a public company, Natalie, an auditor for N. M. Meal & Associates, identifies four deficiencies in ICRF. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue? a. An unqualified report. b. An adverse report. c. A disclaimer of opinion. d. An exculpatory opinion.

d

Question 10 0.25 / 0.25 pts SOC 1, Type 2 reports by the service organization's auditor typically a. Provide reasonable assurance that their financial statements are free of material misstatements. b. Ensure that the entity will not have any misstatements in areas related to the service organization's activities. c. Ensure that the entity is billed correctly. d. Assess whether the service organization's controls are suitably designed and operating effectively.

a

Question 10 1 / 1 pts Which of the following audit procedures would provide the auditor with the greatest assurance regarding the adequacy of internal controls over cash on hand? a. Conducting a surprise count of cash on hand and reconciling it with the accounting records. b. Testing the year-end bank reconciliations. c. Performing a walk through of a purchase transaction. d. Inquiry of the client's management and staff members handling cash.

c

Question 11 0.25 / 0.25 pts In auditing ICRF for a public company, Emily finds that the company has a significant subsidiary located in a foreign country. Emily's accounting firm has no offices in that country, and the entity has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor's report indicates that there are no material weaknesses in the foreign subsidiary's ICFR. What should Emily do? a. Disclaim an opinion because she cannot rely on the opinion of another auditor in dealing with a significant subsidiary. b. Accept the other auditor's opinion and express an unqualified opinion, making no reference to the other auditor's report in her audit opinion. c. Accept the other auditor's opinion after evaluating the auditor's work, and make reference to the other auditor's report in her audit opinion. d. Qualify the opinion because she is unable to conduct the testing herself, and this constitutes a significant scope limitation.

c

Question 11 0.25 / 0.25 pts Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent a. Disclosures of information that significantly contradict the auditor's going concern assumption. b. Material fraud or illegal acts perpetrated by high-level management. c. Significant deficiencies in the design or operation of the internal control. d. Manipulation or falsification of accounting records or documents from which financial statements are prepared.

Control environment

Question 11 0.25 / 0.25 pts The tone of an organization, which reflects the overall attitude, awareness, and actions of the board of directors, management, and owners influencing the control consciousness of its people.

b

Question 12 0.25 / 0.25 pts An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's a. Program for tests of controls. b. Understanding of the system. c. Understanding of the types of fraud that are probable, giving the present system. d. Documentation of the study and evaluation of the system.

Electronic data interchange

Question 12 0.25 / 0.25 pts The transmission of business transactions over telecommunications networks.

a

Question 12 0.25 / 0.25 pts Which of the following statements concerning control deficiencies is true? a. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit. b. All significant deficiencies are material weaknesses. c. All control deficiencies are significant deficiencies. d. An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB.

Material weakness

Question 13 0.25 / 0.25 pts A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis.

d

Question 13 0.25 / 0.25 pts An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus? a. Data capture controls. b. Application controls. c. Output controls. d. General controls.

c

Question 13 0.25 / 0.25 pts Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent a. Material fraud or illegal acts perpetrated by high-level management. b. Disclosures of information that significantly contradict the auditor's going concern assumption c. Significant deficiencies in the design or operation of internal control. d. Potential manipulation or falsification of accounting records.

Computer-assisted audit techniques (CAATs)

Question 14 0.25 / 0.25 pts Computer programs that allow auditors to test computer files and databases.

a

Question 14 0.25 / 0.25 pts Which of the following most likely represents a weakness in internal control of an IT system? a. The systems analyst review output and controls the distribution of output from the IT department. b. The accounts payable clerk prepares data for computer processing and enters the data into the computer. c. The systems programmer designs the operating and control functions of programs and participates in testing operating systems. d. The control clerk establishes control over data received by the IT department and reconciles control totals after processing.

d

Question 15 0.25 / 0.25 pts A primary advantage of using generalized audit software packages to audit the financial statements of an entity that uses an IT system is that the auditor may a. Consider increasing the use of substantive tests of transactions in place of analytical procedures. b. Substantiate the accuracy of data through self-checking digits and hash totals. c. Reduce the level of required tests of controls to a relatively small amount. d. Access information stored on computer files while having a limited understanding of the client's hardware and software features.

General controls

Question 15 0.25 / 0.25 pts Controls that relate to the overall information processing environment, and have a pervasive effect on the entity's computer operations.

b

Question 2 0.25 / 0.25 pts A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a a. Deficiency in design. b. Deficiency in operation. c. Significant deficiency. d. Material weakness.

Internal control

Question 2 0.25 / 0.25 pts The method by which an entity's board of directors, management, and other personnel provide reasonable assurance about the achievement of objectives in the following categories: (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations.

d

Question 2 0.25 / 0.25 pts Which of the following statements about internal control is correct? a. A properly maintained internal control system reasonably ensures that collusion among employees cannot occur. b. The establishment and maintenance of internal control is an important responsibility of the internal auditor. c. An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance. d. The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.

c

Question 2 1 / 1 pts Internal controls over financial reporting are designed to a. insure efficiency and effectiveness of operations. b. insure that management's operational policies and procedures are followed. c. prevent or detect and correct potential material misstatements on the financial statements. d. prevent or detect and correct all potential misstatements on the financial statements.

a

Question 3 0 / 1 pts Monitoring within a client's internal control system includes a. internal auditor review of compliance with internal controls. b. informing the appropriate individuals of ethical standards of behavior, risks, and non-compliance with internal controls. c. evaluating the risks within an organization and developing policies and procedures to reduce those risks. d. establishing a "tone at the top" which encourages high ethical conduct and performance.

d

Question 3 0.25 / 0.25 pts Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective? a. Effectiveness and efficiency of operations. b. Reliability of financial reporting. c. Compliance with applicable laws and regulations. d. All of the above.

Reliance strategy

Question 3 0.25 / 0.25 pts The auditor's decision to rely on the entity's controls, test those controls, and reduce the direct tests of the financial statement accounts.

c

Question 3 0.25 / 0.25 pts Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance? a. The susceptibility of the related assets or liability to loss or fraud. b. The interaction or relationship of the control with other controls. c. The financial statement amounts exposed to the deficiency. d. The nature of the financial statement accounts, disclosures, and assertions involved.

c

Question 4 0 / 1 pts Of the following, which best describes a test of internal controls that might be employed by an independent auditor? a. Observing a client's count of inventory at year end. b. Vouching recorded sales transactions to test for overstatement. c. Examining purchase orders to verify proper authorization of purchase transactions. d. Recalculating bad debt expense and comparing it with the amount reported by the client.

c

Question 4 0.25 / 0.25 pts Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which of the following is not an entry-level control? a. Controls to monitor results of operations. b. Management's risk assessment process. c. Control to monitor the inventory taking process. d. The period-end financial reporting process.

d

Question 4 0.25 / 0.25 pts Monitoring is a major component of the COSO Internal Control-Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component? a. Monitoring can be an ongoing process. b. Monitoring can be conducted as a separate evaluation. c. Monitoring and other audit work conducted by internal audit staff can reduce external audit costs. d. The independent auditor can serve as part of the entity's control environment and continuous monitoring.

Control activities

Question 4 0.25 / 0.25 pts The policies and procedures that help ensure that management's directives are carried out.

b

Question 5 0 / 1 pts The design, operation, and monitoring of internal controls within an entity is primarily the responsibility of the a. internal auditors. b. entity's management. c. independent auditor. d. audit committee of the board of directors.

a

Question 5 0.25 / 0.25 pts After obtaining an understanding of an entity's internal control system, an auditor may set control risk at high for some assertions because he or she a. Believes the internal controls are unlikely to be effective. b. Determines that the pertinent internal control components are not well documented. c. Performs tests of controls to restrict detection risk to an acceptable level. d. Identifies internal controls that are likely to prevent material misstatements.

Application controls

Question 5 0.25 / 0.25 pts Controls that apply to the processing of specific computer applications and are part of the computer programs used in the accounting system.

c

Question 5 0.25 / 0.25 pts Which of the following controls would most likely be tested during an interim period? a. Controls over nonroutine transactions. b. Controls over the period-end financial reporting process. c. Controls that operate on a continuous basis. d. Controls over transactions that involve a high degree of subjectivity.

a

Question 6 0 / 1 pts An employee in the purchasing department routinely orders personal items in the name of the employer and has them delivered to his home address. The employing entity has routinely paid for all of these purchases without detecting that they were fraudulent. Which of the following internal control weaknesses could have contributed to the purchasing employee's ability to perpetrate this fraud? a. All of the above internal control weaknesses could have contributed to the fraud. b. Lack of separation of duties. c. Not requiring authorizations for all purchases. d. Paying invoices without collecting appropriate supporting documentation.

Monitoring of controls

Question 6 0.25 / 0.25 pts A process that assesses the quality of internal control performance over time.

b

Question 6 0.25 / 0.25 pts If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for their assessment. a. Documentation and test controls over specific risks. b. Self-assessment processes in conjunction with entity-level controls. c. Documentation and test entity-level controls over the entire entity. d. Selective control test at that location.

c

Question 6 0.25 / 0.25 pts Regardless of the assessed level of control risk, an auditor would perform some a. Test of controls to determine the effectiveness of internal controls. b. Analytical procedures to verify the design of internal controls. c. Substantive procedures to restrict detection risk for significant transactions classes. d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

d

Question 7 0.25 / 0.25 pts A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to a. Tour the organization's facilities and locations before beginning any audit work. b. Trace a transaction from every class of transactions from origination through the company's information system. c. Trace a transaction from each major class of transactions from origination through the company's information systems. d. Trace a transaction from each major class of transactions from origination through the company's information system until it is reflected in the company's financial reports.

b

Question 7 0.25 / 0.25 pts Assessing control risk below high involves all of the following except a. Identifying specific controls to rely on. b. Concluding that controls are ineffective. c. Performing tests of controls. d. Analyzing the achieved level of control risk after performing tests of controls.

Substantive strategy

Question 7 0.25 / 0.25 pts The auditor's decision not to rely on the entity's controls and to audit the related financial statement accounts by relying more on substantive procedures.

d

Question 7 1 / 1 pts What impact do strong internal controls of an audit client have on the audit of a client's financial statements? a. Strong internal controls increase the amount of substantive testing required in the audit. b. They may replace the audit of certain material transactions and/or balances. c. They have no direct impact on the audit of transactions and balances. d. Strong internal controls may be relied upon to reduce substantive testing.

a

Question 8 0 / 1 pts A CPA performing the audit of a private entity must disclose which of the following internal control weaknesses to management and those charged with governance? a. Significant deficiencies and material weaknesses in internal controls. b. All weaknesses existing in the client's internal controls. c. None of the above. Weaknesses need only be reported to management. d. Only material weaknesses in internal controls.

Walkthrough

Question 8 0.25 / 0.25 pts A transaction being traced by an auditor from origination through the entity's information system until it is reflected in the entity's financial reports.

d

Question 8 0.25 / 0.25 pts When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period? a. Any significant changes that occurred in internal control subsequent to the interim date. b. The length of the remaining period. c. The specific controls tested prior to the "as of" date and the results of those tests. d. The walkthrough of the control system conducted at interim.

b

Question 8 0.25 / 0.25 pts Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of a control? a. Inquiry of client personnel. b. Reperformance of the control by the auditor. c. Observation of entity personnel. d. Walkthrough.

b

Question 9 0 / 1 pts Which of the following audit tools, documentation, and/or procedures are primarily used in testing internal controls? a. Analyst's reports, recalculation, and external confirmation. b. Questionnaires, flowcharts, narrative descriptions, and organizational charts. c. Analytical procedures. d. Vouching, retracing, and recalculation.

Control deficiency

Question 9 0.25 / 0.25 pts A weakness in internal control that exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis.

c

Question 9 0.25 / 0.25 pts AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the company hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the client's internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control? a. An unqualified report. b. An adverse report. c. A disclaimer of opinion. d. An exculpatory opinion.

b

Question 9 0.25 / 0.25 pts The highest quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by a. Inspection of documents prepared by a third party, but which contain the initials of those applying client controls. b. Observation by the auditor of the employees performing control activities. c. Inspection of a flowchart of duties performed and available personnel. d. Inquiries of employees who apply control activities.

Control risk

The risk that material misstatements that could occur will not be prevented, or detected and corrected, on a timely basis by the entity's internal controls. Question 16 0.25 / 0.25 pts Business transactions between individuals and organizations that occur without paper documents, using computers and telecommunication networks.