Extra Credit Internal Controls

which of the following statements is correct regarding internal control? a. a well-designed internal control environment ensures the achievement of an entity's control objectives. b. an inherent limitation to internal control is the fact that controls can be circumvented by management override. c. a well-designed and operated internal control environment should detect collusion perpetrated by two people. d. internal control is a necessary business function and should be designed and operated to detect all errors and fraud.

b. an inherent limitation to internal control is the fact that controls can be circumvented by management override.

Obtaining an understanding of an internal control involves evaluating the design of the control and determine whether the control has been: a. authorized. b. implemented. c. tested. d. monitored.

b. implemented.

management philosophy and operating style most likely would have a significant influence on an entity's control environment when: a. the internal auditor reports directly to management. b. management is dominated by one individual. c. accurate management job descriptions delineate specific duties. d. those charges with governance actively oversee the financial reporting process.

b. management is dominated by one individual. management philosophy and operating style encompass a broad range of characteristics. such characteristics may include the following: management's approach to taking and monitoring business risks, management's attitudes and actions toward financial reporting, and management's attitudes toward information processing and accounting functions and personnel. These characteristics are more likely to have a significant influence on the control environment when management is dominated by one individual, since there will be few alternative viewpoints presented. a. the internal auditor reports directly to management. incorrect, the internal audit function is part of the monitoring component of internal control, not part of the control environment. If the internal auditor reports directly to management, this would reduce his or her objectivity and perhaps make the monitoring function less effective, but it would have minimal impact on the control environment.

which of the following situations represented a limitation, rather than a failure, of internal control? a. a jewelry store employee steels a small necklace from a display cabinet. b. a bank teller embezzles several hundred dollars from the cash drawer. c. a purchasing employee and an outside vendor participate in a kickback scheme. d. a movie theater cashier sells reduced-prize tickets to full-paying customers and pockets the difference.

c. a purchasing employee and an outside vendor participate in a kickback scheme. even a well-designed internal control system has its limitation. Once example of a limitation of internal control includes deliberate circumvention of controls by collusion of two or more people, such as when a purchasing employee and outside vendor participate in a kickback scheme. other limitations of internal controls include human error and management override of control.

the overall attitude and awareness of those charges with governance (i.e., an entity's board of directors) concerning the importance of internal control usually is reflected in its: a. computer-based controls. b. system of segregation of duties. c. control environment. d. safeguards over access to assets.

c. control environment. the control environment reflects the overall attitude, awareness, and actions of those charged with governance (i.e., the board of directors, management, owners, and others) concerning the importance of control and its emphasis in the entity.

which of the following is not a possible reason why a properly designed system of internal control may fail to prevent or detect fraud? a. collusion by two or more individuals may be used to circumvent controls. b. human error may result in an inappropriate application of controls. c. inadequate segregation of duties may allow one person to both perpetrate and conceal fraudulent activity. d. management may override controls through its attitude and actions.

c. inadequate segregation of duties may allow one person to both perpetrate and conceal fraudulent activity. inadequate segregation of duties implies that the system of internal control was not properly designed.

which of the following is a component of internal control? a. financial reporting. b. operating effectiveness. c. risk assessment. d. organization structure.

c. risk assessment.

which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization? a. disclosing lack of segregation of duties to the external auditors during the annual review. b. replacing personnel every three or four years. c. requiring accountants to pass a yearly background check. d. allowing for greater management oversight of incompatible activities.

d. allowing for greater management oversight of incompatible activities.

which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control activities are suitably designed to prevent or detect material misstatements? a. reperforming the activities for a sample of transactions. b. reperforming analytical procedures using data aggregated at a high level. c. vouching a sample of transactions directly related to the activities. d. observing the entity's personnel applying the activities.

d. observing the entity's personnel applying the activities. observation and inspection may be used to evaluate the design of controls. observation of entity personnel applying control activities is a procedure that would likely provide evidence about the design of the activities. a. reperforming the activities for a sample of transactions. incorrect, reperforming control activities provides the auditor with evidence about the operating effectiveness of specific control activities, not the design effectiveness.