ACCT 131 Chapter 7

At the completion of the audit, the auditors are least likely to know:

Actual control risk.

Tests of controls ordinarily are designed to provide evidence of:

Operating effectiveness.

The report of a service auditor may provide assurance on whether: Controls are Operating effectiveness implemented of controls A. Yes Yes B. Yes No C. No Yes D. No No

Option A

Management's emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:

A significant portion of management compensation is represented by stock options.

Which of the following factors most likely would be considered an inherent limitation to an entity's internal control?

Collusion of employees in circumventing internal controls.

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes?

Confirmation

When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should:

Consider the organizational level to which the internal auditors report the results of their work.

Which statement is correct concerning the relevance of various types of controls to a financial statement audit?

Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.

You are performing an audit of Western Electronics Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. f. Adjustment of perpetual inventory records to physical counts.

Corrective

In obtaining an understanding of the entity and its environment, including its internal control, an auditor is required to obtain knowledge about the:

Design of relevant internal controls pertaining to financial reporting in each of the five internal control components.

During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assessing the risk of material misstatement and:

Designing further audit procedures.

Which of the following would be least likely to be considered an objective of internal control?

Detecting management fraud.

You are performing an audit of Western Electronics Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. a. Annual physical inventory.

Detective

You are performing an audit of Western Electronics Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. b. Monthly reconciliation of bank accounts.

Detective

You are performing an audit of Western Electronics Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. g. Management review of budget/actual information.

Detective

You are performing an audit of Western Electronics Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. h. Internal audits of payroll.

Detective

Which of the following is not an advantage of establishing an enterprise risk management system within an organization?

Eliminates all risks.

To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except:

Establish internal control with no material weakness.

Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively?

Establishing budgets and forecasts to identify variances from expectations.

Which of the following most accurately describes the process of a walkthrough?

Following a transaction from its origination until it is reflected in the financial statements.

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been:

Implemented

How do auditors obtain evidence about the operating effectiveness of monitoring controls?

Inquiry, inspection, and reperformance.

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with:

Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:

Management us dominated by one individual who is also a shareholder.

Proper segregation of duties reduces the opportunities to allow persons to be in positions to both:

Perpetrate and conceal errors and fraud.

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control?

Preparing bank reconciliations.

You are performing an audit of Western Electronics Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. c. Segregation of duties over purchasing.

Preventive

You are performing an audit of Western Electronics Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. d. Supervisory approval of time cards.

Preventive

You are performing an audit of Western Electronics Corporation and evaluating various controls. Classify the following controls as being primarily preventive, detective, or corrective. e. Dual signatures for checks.

Preventive

Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the design of the relevant controls and to determine whether they have been implemented (placed in operation)?

Results of substantive procedures.

An auditor may compensate for a weakness in internal control by increasing the extent of:

Substantive tests of details.

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should:

Test controls for all significant accounts.

Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan?

The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

The preliminary assessments of control risk are often referred to as:

The planned assessed level of control risk.

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by:

Direct participation by the owner in key record-keeping and control activities of the business.

Tests of controls do not address:

How controls were originated.

An entity's ongoing monitoring activities often include:

Management review of weekly performance reports.

Which of the following is least likely to be a test of controls?

Observation of confirmations.

Which of the following represents an inherent limitation of internal controls?

The CEO can request a check with no purchase order.

Which of the following is usually considered a monitoring activity?

Using information from customer complains.