Audit Chapter 5
An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern? a. Verifying that approved spending limits are not exceeded. b. Matching purchase orders to accounts payable. c. Tracing sales orders to the revenue account. d. Reviewing minutes of board meeting.
A
An auditor uses assessed control risk to a. Determine the acceptable level of detection risk for financial statement assertions. b. Identify transactions and account balances where inherent risk is at maximum. c. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. d. Evaluate the effectiveness of the entity's controls.
A
An auditor's primary consideration in evaluating controls is whether specific controls: a. Affect financial statement assertions. b. Can be classified into one of the five internal control components. c. Improve the efficiency of the client's operations. d. Reduce detection risk to a sufficiently low level.
A
Control: Are authorizations for deductions signed by the employees on file? For the control above, determine the type of control [a-b]: a. preventive control b. detective control
A
Control: Are names of newly-hired employees reported in writing to the payroll department? For the control above, determine the type of control [a-b]: a. preventive control b. detective control Selected Answer: [None Given]Correct Answer:
A
Control: Is the payroll register sheet signed by the employee preparing it and approved prior to payment? For the control above, determine the type of control [a-b]: a. preventive control b. detective control
A
Control: Is there a timekeeping department (function) independent of the payroll department? For the control above, determine the type of control [a-b]: a. preventive control b. detective control
A
If the auditors encounter a significant scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate? a. Disclaimer of opinion. b. Unqualified opinion or adverse opinion. c. Qualified opinion or adverse opinion. d. Unqualified opinion or disclaimer of opinion.
A
In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would: a. Review the entity's descriptions of inventory controls. b. Analyze inventory turnover statistics to identify slow-moving and obsolete items. c. Perform test counts of inventory during the entity's physical count. d. Analyze monthly production reports to identify variances and unusual transactions.
A
In planning an audit, the auditor's knowledge about the design of relevant internal controls should be used to: a. Identify the types of potential misstatements that could occur. b. Document the assessed level of control risk. c. Determine whether controls have been circumvented by collusion. d. Assess the operational efficiency of internal control.
A
Management philosophy and operating style most likely would have a significant influence on an entity's control environment when: a. Management is dominated by one individual. b. Accurate management job descriptions delineate specific duties. c. The internal auditor reports directly to management. d. Those charged with governance actively oversee the financial reporting process.
A
Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following: a. The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity. b. The length of time that the auditor is planning to rely on the operating efficiency of the control activity. c. The frequency of the performance of the control by the company during the period being audited. d. The expected rate of deviation for a control activity.
A
Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both: a. Record and conceal fraudulent transactions in the normal course of assigned tasks. b. Monitor internal controls and evaluate whether the controls are operating as intended. c. Adopt new accounting pronouncements and authorize the recording of transactions. d. Journalize cash receipts and disbursements and prepare the financial statements.
A
The following is a description of an internal control. DESCRIPTION: Senior management obtains and evaluates information about international events that might affect the entity and evaluates the impact of that information on the company's operations. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Risk Assessment b. Control Activities c. Monitoring d. Control Environment e. Information and Communication
A
The following is a description of an internal control. DESCRIPTION: The compensation committee reviews compensation plans for senior executives to ensure that both monetary and equity-based pay totals are consistent with contracts approved by the board of directors. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Monitoring b. Control Activities c. Risk Assessment d. Information and Communication e. Control Environment
A
When completing the audit of internal controls for a public company, AS 5 requires auditors to report on a. Management's Report on Internal Control An Audit of Internal Control No Yes b. Management's Report on Internal Control An Audit of Internal Control No No c. Management's Report on Internal Control An Audit of Internal Control Yes No d. Management's Report on Internal Control An Audit of Internal Control Yes Yes
A
Which of the following does not accurately summarize auditors' requirements regarding internal control? a. Public Entity Nonpublic Entity Test controls Yes Yes b. Public Entity Nonpublic Entity Understanding Yes Yes c. Public Entity Nonpublic Entity Documenting Yes Yes d. Public Entity Nonpublic Entity Evaluating control risk Yes Yes
A
Which of the following is a definition of control risk? a. The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls. b. The risk that the auditor's assessment of internal controls will be at less than the maximum level. c. The risk that the auditor will not detect a material misstatement. d. The susceptibility of material misstatement assuming there are no related internal controls, policies, or procedures.
A
Which of the following is an information technology general control? a. Separation of duties in the IT department. b. Distribution of computerized output. c. Run-to-run totals. d. Check digit.
A
Which of the following statements is not true with respect to the auditors' report on internal control over financial reporting? a. The report will be dated as of the date of the financial statements. b. The auditor will issue an adverse opinion if one or more material weaknesses exist. c. The report may be presented with the report on the entity's financial statements as a combined report. d. The report will express an opinion on the effectiveness of internal control over financial reporting.
A
Which of the following would probably not be considered an indication of a material weakness? a. Overproduction by the manufacturing plant. b. Ineffective oversight by the audit committee. c. Evidence of a material misstatement. d. Immaterial fraud committed by senior management.
A
The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: Recorded sales are supported by sales orders, shipping documents, and invoices. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies [A-E]; A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested [I-V] I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment
A & I
The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: All sale of the company's common stock are approved by the board of directors. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies [A-E]; A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested [I-V] I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment
A & V
(T/F) Effectiveness of audit procedures would be reduced by selecting larger sample sizes for audit.
B
According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to a. Determine whether the company's controls are processing company data effectively. b. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed. c. Determine that the company's employees are processing the controls according to the policy and procedures manuals at the company. d. None of the above.
B
Actions, policies, and procedures that reflect the overall attitude of management, directors and owners of the entity about internal control relate to which of the following internal control components? a. Risk assessment. b. Control environment. c. Monitoring. d. Information and communication.
B
Control: Are blank payroll checks prenumbered and the numerical sequence checked for missing documents? For the control above, determine the type of control [a-b]: a. preventive control b. detective control
B
Control: Are individual payroll records reconciled with quarterly tax reports? For the control above, determine the type of control [a-b]: a. preventive control b. detective control
B
Control: Is payroll periodically compared to personnel files? For the control above, determine the type of control [a-b]: a. preventive control b. detective control
B
In an audit of financial statements, an auditor's primary consideration regarding internal control is whether the control: a. Reflects management's philosophy and operating style. b. Affects management's financial statement assertions. c. Enhances management's decision-making processes. d. Provides adequate safeguards over access to assets.
B
Once the auditor detects a control deficiency, which of the following steps must he or she take first? a. Perform tests of other controls related to the same assertion as the control deemed ineffective. b. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion. c. Modify the planned substantive procedures as a result of the deficiency. d. Test the deficient control, assuming a maximum level of risk. e. Either a or b. f. Not enough information.
B
The appropriate separation of duties does not include: a. custody of assets involved in the transactions. b. data preparation. c. recording of transactions. d. authorization to execute transactions.
B
The following is a description of an internal control. DESCRIPTION: Audit committee members are evaluated to ensure that they are financially literate in addition to understanding their general stewardship role with the firm. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Risk Assessment b. Control Environment c. Monitoring d. Information and Communication e. Control Activities
B
Tracing bills of lading to sales invoices provides evidence that: a. invoiced sales were recorded as sales. b. shipments to customers were invoiced. c. shipments to customers were recorded as sales. d. recorded sales were shipped.
B
When completing the audit of internal controls for a public company, AS 5 requires auditors to test a. Design effectiveness only. b. Both operating and design effectiveness. c. Neither operating nor design effectiveness. d. None of the above.
B
Which of the following is a preventive control? a. Reconciliation of a bank account. b. Separation of duties between the payroll and personnel departments. c. Detailed fluctuation analysis completed by the CFO for revenue. d. Recalculation of a sample of payroll entries by internal auditors.
B
Which of the following is an inherent limitation in internal control? a. Incompatible duties. b. Faulty human judgment. c. Lack of an audit committee. d. Lack of segregation of duties.
B
Which of the following is not an objective of internal controls over financial reporting as defined by the Sarbanes-Oxley Act? a. Policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant. b. Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations. c. Policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements. d. Policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant.
B
Which of the following should an auditor do when control risk is assessed at the maximum level? a. Perform fewer substantive tests of details. b. Document the assessment. c. Perform more tests of controls. d. Document the control structure more extensively.
B
obtaining an understanding of the entity and its environment, including its internal control, an auditor is required to obtain knowledge about the: . Effectiveness of the internal controls that have been placed in operation. b. Design of relevant internal controls pertaining to financial reporting in each of the five internal control components. c. Consistency with which the internal controls are currently being applied. d. Controls related to each principal transaction class and account balance.
B
Audit Procedure: Obtain financial statements or credit reports on large past due accounts and inquire of the credit manager about collections. REQUIRED: Indicate whether the audit procedure above: I. Is a test of controls, a substantive test, or dual-purpose test [a-c] a. Test of controls b. Substantive test c. dual-purpose test II. Next, indicate the financial statement assertion most closely related to each audit procedure. [1-5] 1. Existence or Occurrence 2. Rights and Obligations 3. Valuation and Allocation 4. Completeness 5. Presentation and Disclosure
B & 3
Each of the following types of controls is considered to be an entity-level control, except those: a. pertaining to the company's risk assessment process. b. addressing policies over significant risk management practices. c. regarding the company's annual stockholder meeting. d. relating to the control environment.
C
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. Total debits and total credits. b. Hours worked. c. Department numbers. d. Net pay.
C
In most audits of large entities, control risk assessment contributes to audit efficiency, which means that a. The cost of control evaluation work will exceed the cost of substantive procedures. b. The cost of substantive procedures will exceed the cost of control evaluation work. c. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs. d. Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls.
C
In testing control activities, an auditor ordinarily selects from a variety of techniques, including: a. comparison and confirmation. b. inspection and verification. c. reperformance and observation. d. inquiry and analytical procedures.
C
In which of the following circumstances would an auditor expect to find that an entity implemented automated controls to reduce risks of misstatement? a. When errors are difficult to predict. b. When large, unusual, or nonrecurring transactions require judgment. c. When transactions are high-volume and recurring. d. When misstatements are difficult to define.
C
Management periodically assesses the company's preparedness for actual implementation of contingency plans related to off-site and cloud access in the event of a security breach or failure of the accounting system. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Control Environment b. Control Activities c. Risk Assessment d. Monitoring e. Information and Communication
C
Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been: a. tested. b. monitored. c. implemented. d. authorized.
C
Proper separation of duties reduces the opportunities to allow persons to be in positions to both: a. journalize entries and prepare financial statements. b. record cash receipts and cash disbursements. c. perpetrate a fraud and then conceal it in the books. d. establish internal controls and authorize transactions.
C
The "obtaining an understanding" work phase (Phase 1) of internal control evaluation would not give auditors an overall acquaintance with the client's: a. control environment. b. information and communication system. c. control activity effectiveness. d. monitoring activities.
C
The auditor's tests of controls revealed that required approvals of cash disbursements were absent for a large number of sample transactions examined. Which of the following is least likely to be the appropriate auditor response? . The auditor will perform more extensive substantive tests surrounding cash disbursements. b. The auditor will not select more sample items to audit. c. The auditor will increase planned detection risk. d. The auditor will communicate the deficiency to those charged with governance.
C
When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate? a. Inquire of management as to the effectiveness of the controls. b. Report the reliance in the report on internal controls. c. Test the operating effectiveness of such controls in the current audit. d. Document that reliance and proceed with the original audit strategy.
C
When auditing financial statements of a private company, the minimum work an auditor must perform in connection with a company's internal control is best described by which of the following statements? a. Determine whether the company's control policies are designed well enough to prevent material misstatements. b. Design procedures to search for significant deficiencies in the actual operation of the company's internal control. c. Prepare auditing working papers that document the auditor's understanding of the company's internal control. d. Perform exhaustive tests of accounting controls and evaluate the company's control system effectiveness.
C
When completing the audit of internal controls for a public company, AS 5 requires auditors to test a. Design effectiveness only. b. Operating effectiveness only. c. Both operating and design effectiveness. d. Neither operating nor design effectiveness.
C
When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over a. Operations. b. Compliance with regulations. c. Financial reporting. d. All of the above.
C
Which of the following is necessary in a financial statement audit? a. An understanding of internal control relevant to each of an entity's operating units. b. An understanding of internal control relevant to an entity's compliance objective. c. An understanding of internal control relevant to an entity's financial reporting objective. d. An understanding of internal control relevant to each of an entity's business functions.
C
Which of the following is not a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client? a. A narrative memorandum describing the control system. b. A flowchart of the documents and procedures used by the company. c. All of the above. d. None of the above.
C
Which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control? a. To consider factors that may affect the risk of material misstatement. b. To identify types of possible misstatements that may occur. c. To serve as a basis for constructive suggestions. d. To plan subsequent substantive tests.
C
Which of the following items is an example of an inherent limitation in an internal control system? a. Segregation of employee duties. b. Ineffective board of directors. c. Human error in decision making. d. Understaffed internal audit functions.
C
Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls? a. Management override. b. Collusion among employees. c. Incompatible duties. d. Mistakes in judgment.
C
Which of the following statements about internal control is correct? a. Properly maintained internal control reasonably ensures that collusion among employees cannot occur. b. Exceptionally strong internal control is enough for the auditor to eliminate substantive tests on a significant account balance. c. The cost-benefit relationship is a primary criterion that should be considered in designing internal control. d. The establishment and maintenance of internal control is an important responsibility of the internal auditor.
C
Audit Procedure: Vouch recorded sales invoices to supporting shipping documents. REQUIRED: Indicate whether the audit procedure above: I. Is a test of controls, a substantive test, or dual-purpose test [a-c] a. Test of controls b. Substantive test c. dual-purpose test II. Next, indicate the financial statement assertion most closely related to each audit procedure. [1-5] 1. Existence or Occurrence 2. Rights and Obligations 3. Valuation and Allocation 4. Completeness 5. Presentation and Disclosure
C & 1
Audit Procedure: Recalculate the arithmetic accuracy of the recorded sales invoices. REQUIRED: Indicate whether the audit procedure above: I. Is a test of controls, a substantive test, or dual-purpose test [a-c] a. Test of controls b. Substantive test c. dual-purpose test II. Next, indicate the financial statement assertion most closely related to each audit procedure. [1-5] 1. Existence or Occurrence 2. Rights and Obligations 3. Valuation and Allocation 4. Completeness 5. Presentation and Disclosure
C & 3
A transaction-level internal control activity is best described as a. An action taken by auditors to obtain evidence. b. A method for recording, summarizing, and reporting financial information. c. The functioning of the board of directors in support of its audit committee. d. None of the above.
D
Control strengths and weaknesses should be documented in audit documentation, sometimes called: a. internal control letters. b. questionnaires, narratives, and flowcharts. c. communications of significant deficiencies. d. bridge working papers.
D
Effectiveness of audit procedures would be reduced by a. Selecting larger sample sizes for audit. b. Performing audit procedures at the fiscal year-end date as opposed to the interim period. c. Deciding to obtain external evidence instead of internal evidence. d. None of the above.
D
On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level that is substantially the same as the planned audit risk level, the auditor will a. Increase inherent risk. b. Decrease substantive testing. c. Increase materiality levels. d. Decrease planned detection risk.
D
Once the auditor detects a control deficiency, which of the following steps must he or she take first? a. Perform tests of other controls related to the same assertion as the control deemed ineffective. b. Test the deficient control, assuming a maximum level of risk. c. Modify the planned substantive procedures as a result of the deficiency. d. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion.
D
Tests of controls in a GAAS audit are required for a. Obtaining evidence about the financial statement assertions. b. Accomplishing control over the occurrence of recorded transactions. c. Applying analytical procedures to financial statement balances. d. Obtaining evidence about the operating effectiveness of client control activities. e. Both and b f. All of the above.
D
The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including a. The auditor's testing of controls for the audit of internal control on a public company. b. Misstatements detected during the financial statement audit. c. Any control deficiencies identified during the audit. d. All of the above.
D
The following is a description of an internal control. DESCRIPTION: Before a cash disbursement can be processed, a voucher package must be submitted to the accounts payable department. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Information and Communication b. Risk Assessment c. Control Environment d. Control Activities e. Monitoring
D
The primary objective of procedures performed to obtain an understanding of the entity's internal control is to provide an auditor with: a. a basis for modifying tests of controls. b. an evaluation of the consistency of application of management's policies. c. evidential matter to use in assessing inherent risk. d. knowledge necessary for audit planning.
D
To test the operating effectiveness of a control, an audit team might use a combination of tests, including: a. Inquiry of client personnel. b. Observation of company operations. c. Inspection of documentation. d. All of the above. e. None of the above.
D
When a nonpublic company auditor's tests of internal controls identify deficiencies internal control over financial reporting, the auditor a. Must issue an adverse opinion on the financial statements. b. May communicate orally or in writing to the board all significant deficiencies and material weaknesses identified. c. Must communicate to management all deficiencies identified. d. Must communicate both significant deficiencies and material weaknesses to those charged with governance.
D
When completing the audit of internal controls for a public company, AS 5 requires auditors to test a. Operating effectiveness only. b. Design effectiveness only. c. Neither operating nor design effectiveness. d. None of the above.
D
When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on: a. Whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. b. Whether the account has a history of errors. c. The magnitude of the potential misstatement resulting from the deficiency or the deficiencies. d. Both a and c are correct. e. All of the above are correct. f. None of the above.
D
When considering internal control, an auditor must be aware of the concept of reasonable assurance, which recognizes that the a. Establishment and maintenance of internal control is an important responsibility of management and not for the auditor. b. Separation of incompatible functions is necessary to ascertain that the internal control is effective. c. Employment of competent personnel provides assurance that management's control objectives will be achieved. d. Cost of internal control should not exceed the benefits expected to be derived therefrom.
D
When testing a control activity's operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include a. Inquiry of appropriate personnel. b. Reading over the company's code of conduct. c. Reperformance of the control activity. d. Both a and c are correct.
D
Which of the following accurately summarizes the auditors' requirements regarding internal control? a. Public Entity Nonpublic Entity Documenting Yes Yes b. Public Entity Nonpublic Entity Evaluating control risk Yes Yes c. Public Entity Nonpublic Entity Test controls Yes Yes d. Both a and b. e. All of the above.
D
Which of the following information would be included in the introductory paragraph of the auditors' report on internal control over financial reporting if the report is presented separately from the auditors' report on the entity's financial statements? a. The fact that the auditors conducted an audit of the entity's financial statements. b. The definition of a material weakness in internal control over financial reporting. c. A reference to the auditors' report and opinion on the entity's financial statements. d. None of the above.
D
Which of the following is a component of internal control? a. Operating effectiveness. b. Organizational structure. c. Risk assessment. d. Financial reporting.
D
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. Management may override controls through its attitude and actions. b. Human error may result in an inappropriate application of controls. c. Collusion by two or more individuals may be used to circumvent controls. d. Inadequate segregation of duties may allow one person to both perpetrate and conceal fraudulent activity.
D
Which of the following is not a preventive control? a. Reconciliation of a bank account. b. Recalculation of a sample of payroll entries by internal auditors. c. Detailed fluctuation analysis completed by the CFO for revenue. d. All of the above. e. None of the above.
D
Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks? a. The relevant internal control components are not well documented. b. The internal auditor already has tested the relevant controls and found them effective. c. The cost of substantive procedures will exceed the cost of testing the relevant controls. d. Testing the operating effectiveness of the relevant controls would not be efficient.
D
Which of the following statements is correct regarding internal control? a. Internal control is a necessary business function and should be designed and operated to detect all errors and fraud. b. A well-designed internal control environment ensures the achievement of an entity's control objectives. c. A well-designed and operated internal control environment should detect collusion perpetrated by two people. d. An inherent limitation to internal control is the fact that controls can be circumvented by management override.
D
Which report would not be appropriate for a public accounting firm to provide on financial reporting controls? a. Disclaimer of opinion—unable to perform all necessary procedures. b. Adverse—material weaknesses exist. c. Unqualified—no material weaknesses found. d. Disclaimer of opinion—significant deficiencies exist.
D
All significant accounting estimates related to determining fair market value of derivative instruments are reviewed by at least two members of senior management with knowledge and expertise in financial instruments. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies [A-E]; A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested [I-V] I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment
D & V
The PCAOB standards recognize that a public company's internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives due to inherent limitations. Which of the following is not such an inherent limitation? a. Improper management override b. Circumvention by collusion c. Breakdowns from human failures d. Lapses in judgment e. Lack of controls over information technology
E
The following is a description of an internal control. DESCRIPTION: Prior to sales transactions, the credit department assesses the credit worthiness of potential customers. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Risk Assessment b. Control Environment c. Information and Communication d. Monitoring e. Control Activities
E
The following is a description of an internal control. DESCRIPTION: The company actively promotes a commitment to integrity and competence throughout the organization. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Control Activities b. Information and Communication c. Risk Assessment d. Monitoring e. Control Environment
E
The following is a description of an internal control. DESCRIPTION: The company actively trains manager's to ensure that they are up-to-date on current issues in financial reporting. Required: Indicate which of the COSO internal control components is best represented by each internal control. a. Risk Assessment b. Control Activities c. Information and Communication d. Monitoring e. Control Environment
E
The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the a. Operational responsibility from the record-keeping responsibility. b. Human resources function from the controllership function. c. Administrative controls from the internal accounting controls. d. All of the above. e. None of the above.
E
Which of the following statements is true with respect to the auditors' report on internal control over financial reporting? a. The report will express an opinion on the effectiveness of internal control over financial reporting. b. The auditor will issue an adverse opinion if one or more material weaknesses exist. c. The report may be presented with the report on the entity's financial statements as a combined report. d. Both b and c. e. All of the above.
E
The following internal control has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in different transaction cycles. CONTROL: A chart of accounts is used to classify each purchase entry. Required: For the internal control above, identify: 1. the transaction-related audit objective(s) to which it applies [A-E]; A. Existence or Occurrence B. Rights and Obligations C. Completeness D. Valuation or Allocation E. Presentation and Disclosure 2. the transaction cycle where the control is most likely to be tested [I-V] I. Revenue and Cash Collection II. Acquisition and Disbursement III. Payroll and Personnel IV. Production V. Finance and Investment
E & II
(T/F) A material weakness is a situation in which it is reasonably possible that an immaterial misstatement would not be detected on a timely basis.
False
(T/F) In most audits of large entities, control risk assessment contributes to audit efficiency, which means that the cost of control evaluation work will exceed the cost of substantive procedures.
False
(T/F) PCAOB Standard 5 requires the auditor to evaluate the effectiveness of the audit committee's oversight of the company's external financial reporting and internal control over financial reporting.
T
If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance. T/F
T
To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for: a. Inspection of documentation. b. Confirmation of balances. c. Inquiry of client personnel. d. Observati
b
