AUDIT internal control

Assume that a company has a control deficiency regarding the processing of cash receipts. Reconciliation of cash accounts by a competent individual otherwise independent of the cash function might make the likelihood of a significant misstatement due to the control deficiency remote. In this situation, reconciliation may be referred to as what type of control? a. Compensating. b. Preventive. c. Adjustive. d. Nonroutine.

Compensating.

Which of the following is LEAST likely to be evidence the auditor examines to determine whether controls are operating effectively? a. Records documenting usage of computer programs. b. Canceled supporting documents. c. Confirmations of accounts receivable. d. Signatures on authorization forms.

Confirmations of accounts receivable.

Which of the following factors are included in an entity's control environment?

Audit committee, Integrity and ethical values, Organizational

Which of the following controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger? a. Daily sales summaries are compared to daily postings to the accounts receivable ledger. b. Each sales invoice is supported by a prenumbered shipping document. c. The accounts receivable ledger is reconciled daily to the control account in the general ledger. d. Each shipment on credit is supported by a prenumbered sales invoice.

Daily sales summaries are compared to daily postings to the accounts receivable ledger.

In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the

Design of controls only. NOT operating effectiveness of those controls.

In obtaining an understanding of an entity's internal control relevant to audit planning, an auditor is required to obtain knowledge about the a. Design of the controls pertaining to internal control components. b. Effectiveness of controls that have been implemented. c. Consistency with which controls are currently being applied. d. Controls related to each principle transaction class and account balance.

Design of the controls pertaining to internal control components.

For purposes of an audit of internal control performed under Public Company Accounting Oversight Board requirements, an account is significant if it is a. Reasonably possible that it could contain immaterial or material misstatements. b. Reasonably possible that it could contain material misstatements. c. Remotely or reasonably possible, or probable, that it could contain material misstatements. d. Reasonably possible that it could contain one or more control deficiencies no matter how severe.

Reasonably possible that it could contain material misstatements.

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner? a. Footing the purchase journal. b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts. c. Tracing totals from the purchases journal to the ledger accounts. d. Sending written quarterly confirmations to all vendors.

Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

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. The audit committee actively oversees the financial reporting process.

Management is dominated by one individual.

Which of the following need not be included in management's report on internal control under Section 404a of the Sarbanes-Oxley Act of 2002? a. A statement that the company's auditor has issued an audit report on the company's internal control over financial reporting. b. Identification of the framework for evaluating internal control. c. Management's assessment of the effectiveness of internal control. d. Management's statement of responsibility to establish and maintain internal control that has no significant deficiencies.

Management's statement of responsibility to establish and maintain internal control that has no significant deficiencies.

In an integrated audit, which of the following lead(s) to an adverse opinion on internal control? Material Weaknesses and/or Significant Deficiencies

Material Weakness only. Not significant deficiencies.

Which of the following is an accurate statement about internal control weaknesses? a. Material weaknesses are also control deficiencies. b. Significant deficiencies are also material weaknesses. c. Control deficiencies are also reportable conditions. d. Control deficiencies always merit attention by those responsible for oversight of the company's financial reporting.

Material weaknesses are also control deficiencies.

Which of the following statements regarding auditor documentation of the client's internal control is correct? a. Documentation must include flowcharts. b. Documentation must include procedural write-ups. c. No documentation is necessary although it is desirable. d. No one particular form of documentation is necessary, and the extent of documentation may vary.

No one particular form of documentation is necessary, and the extent of documentation may vary.

The minimum likelihood of loss involved in the consideration of a control deficiency is a. Remote. b. Reasonably possible. c. Probable. d. Not explicitly considered.

Not explicitly considered.

Which of the following controls most likely would reduce the risk of diversion of customer receipts by an entity's employees? a. A bank lockbox system. b. Prenumbered remittance advices. c. Monthly bank reconciliations. d. Daily deposit of cash receipts.

A bank lockbox system.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a misstatement of the company's annual or interim financial statements of at least what amount will not be prevented or detected on a timely basis? a. An amount greater than zero. b. An amount greater than zero, but not significant. c. A significant amount. d. A material amount.

A material amount.

The overall attitude and awareness of 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.

Control environment.

Which of the following is not a component of an entity's internal control? a. Control risk. b. Control activities. c. Monitoring. d. Control environment.

Control risk.

Control risk should be assessed in terms of a. Specific controls. b. Types of potential fraud. c. Financial statement assertions. d. Control environment factors.

Financial statement assertions.

Assessing control risk at a low level most likely would involve a. Performing more extensive substantive tests with larger sample sizes than originally planned. b. Reducing inherent risk for most of the assertions relevant to significant account balances. c. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end. d. Identifying specific controls relevant to specific assertions.

Identifying specific controls relevant to specific assertions.

An entity's ongoing monitoring activities often include a. Periodic audits by the audit committee. b. Reviewing the purchase function. c. The audit of the annual financial statement. d. Control risk assessment in conjunction with quarterly reviews.

Reviewing the purchase function.

Components of COSO framework:

Risk assessment Control environment Control activities Info/Communication Monitoring

The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States? a. All companies. b. SEC registrants. c. All issuer (public) companies and nonissuer (nonpublic) companies with more than $100,000,000 of net worth. d. All nonissuer companies.

SEC registrants.

Tracing shipping documents to prenumbered sales invoices provides evidence that a. No duplicate shipments or billings occurred. b. Shipments to customers were properly invoiced. c. All goods ordered by customers were shipped. d. All prenumbered sales invoices were accounted for.

Shipments to customers were properly invoiced.

In an integrated audit, which of the following is defined as a weakness in internal control that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting? a. Control deficiency. b. Material weakness. c. Unusual deficiency. d. Significant deficiency.

Significant deficiency.

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that a. Internal control may be ineffective due to mistakes in judgment and personal carelessness. b. Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability. c. Establishing and maintaining internal control is an important responsibility of management. d. The cost of an entity's internal control should not exceed the benefits expected to be derived.

The cost of an entity's internal control should NOT exceed the benefits expected to be derived.

An auditor identified a material weakness in December. The client was informed and corrected it shortly after the "as of date" (December 31); the auditor agrees that the correction eliminates the material weakness as of January 31. The appropriate report under a PCAOB Standard 5 audit of internal control is a. Adverse. b. Unqualified. c. Unqualified with explanatory language relating to the material weakness. d. Qualified.

Adverse.

To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including a. Inquiry. b. Analytical procedures. c. Calculation. d. Confirmation.

Inquiry.

Which of the following controls is not usually performed in the vouchers payable department? a. Matching the vendor's invoice with the related receiving report. b. Approving vouchers for payment by having an authorized employee sign the vouchers. c. Indicating the asset and expense accounts to be debited. d. Accounting for unused pre-numbered purchase orders and receiving reports.

Accounting for unused pre-numbered purchase orders and receiving reports.

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the a. Internal auditor to investigate the listing for unusual transactions. b. Treasurer to compare the listing with the monthly bank statement. c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records. d. Entity's bank to compare the listing with the cashier's deposit slip.

Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

After assessing control risk, an auditor desires to seek a further reduction in the assessed level of control risk. At this time, the auditor would consider whether a. It would be efficient to obtain an understanding of the entity's information system. b. The entity's controls have been implemented. c. The entity's controls pertain to any financial statement assertions. d. Additional audit evidence sufficient to support a further reduction is likely to be available.

Additional audit evidence sufficient to support a further reduction is likely to be available.

A control deficiency that is more than a significant deficiency is most likely to result in what form of audit opinion relating to internal control? a. Adverse. b. Qualified. c. Unqualified. d. Unqualified with explanatory language.

Adverse.

An auditor assesses control risk because it a. Is relevant to the auditor's understanding of the control environment. b. Provides assurance that the auditor's materiality levels are appropriate. c. Indicates to the auditor where inherent risk may be the greatest. d. Affects the level of detection risk that the auditor may accept.

Affects the level of detection risk that the auditor may accept.

Which of the following is most likely to be considered a material weakness in internal control for purposes of an internal control audit of an issuer (public) company. a. An ineffective internal audit function. b. Restatement of previously issued financial statements due to a change in accounting principles. c. Inadequate segregation of recordkeeping from accounting. d. Weaknesses in control activities.

An ineffective internal audit function.

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases? a. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? b. Are purchase requisitions prenumbered and independently matched with vendor invoices? c. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? d. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

Which of the following statements is correct concerning an auditor's assessment of control risk? a. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity's internal control. b. Evidence about the operation of internal control in prior audits may not be considered during the current year's assessment of control risk. c. The basis for an auditor's conclusions about the assessed level of control risk need not be documented unless control risk is assessed at the maximum level. d. The lower the assessed level of control risk, the less assurance the evidence must provide that the control procedures are operating effectively.

Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity's internal control.

Which of the following is most likely to indicate a significant deficiency relating to a client's antifraud program? a. A broad scope of internal audit activities. b. A "whistle-blower" program that encourages anonymous submissions. c. Audit committee passivity when conducting oversight functions. d. Lack of performance of criminal background investigations for likely customers.

Audit committee passivity when conducting oversight functions.

Proper segregation of functional responsibilities calls for separation of the functions 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.

Walk-throughs ordinarily provide evidence that helps the auditor to Evaluate design effectiveness of controls and/or Confirm whether controls have been placed in operation

Both. Evaluate design effectiveness of controls and confirm whether controls have been placed in operation.

The framework most likely to be used by management in its internal control assessment under requirements of the Sarbanes-Oxley Act of 2002 is the a. COSO internal control framework. b. COSO enterprise risk management framework. c. FASB 37 internal control definitional framework. d. AICPA internal control analysis manager.

COSO internal control framework.

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendor's invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all a. Cash disbursements. b. Approved vouchers. c. Receiving reports. d. Vendor's invoices.

Cash disbursements.

An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all a. Purchase orders. b. Cleared payments (i.e., canceled checks). c. Receiving reports. d. Approved vouchers.

Cleared payments (i.e., canceled checks).

Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed? a. Confirmations of receivables verifying account balances. b. Letters of representations corroborating inventory pricing. c. Attorneys' responses to the auditor's inquiries. d. Client records documenting the use of computer programs.

Client records documenting the use of computer programs.

Which statement is correct concerning the relevance of various types of controls to a financial audit? a. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken. b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant. c. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant. d. All controls are ordinarily relevant to an audit.

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

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the a. Dates checks are deposited per bank statements with the dates remittance credits are recorded. b. Daily cash summaries with the sums of the cash receipts journal entries. c. Individual bank deposit slips with the details of the monthly bank statements. d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

Dates checks are deposited per bank statements with the dates remittance credits are recorded.

Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals and a. Protect employees who make unintentional misstatements from possible monetary damages resulting from their misstatements. b. Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts. c. Facilitate an independent monitoring of the receiving and depositing of cash receipts. d. Force employees in positions of trust to take periodic vacations and rotate their assigned duties.

Deter dishonesty by making employees aware that insurance companies may investigate and prosecute dishonest acts.

An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risk of material misstatement primarily to a. Determine whether procedures and records concerning the safeguarding of assets are reliable. b. Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized. c. Modify the initial assessments of inherent risk and preliminary judgments about materiality levels. d. Determine the nature, timing, and extent of substantive tests for financial statement assertions.

Determine the nature, timing, and extent of substantive tests for financial statement assertions.

Inability to evaluate internal control due to a circumstance-caused scope limitation relating to a significant account in a Sarbanes-Oxley Section 404 internal control audit is most likely to result in a(n) a. Adverse opinion. b. Disclaimer of opinion. c. Unqualified opinion with explanatory language. d. Qualified opinion.

Disclaimer of opinion.

In an audit of financial statements in accordance with GAAP, an auditor is required to a. Document the auditor's understanding of the entity's internal control. b. Search for significant deficiencies in the operation of internal control. c. Perform tests of controls to evaluate the effectiveness of the entity's internal control. d. Determine whether controls are suitably designed to prevent or detect material misstatements.

Document the auditor's understanding of the entity's internal control.

How frequently must an auditor test the operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely in the current year? a. Monthly. b. Each audit. c. At least every second audit. d. At least every third audit.

Each audit.

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? a. Observe the consistency of the employee's use of cash registers and tapes. b. Inquire about employee's access to recorded but undeposited cash. c. Trace deposits in the cash receipts journal to the cash balance in the general ledger. d. Compare the cash balance in the general ledger with the bank confirmation request.

Observe the consistency of the employee's use of cash registers and tapes.

Which of the following controls most likely would be effective in offsetting the tendency of sales personal to maximize sales volume at the expense of high bad debt write-offs? a. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash. b. Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts. c. Employees involved in the credit-granting function are separated from the sales function. d. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

Employees involved in the credit-granting function are separated from the sales function.

For effective internal control, the accounts payable department generally should a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. b. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee. c. Obliterate the quantity ordered on the receiving department copy of the purchase order. d. Establish the agreement of the vendor's invoice with the receiving report and purchase order.

Establish the agreement of the vendor's invoice with the receiving report and purchase order.

According to Public Company Accounting Oversight Board Auditing Standard 5, what type of transaction involves establishing a loan loss reserve? a. Substantive transaction. b. Routine transaction. c. Nonroutine transaction. d. Estimation transaction.

Estimation transaction.

For an issuer (public) company audit of internal control, walkthroughs provide the auditor with primary evidence to

Evaluate the effectiveness of the design of controls and Confirm whether controls have been placed in operation.

The objective of tests of details of transactions performed as tests of control is to a. Monitor the design and use of entity documents such as prenumbered shipping forms. b. Determine whether controls have been implemented. c. Detect material misstatements in the accounting balances of the financial statements. d. Evaluate whether controls operated effectively.

Evaluate whether controls operated effectively.

Which of the following is a provision of the Foreign Corrupt Practices Act? a. It is a criminal offense for an audit to fail to detect and report a bribe paid by an American business entity to a foreign official for the purpose of obtaining business. b. The auditor's detection of illegal acts committed by official of the auditor's publicly held client in conjunction with foreign officials should be reported to the Enforcement Division of the Securities and Exchange Commission. c. If the auditor of a publicly held company concludes that the effects on the financial statements of a bribe given to a foreign official are not susceptible of reasonable estimation, the auditor's report should be modified. d. Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurances that internal control objectives are met.

Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurances that internal control objectives are met.

In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? a. Completeness. b. Existence or occurrence. c. Valuation or allocation. d. Rights and obligations.

Existence or occurrence.

An auditor may compensate for a weakness in internal control by increasing the a. Level of detection risk. b. Extent of tests of controls. c. Preliminary judgment about audit risk. d. Extent of analytical procedures.

Extent of analytical procedures.

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the a. Extent of tests of controls. b. Level of detection risk. c. Extent of tests of details. d. Level of inherent risk.

Extent of tests of details.

Which of the following is correct when applying a top-down approach to identify controls to test in an integrated audit? a. For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those controls. b. Starting at the top--controls over specific assertions--the author should link to major accounts and reporting items. c. The goal is to focus on details of accounting controls, while avoiding consideration of overall entity-level controls. d. The goal is to focus on all controls related to assertions, omitting consideration of controls related to the financial statements.

For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those controls.

Which is most likely to be a question asked of employee personnel during a walk-through in an audit of the internal control of an issuer (public) company? a. Have you ever been asked to override the process? b. Do you believe that you are underpaid? c. What do you do when you find a fraudulent transaction? d. Who trained you for this job?

Have you ever been asked to override the process?

How large must the actual loss identified by the auditor be for a control deficiency to possibly be considered a material weakness?

Immaterial and Material.

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control? a. Incompatible duties. b. Management override. c. Mistakes in judgment. d. Collusion among employees.

Incompatible duties.

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions? a. Verify that extensions and footings on the entity's sales invoices and monthly customers statements have been recomputed. b. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal. c. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list. d. Inquire about the entity's credit granting policies and the consistent application of credit checks.

Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.

Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is most likely obtained in part by a. Preparing flowcharts. b. Performing substantive tests. c. Analyzing tests of trends and ratios. d. Inspection of documents.

Inspection of documents.

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also a. Reviews the monthly bank reconciliation. b. Returns the checks to accounts payable. c. Is denied access to the supporting documents. d. Is responsible for mailing the checks.

Is responsible for mailing the checks.

After obtaining an understanding of internal control and assessing the risk of material misstatement, an auditor decided to perform tests of controls. The auditor most likely decided that a. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. b. Additional evidence to support a further reduction in the risk of material misstatement is not available. c. An increase in the assessed level of the risk of material misstatement is justified for certain financial statement assertions. d. There were many internal control weaknesses that could allow misstatements to enter the accounting system.

It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with a. Knowledge necessary to assess the risks of material misstatements. b. Evidence to use in assessing inherent risk. c. A basis for modifying tests of controls. d. An evaluation of the consistency of application of management's policies.

Knowledge necessary to assess the risks of material misstatements.

In an integrated audit, what must the auditor communicate to the audit committee? Known material weaknesses and/or All control deficiencies

Known material weaknesses only. Not all control deficiencies.

Decision tables differ from program flowcharts in that decision tables emphasize a. Ease of manageability for complex programs. b. Logical relationships among conditions and actions. c. Cost benefit factors justifying the program. d. The sequence in which operations are performed.

Logical relationships among conditions and actions.

When obtaining an understanding of an entity's internal control, an auditor should concentrate on the substance of controls rather than their form because a. The controls may be operating effectively but may not be documented. b. Management may establish appropriate controls but not enforce compliance with them. c. The controls may be so inappropriate that no reliance is contemplated by the auditor. d. Management may implement controls whose costs exceed their benefits.

Management may establish appropriate controls but NOT enforce compliance with them

In an integrated audit, which must the auditor communicate in writing to management? a. Only material weaknesses. b. Material weaknesses and significant deficiencies. c. Material weaknesses, significant deficiencies and other control deficiencies. d. Material weaknesses, significant deficiencies, other control deficiencies, and all suspected and possible employee law violations.

Material weaknesses, significant deficiencies and other control deficiencies.

With well-designed internal control, employees in the same department most likely would approve purchase orders, and also a. Reconcile the open invoice file. b. Inspect goods upon receipt. c. Authorize requisitions of goods. d. Negotiate terms with vendors.

Negotiate terms with vendors.

Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain evidence in support of an assessed level of control risk below the maximum? a. Observing an entity's employee prepare the schedule of past due accounts receivable. b. Sending confirmation request to an entity's principle customers to verify the existence of account receivable. c. Inspecting an entity's analysis of accounts receivable for unusual balances. d. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable.

Observing an entity's employee prepare the schedule of past due accounts receivable.

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. Re-performing the activities for a sample of transactions. b. Performing 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 personal applying the activities.

Observing the entity's personal applying the activities.

Which of the following is correct concerning the level of assistance auditors may provide in assisting management with its assessment of internal control? a. No assistance of any type may be provided. b. No limitations on assistance exist. c. Only very limited assistance may be provided. d. As less risk is assumed by the auditors, a higher level of assistance is appropriate.

Only very limited assistance may be provided.

Which is correct concerning the external auditor's use of the work of others in an audit of internal control performed for a public company? a. It is not allowed. b. The work of internal auditors may be used, but only when those internal auditors report directly to the audit committee. c. Ordinarily the work of internal auditors and others is used primarily in low-risk areas. d. There is no limitation and is likely to reduce auditor liability since the auditors will then share legal responsibility with those who have performed the service.

Ordinarily the work of internal auditors and others is used primarily in low-risk areas.

Which of the following is NOT a step in an auditor's assessment of control risk? a. Evaluate the effectiveness of internal control with tests of controls. b. Obtain an understanding of the entity's information system and control environment. c. Perform tests of details of transactions to detect material misstatements in the financial statements. d. Consider whether controls can have a pervasive effect on financial statement assertions.

Perform tests of details of transactions to detect material misstatements in the financial statements.

An auditor generally tests the segregation of duties related to inventory by a. Personal inquiry and observation. b. Test counts and cutoff procedures. c. Analytical procedures and invoice recomputation. d. Document inspection and reconciliation.

Personal inquiry and observation.

Sound internal control dictates that immediately upon receiving checks from customers by mail, a responsible employee should a. Add the checks to the daily cash summary. b. Verify that each check is supported by a prenumbered sales invoice. c. Prepare a duplicate listing of checks received. d. Record the checks in the cash receipts journal.

Prepare a duplicate listing of checks received.

An auditor should obtain sufficient knowledge of an entity's information system to understand the a. Safeguards used to limit access to computer facilities. b. Process used to prepare significant accounting estimates. c. Controls used to assure proper authorization of transactions. d. Controls used to detect the concealment of fraud.

Process used to prepare significant accounting estimates.

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including a. Inquiry and analytical procedures. b. Re-performance and observation. c. Comparison and confirmation. d. Inspection and verification.

Re-performance and observation.

Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the a. Department that initiated the requisition. b. Receiving department. c. Purchasing agent. d. Accounts payable department.

Receiving department.

When a customer fails to include a remittance advice with a payment, it is common practice for the person opening the mail to prepare one. Consequently, mail should be opened by which of the following four company employees? a. Credit manager. b. Receptionist. c. Sales manager. d. Accounts receivable check.

Receptionist.

With properly designed internal control, the same employee most likely would match vendor's invoices with receiving reports and also a. Post the detailed accounts payable records. b. Recompute the calculation on vendors' invoices. c. Reconcile the accounts payable ledger. d. Cancel vendors' invoices after payment.

Recompute the calculation on vendors' invoices.

Which of the following procedures most likely would not be a control designed to reduce the risk of misstatements in the billing process? a. Comparing control totals for shipping documents with corresponding totals for sales invoices. b. Using computer programmed controls on the pricing and mathematical accuracy of sales invoices. c. Matching shipping documents with approved sales orders before invoice preparation. d. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

During the consideration of internal control in a financial statement audit, an auditor is not obligated to a. Search for significant deficiencies in the operation of the internal control. b. Understand the internal control and the information system. c. Determine whether the control activities relevant to audit planning have been implemented. d. Perform procedures to understand the design of internal control.

Search for significant deficiencies in the operation of the internal control.

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is a. Supported by a vendor's invoice. b. Stamped "paid" by the check signer. c. Prenumbered and accounted for. d. Approved for authorized purchases.

Stamped "paid" by the check signer.

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

Substantive tests to restrict detection risk for significant transaction classes.

Which of the following may not be required on a particular audit of a nonissuer (nonpublic) company? a. Risk assessment procedures. b. Tests of controls. c. Substantive procedures. d. Analytical procedures.

Tests of controls.

Which of the following is not included in a standard unqualified opinion on internal control over financial reporting performed under PCAOB requirements? a. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. b. In our opinion, [company name] maintained, in all material respects, effective internal control over financial reporting. c. Our audit included obtaining an understanding of internal control over financial reporting. d. The [company name] management and audit committee are responsible for maintaining effective internal control over financial reporting.

The [company name] management and audit committee are responsible for maintaining effective internal control over financial reporting.

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded? a. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances. b. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly. c. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. d. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

In which manner are significant deficiencies communicated by the auditors to the audit committee under Public Company Accounting Oversight Board Standard 5? a. The communication may either be orally or in written form. b. The communication must be oral, and not in written form. c. The communication must be in written form. d. No such communication is required as only material weaknesses must be communicated.

The communication must be in written form.

For purposes of an audit of internal control performed under Public Company Accounting Oversight Board standards, the "as of date" is ordinarily a. The first day of the year. b. The last day of the fiscal period. c. The last day of the auditor's fieldwork. d. The average date for the entire fiscal period.

The last day of the fiscal period.

During the consideration of a small business client's internal control, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness? a. The owner reviews errors in billing to customers and posting to the subsidiary ledger. b. The controller receives the monthly bank statement directly and reconciles the checking accounts. c. The owner reviews credit memos after they are recorded. d. The controller reconciles the total of the detail accounts receivable accounts to the amount shown in the ledger.

The owner reviews credit memos after they are recorded.

Consider an issuer (public) company whose purchases are made through the Internet and by telephone. Which of the following is correct? a. These types of purchases represent control objectives for the audit of internet control. b. These purchases are the assertions related to the purchase class of transactions. c. These types of purchases represent two major classes of transactions within the purchases process. d. These two types of transactions represent routine transactions that must always be investigated in extreme detail.

These types of purchases represent two major classes of transactions within the purchases process.

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments? a. Accounts receivable. b. Credit. c. Accounts payable. d. Treasurer.

Treasurer.

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of a. Valuation or allocation. b. Completeness. c. Existence or occurrence. d. Rights and obligations.

Valuation or allocation.

A procedure that involves the auditor's following a transaction from its origination through the company's processes, including information systems, until it is reflected in the company's financial records, using the same documents and information technology that company personnel use, is referred to as a(an) a. Analytical analysis. b. Substantive procedure. c. Test of control. d. Walk-through.

Walk-through.