auditing chapter 5 homework

d. An auditor may compensate for a weakness in internal control by increasing the extent of: 1. Test of controls 2. Detection risk 3. Substantive test of details 4. Inherent risk

3. • Increasing substantive test of details will help compensate for weaknesses in internal controls

answers

a. 3 b. 2 c. 1 d. 7 e. 5 f. 11 g. 10

k. 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: 1. Establish internal control with no material weakness 2. Accept responsibility for the effectiveness of internal control 3. Evaluate the effectiveness of internal control using suitable control criteria 4. Support the evaluation with sufficient evidence

1. • Management must do everything except establish internal control with no material weakness because they can issue reports with or without material weaknesses.

h. Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: 1. Employment of temporary personnel to aid in the separation of duties 2. Direct participation by the owner in key record keeping and control activities of the business 3. Engaging a CPA to perform monthly write up work 4. Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee

2. • Effective internal control will be direct participation because all other are for larger businesses

a. Which of the following would be least likely to be considered an objective of internal control? 1. Checking the accuracy and reliability of accounting data 2. Detecting management fraud 3. Encouraging adherence to managerial policies 4. Safeguarding assets

2. • The other options are objectives of internal control

e. Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? 1. Segregation of duties over cash dispersments 2. Requiring approval of purchase transactions 3. Preparing bank reconciliations 4. Maintaining backup copies of key transactions

3. • An example of a detective control is bank reconciliations, while they are detective they do not prevent cash related misstatements

I. Which of the following is not an advantage of establishing an enterprise risk management system within an organization? 1. Reduced operational surprises 2. Provides integrated responses to multiple risks 3. Eliminates all risks 4. Identifies opportunities

3. • Advantages of establishing an enterprise risk management system are reducing operational surprises, providing integrated responses to multiple risks and identify opportunities.

L. When the auditors are performing a first-time internal control auditing accordance with the Sarbanes-Oxley Act and PCAOB standards, they should: 1. modify their report for any significant deficiencies identifies 2. Use a "bottom-up" approach to identify controls to test 3. Test controls for all significant accounts 4. Perform a separate assessment of controls over operations

3. • One the first time audit, auditors should test all major accounts to test internal controls.

f. Which of the following symbols indicate that a file has been consulted? 1. 2. 3. 4.

4. • The left is a manual function and the right is a file

1. An internal control questionnaire

• Easy to complete and simple •Made to where no answers lead to weaknesses • Prepared list • Help control weaknesses

b) If they are satisfied that no material weaknesses in internal control exist after completing their description of internal control, is it necessary for the CPAs to conduct test of controls? Explain.

• Test of controls is used to verify that the control is operating effectively • Even when controls are strong it does not guarantee employees are doing their assigned job or performing properly • When doing a test of controls it shows if the organization controls that are in place are working properly and if they will detect material errors

3. A flowchart

• Graph makes it easier to understand • Usually unlikely areas will be overlooked • Uses symbols to explain procedures • Each section has different symbols

4. How does separation of the record keeping function from custody of assets contribute to internal control?

• It separates control over the asset to prevent fraud, theft and control errors

g. When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPAs procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should: 1. Consider the organizational level to which the internal auditors report the results of their work 2. Review the internal auditors' work 3. Consider the qualifications of the internal auditors staff 4. Review the training program in effect for the internal audit staff

1. • The other answers are related to the auditors opinion

c. A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: 1. Knowledge necessary to determine the nature, timing, and extent of further audit procedures 2. Audit evidence to use in reducing detection risk 3. A basis for modifying test of controls 4. An evaluation of the consistency of application of management policies

1. • The primary parts of internal control are to determine the nature, timing and extent of further audit procedures.

j. Management of Warren Company has decided to respond to a particular risk by hedging the risk with futures contract. This is an example of: 1. Avoidance 2. Acceptance 3. Reduction 4. Sharing

4. • Hedging the risk of future contracts is avoidance by responding to a particular risk

b. An entity's ongoing monitoring activities often include: 1. Periodic audits by internal auditors 2. The audit of the annual financial statements 3. Approval of cash dispersments 4. Management review of weekly performance reports

4. • Weekly reviews are more frequent then the other options and can help detect fraud

Term a. Compensating control b. Complementary control c. Corrective control d. Deficiency in internal control e. Material weakness in internal control f. Walk through g. Transaction cycle

Definition 1. A control established to remedy misstatement that are discovered 2. A control that functions together with another control to achieve the same control objective 3. A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a control objective 4. A control that reduces the risk of misstatement by remediating control deficiencies through automated means 5. A deficiency in internal control such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis 6. A deficiency in internal control that s less severe than a material weakness, but more severe than a significant deficiency 7. A situation in which a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis 8. Duplicate controls that achieve a control objective 9. Procedures cycled periodically through the auditors internal control deviation analysis 10.the sequence of procedures applied by the client in processing a particular type of recurring transactions 11. A procedure in which an auditor follows a transaction from origination through the company's processes, including information systems, until it is reflected in the company's financial records

2. A written narrative

• Made for each engagement • Written Memos • Details internal control • Analysis of weaknesses • Requires detailed analysis

23. List the five stages of the auditors overall approach in an audit of internal control performed in accordance with PCAOB requirements.

• Plan the engagement • Use a top-down approach to identify controls to test • Test and evaluate design effectiveness of internal control • Test and evaluate operating effectiveness of internal control • Form an opinion on the effectiveness of internal control over financial reporting