Ch. 7: Auditing Internal Control Over Financial Reporting

T/F: A control deficiency is defined as an existing control that is not properly designed to meet control objectives even if it operates as designed.

False

T/F: Auditors of publicly traded companies must issue a report that accepts responsibility for establishing and maintaining adequate ICFR.

False

When an entity has a material weakness, it should take steps to correct it, which is referred to as ___________.

Remediation

An unqualified opinion regarding the effectiveness of the entity's ICFR provides ______ assurance that the entity's controls are designed and operating effectively in all material respects as of the balance sheet date. a. reasonable b. limited c. absolute

a

If the auditor discovers fraud involving senior management while auditing ICFR, the auditor must communicate the matter directly to the ______. a. audit committee b. appropriate law enforcement agency c. appropriate regulatory agency d. internal audit department

a

The phrase "All material respects" means that the entity's ICFR ______. a. is free of any material weakness b. does not have any significant deficiencies c. has prevented and/or detected all material errors

a

Which of the following statements is correct? a. Audit procedures to test and evaluate the design effectiveness of controls might also provide some evidence about operating effectiveness. b. A single set of audit procedures should be used to test both the design and operating effectiveness of controls. c. Evidence about the operating effectiveness of controls should never be based on procedures used to test design effectiveness.

a

Select all that apply Audit documentation related to the audit of internal controls must include ______. a. the extent of reliance on work performed by others b. the scope of testing c. a discussion of PCAOB documentation standards d. the evaluation of deficiencies discovered

a, b, d

Select all that apply Which of the following statements are correct? a. The severity of a control deficiency depends on its likelihood and magnitude. b. The assessment of the significance of a control deficiency depends on whether or not a misstatement has occurred. c. Auditors are required to evaluate the severity of each control deficiency.

a, c

Select all that apply When deciding on the extent of testing, the auditor should consider the ______. a. importance of the control b. timing of the audit c. nature of the control d. frequency of operation e. other audit evidence

a, c, d

A deficiency or combination of deficiencies in ICFR that is less severe than a material weakness yet important enough to merit attention is a ______ deficiency. a. remote b. significant c. possible d. reasonable

b

When compared to automated controls, manual controls should be subjected to ______ testing a. the same level of b. more extensive c. less extensive

b

Select all that apply Prior to the issuance of the auditor's report on ICFR, the auditor must communicate in writing to both management and the audit committee identified ______. a. compensating controls b. significant deficiencies c. material weaknesses d. control deficiencies

b, c

Select all that apply When companies use service organizations to process transactions, ______. a. an audit only can only be expressed if the auditor performs tests of controls at the service organization b. both management and the auditor must consider the service organization activities c. the service organization is considered part of the information and communication component of the entity's ICFR d. the auditor cannot express an opinion about the effectiveness of operating controls

b, c

Select all that apply. Entity-level controls that require specific evaluation by the auditor are the ______. a. interim financial reporting process b. control environment c. period-end financial reporting process d. management compensation and evaluation processes

b, c

Select all that apply The auditor's report on the effectiveness of internal control must ______. a. be issued as a separate report from the financial statement audit report b. be addressed to the shareholders and board of directors c. provide an opinion on whether the entity maintained effective ICFR throughout the financial statement audit period d. contain the basis of the auditor's opinion

b, d

A control issue does not rise to the level of control deficiency if the likelihood is ______. a. probable b. likely c. remote d. reasonably possible

c

If a material weakness cannot be corrected and/or properly tested before the "as of" date, ______. a. the auditor should issue a report that the ICFR is not operating effectively and the management should not issue an opinion b. management should issue a report that the ICFR is not operating effectively and the auditor should disclaim an opinion c. both management and the auditor should issue a report that the ICFR is not operating effectively d. neither management or the auditor should issue a report on the effectiveness of ICFR

c

If a significant deficiency of material weakness exists because of the audit committee's ineffective oversight, the auditor must communicate the specific deficiency or weakness, in writing, directly to the ______. a. appropriate regulatory agency b. company CEO c. board of directors d. internal audit department

c

The auditor's written communication about control deficiencies may indicate ______. a. only that no significant deficiencies were noted during an audit of internal controls b. both that no material weaknesses were identified and no significant deficiencies were noted c. only that no material weaknesses were identified

c

The difference between a control deficiency, a significant deficiency, and a material weakness is determined solely based on ______. a. auditor judgment b. likelihood c. magnitude d. management judgment

c

The severity of a control deficiency depends on ______. a. number of misstatements & magnitude b. likelihood & number of misstatements c. likelihood & magnitude

c

Select all that apply The auditor's report on the effectiveness of internal control must ______. a. contain the basis of management's opinion on the effectiveness of ICFR b. be addressed to the management of the company c. have the same date as the financial statement audit report d. provide an opinion on effective ICFR as of the specified date

c, d

In addition to material weaknesses and significant deficiencies, the auditor should communicate, in writing, to management all ___________ deficiencies identified during the audit.

control

If one or more unremediated material weaknesses is identified, the auditor issues a(n) ______ opinion on the entity's internal control. a. unqualified b. qualified c. disclaimer of d. adverse

d

The presence of a material weakness in ICFR at the end of the period necessitates a(n) ______ assessment by management and a(n) ______ opinion by the auditor. a. adverse, qualified b. qualified, adverse c. qualified, qualified d. adverse, adverse

d

Unless a longer period of time is required, PCAOB standards require the auditor to retain audit documentation for the ICFR and financial statement audit for ______ years. a. 3 b. 10 c. 5 d. 7

d

When the auditor issues an adverse opinion on internal control, ______ be issued on the financial statement audit. a. a disclaimer of opinion must b. at least a qualified opinion must c. an adverse opinion must d. an unqualified opinion may

d

When a control necessary to meet the relevant control objective is missing, a(n) _____________ ____________ exists.

design deficiency

Once key controls have been identified, the auditor starts with evaluating their ____________ effectiveness, which may also provide some evidence about ____________ effectiveness.

design; operating

The auditor must test the effectiveness of _____________-______________ controls because they can have a pervasive effect on the entity's ability to meet the COSO control criteria.

entity-level

T/F: In planning an integrated audit, the auditor should design separate tests of controls to accomplish the objectives of the audit of ICFR and the audit of financial statements.

false

Reports accepting responsibility for establishing and maintaining adequate ICFR are issued by ______________ of public companies.

management

A deficiency in ICFR, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis is defined as a(n) ______________ ____________ by the PCAOB.

material weakness

Factors that affect whether the magnitude of a misstatement might result in a(n) ____________ ____________ include (1) the financial statement amounts or total of transactions exposed to the deficiency and the (2) volume of transactions involved or expected.

material weakness

If the auditor determines that a deficiency might prevent prudent officials in the conduct of their own affairs from concluding they have reasonable assurance that transactions are recorded as necessary to prepare financial statements in accordance with GAAP, the auditor should treat the deficiency as indication of a(n) ___________ ___________.

material weakness

If a misstatement is detected by substantive procedures, the auditor should consider whether the control deficiency might affect the _____________ on the audit of ICFR.

opinion

A material weakness is a deficiency or combination of deficiencies in ICFR such that there is a(n) ______ possibility that a material financial statement misstatement will not be prevented or detected on a timely basis. a. absolute b. remote c. reasonable d. significant

reasonable

If circumstances beyond the control of management or the auditor limit the ____________ of the auditor's work, the auditor should disclaim an opinion or withdraw from the engagement.

scope

A deficiency or combination of deficiencies in ICFR that is less severe than a material weakness yet important enough to merit attention is a(n) _______________ deficiency.

significant

After auditing the effectiveness of an entity's internal control, an auditor issues a(n) __________ ___________ if the entity's internal control is designed and operating effectively in all material respects.

unqualified opinion