Chapter 11
True or False: Adequate separation of duties is one of the subcomponents of the control environment
False
True or False: The auditor determining how the company's risk should be managed is an underlying principle related to risk assessment
False
A(n) ________ total represents the summary total of codes from all records in a batch that do not represent a meaningful total.
Hash
Is processing a general control?
No, it is not.
Is a sales manager's authorization for a sales return a general authorization?
No.
True or False: Application controls relate to the processing of individual transactions.
True
Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Name one.
a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
When purchasing software or developing in-house software
a team of both IT and non-IT personnel should be involved in the decision process
When purchasing software or developing in-house software,
a team of both IT and non-IT personnel should be involved in the decision process
Controls which are designed to assure that the information entered into the computer is authorized, complete, and accurate are called
input controls.
The most important output control is
review of data for reasonableness by someone who knows what the output should look like.
Who is responsible for establishing a private company's internal control?
senior management
In performing the audit of internal control over financial reporting, the auditor emphasizes internal control over classes of transactions because
the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.
What best describes the purpose of control activities?
the achievement of the entity's objectives
To promote operational efficiency, the internal audit department would ideally report to
the audit committee.
An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are
the design and operating effectiveness of the controls.
An example of a physical control is
the matching of employee fingerprints to a database before access to the system is allowed.
The auditors primary purpose in auditing the client's system of internal control over financial reporting is
to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements.
What tools do companies use to limit access to sensitive company data?
Encryption techniques Digital signatures Firewall
Which of the following best describes an entity's accounting information and communication system? (1)Monitor transactions (2)Record and process transactions (3)Initiate transactions
(1) No (2) Yes (3) Yes
When management is evaluating the design of internal control, management evaluates whether the control can do which of the following? (1) Detect material misstatements (2) Correct material misstatements
(1) Yes (2) No
Which of the following factors may increase risks to an organization? (1) Geographic dispersion of company operations (2) Presence of new information technologies
(1) Yes (2) Yes
Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies? (1) Management (2) Financial statement auditors
(1) Yes (2) Yes
Typical controls developed for manual systems which are still important in IT systems include
(1) management's authorization of transactions. (2) competent personnel. (3) adequate preparation of input source documents.
Risk Assessment Principles
1. Specify Objectives 2. Identify and Analyze Risks 3. Consider Potential for Fraud 4. Identify and Assess Changes
Which of the following is not a general control? A) Computer performed validation tests of input accuracy. B) Equipment failure causes error messages on monitor. C) There is a separation of duties between programmer and operators. D) There are adequate program run instructions for operating the computer.
A) Computer performed validation tests of input accuracy.
Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes-Oxley Act? A) The audits of internal control and the financial statements provide reasonable assurance as to misstatements. B) The audit of internal control provides absolute assurance of misstatement. C) The audit of financial statements provides absolute assurance of misstatement. D) The audits of internal control and the financial statements provide absolute assurance as to misstatements.
A) The audits of internal control and the financial statements provide reasonable assurance as to misstatements.
Which of the following is an accurate statement regarding the auditor's responsibility for understanding internal control? A) Transaction-related audit objectives typically have no impact on the rights and obligations objectives. B) Transaction-related audit objectives typically have a significant impact on the balance-related audit objective of realizable value. C) Auditors generally emphasize internal control over account balances rather than classes of transactions. D) Auditors and management are both equally concerned about controls that affect the efficiency and effectiveness of company operations.
A) Transaction-related audit objectives typically have no impact on the rights and obligations objectives.
External financial statement auditors must obtain evidence regarding what attributes of an internal audit (IA) department if the external auditors intend to rely on IA's work?
A) integrity B) objectivity C) competence
Which of the following components of the control environment define the existing lines of responsibility and authority? A) organizational structure B) management philosophy and operating style C) human resource policies and practices D) management integrity and ethical values
A) organizational structure
Which of the following best explains the relationship between general controls and application controls? A) Application controls are effective even if general controls are extremely weak. B) Application controls are likely to be effective only when general controls are effective. C) General controls have no impact on application controls. D) None of the above
B) Application controls are likely to be effective only when general controls are effective.
Which of the following activities would be least likely to strengthen a company's internal control? A) separating accounting from other financial operations B) maintaining insurance for fire and theft C) fixing responsibility for the performance of employee duties D) carefully selecting and training employees
B) maintaining insurance for fire and theft
Which of the following is not an example of an applications control? A) Back-up of data is made to a remote site for data security. B) There is a preprocessing authorization of the sales transactions. C) There are reasonableness tests for the unit selling price of a sale. D) After processing, all sales transactions are reviewed by the sales department.
Back-up of data is made to a remote site for data security.
Which of the following tests determines that every field in a record has been completed? A) validation B) sequence C) completeness D) programming
C) completeness
Which of the following is not a general control? A) separation of IT duties B) systems development C) processing controls D) hardware controls
C) processing controls
The internal control framework used by most U.S. companies is the ________ framework.
COSO
________ is the information technology and internal control processes an organization has in place to protect computers, networks, programs, and data from unauthorized access.
Cybersecurity
Which of the following statements related to application controls is correct? A) Application controls relate to various aspects of the IT function including software acquisition and the processing of transactions. B) Application controls relate to various aspects of the IT function including physical security and the processing of transactions in various cycles. C) Application controls relate to all aspects of the IT function. D) Application controls relate to the processing of individual transactions.
D) Application controls relate to the processing of individual transactions.
Of the following statements about internal controls, which one is least likely to be correct? A) No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. B) Transactions must be properly authorized before such transactions are processed. C) Because of the cost-benefit relationship, a client may apply controls on a test basis. D) Control procedures reasonably ensure that collusion among employees cannot occur.
D) Control procedures reasonably ensure that collusion among employees cannot occur.
Which of the following is correct with respect to the design and use of business documents? A) The documents should be in paper format. B) Documents should be designed for a single purpose to avoid confusion in their use. C) Documents should be designed to be understandable only by those who use them. D) Documents should be pre-numbered consecutively to facilitate control over missing documents.
D) Documents should be pre-numbered consecutively to facilitate control over missing documents.
Which of the following is an accurate statement regarding control activities? A) As the level of complexity of IT systems increases, the separation of duties often becomes blurred. B) Segregation of duties would be violated if the same person authorizes the payment of a vendor's invoice and also approves the disbursement of funds to pay the bill. C) The most important type of protective measure for safeguarding assets and records is the use of physical precautions. D) all of the above
D) all of the above
1) Which of the following is not one of the three primary objectives of effective internal control? A) reliability of financial reporting B) efficiency and effectiveness of operations C) compliance with laws and regulations D) assurance of elimination of business risk
D) assurance of elimination of business risk
Which of the following is not one of the three primary objectives of effective internal control? A) reliability of financial reporting B) efficiency and effectiveness of operations C) compliance with laws and regulations D) assurance of elimination of business risk
D) assurance of elimination of business risk
Which of the following is not an application control? A) reprocessing authorization of sales transactions B) reasonableness test for unit selling price of sale C) post-processing review of sales transactions by the sales department D) logging in to the company's information systems via a password
D) logging in to the company's information systems via a password
Controls specific to IT include all of the following except for A) adequately designed input screens. B) pull-down menu lists. C) validation tests of input accuracy. D) separation of duties.
D) separation of duties.
What is separation of duties?
Employees who authorize transactions should not have custody of related assets
Two key concepts that underlie management's design and implementation of internal control are
inherent limitations and reasonable assurance.
It is important for the CPA to consider the competence of the clients' personnel because their competence has a direct impact upon the
achievement of the objectives of internal control
Internal controls are not designed to provide reasonable assurance that
all frauds will be detected.
The Sarbanes-Oxley Act requires
all public companies to issue reports on internal controls
A database management system
allows clients to create databases that include information that can be shared across multiple applications.
Controls that are designed for each software application and are intended to help a company satisfy the transaction-related audit objectives are
application controls
When considering internal controls,
auditors are concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements.
Proper segregation of functional responsibilities calls for separation of
authorization, recording, and custody.
Security controls should require that users enter a(n) ________ before being allowed access to software and other related data files.
authorized password
What is a competent of general controls
back-up and contingency planning
The ________ is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.
chart of accounts
The primary emphasis by auditors is on controls over
classes of transactions.
An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as
collusion
Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the
competency and dependability of the people using it.
Internal controls
consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals.
Without an effective ________, the other components of the COSO framework are unlikely to result in effective internal control, regardless of their quality.
control environment
In an IT system, automated equipment controls or hardware controls are designed to
detect and control errors arising from the use of equipment.
Output controls need to be designed for which of the following data integrity objectives?
detecting errors after the processing is completed
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?
employee numbers
When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is
inefficient
A control that relates to all parts of the IT system is called a(n)
general control
Controls which are built in by the manufacturer to detect equipment failure are called
hardware controls.
When dealing with the administration of the IT function and the segregation of IT duties
in complex environments, management may establish IT steering committees.
Rather than maintain an internal IT center, many companies outsource their basic IT functions such as payroll to an
independent computer service center.
If a company has an effective internal audit department,
it can reduce external audit costs by providing direct assistance to the external auditors
A ________ is responsible for controlling the use of computer programs, transaction files and other computer records and documentation and releases them to the operators only when authorized.
librarian
Reasonable assurance allows for
low likelihood that material misstatements will not be prevented or detected by internal controls.
To obtain an understanding of an entity's control environment, an auditor should concentrate on the substance of management's policies and procedures rather than their form because
management may establish appropriate policies and procedures but not act on them.
The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on
management.
What deals with ongoing or periodic assessment of the quality of internal control by management?
monitoring activities
What is a component of the control environment defining the existing lines of responsibility and authority?
organizational structure
An internal control deficiency occurs when computer personnel
originate changes in customer master files
Old and new systems operating simultaneously in all locations is a test approach known as
parallel testing
What best describes the process of implementing a new system in one part of the organization, while other locations continue to use the current system?
pilot testing
What describes the process of implementing a new system in one part of the organization, while other locations continue to use the current system?
pilot testing
Hanlon Corp. maintains a large internal audit staff that reports directly to the accounting department. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably
place limited reliance on the work performed by the internal audit staff.
Which control prevents and detects errors while transaction data are processed?
processing
Which controls prevent and detect errors while transaction data are processed?
processing
With which of management's assertions with respect to implementing internal controls is the auditor primarily concerned?
reliability of financial reporting
When the auditor is obtaining an understanding of the independent computer service center's internal controls, the auditor should
use the same criteria used to evaluate the client's internal controls