Exam 3 Practice

Which of the following is responsible for establishing a private company's internal control? A) Senior Management B) Internal Auditors C) FASB D) Audit committee

A

2) Which of management's assertions with respect to implementing internal controls is the auditor primarily concerned? A) Efficiency of operations B) Reliability of financial reporting C) Effectiveness of operations D) Compliance with applicable laws and regulations

B

Two key concepts that underlie management's design and implementation of internal control are: A) costs and materiality. B) absolute assurance and costs. C) inherent limitations and reasonable assurance. D) collusion and materiality.

C

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

A control that relates to all parts of the IT system is called a(n): A) general control. B) systems control. C) universal control. D) applications control

a

An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as: A) collusion. B) a material weakness. C) a control deficiency. D) a significant deficiency

a

Auditor's need to exhibit professional skepticism when auditing a client. This auditing standard is best expressed by which of the following? A) The auditor neither assumes dishonesty or honesty of management. B) The auditor assumes dishonesty of management. C) The auditor assumes honesty of management. D) The auditor assumes management lacks integrity.

a

Fraud is more prevalent in smaller businesses and not-for-profit organizations because it is more difficult for them to maintain: A) adequate separation of duties. B) adequate compensation. C) adequate financial reporting standards. D) adequate supervisory boards.

a

If tests of controls support the control risk assessment (of low control risk), then ________ in the audit risk model is likely to be increased. A) planned detection risk. B) planned inherent risk. C) planned fraud risk. D) planned assurance risk.

a

The primary emphasis by auditors is on controls over: A) classes of transactions. B) account balances. C) both A and B, because they are equally important. D) both A and B, because they vary from client to client.

a

The primary emphasis in most tests of details of balances is on the: A) balance sheet accounts. B) revenue accounts. C) cash flow statement accounts. D) expense accounts.

a

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

Which of the following is the best reason for management to emphasize fraud prevention and deterrence? A) It is often more effective and economical for companies to focus on fraud prevention and deterrence rather than on fraud detection. B) Collusion is impossible to detect. C) The AICPA requires management to implement a fraud prevention program. D) All of the above are equally valid reasons.

a

Which of the following is true? A) Tests of details of balances focus on the ending general ledger balances for both balance sheet and income statement accounts. B) Tests of details of balances focus on the transactions during the period for both balance sheet and income statement accounts. C) Tests of details of balances focus on the auditor's understanding of internal controls. D) Tests of details of balances focus on comparisons of recorded amounts to expectations developed by the auditor.

a

) Which of the following is a factor that relates to incentives to misappropriate assets? A) Significant accounting estimates involving subjective judgments B) Significant personal financial obligations C) Management's practice of making overly aggressive forecasts D) High turnover of accounting, internal audit and information technology staff

b

An exception or deficiency found in a test of controls: A) indicates a financial statement misstatement. B) indicates the likelihood of a misstatement. C) indicates that the financial statements are fairly stated. D) indicates that an adverse opinion is warranted on the audit of internal control.

b

Auditors: A) link controls and deficiencies to specific transaction-related audit objectives. B) can use a control risk matrix to help identify both manual and automated application controls and control deficiencies for each related audit objective. C) can rely on IT-based application controls for all cycles if general controls are ineffective. D) can use IT staff to determine how much reliance they can place on general controls

b

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) Gross wages earned B) Employee numbers C) Total hours worked D) Total debit amounts and total credit amounts

b

It is important for the CPA to consider the competence of the clients' personnel because their competence has a direct impact upon the: A) cost/benefit relationship of the system of internal control. B) achievement of the objectives of internal control. C) comparison of recorded accountability with assets. D) timing of the tests to be performed

b

Most cases of fraudulent reporting involve: A) inadequate disclosures. B) an overstatement of income. C) an overstatement of liabilities. D) an overstatement of expenses

b

Narratives, flowcharts, and internal control questionnaires are three common methods of: A) testing the internal controls. B) documenting the auditor's understanding of internal controls. C) designing the audit manual and procedures. D) documenting the auditor's understanding of a client's organizational structure.

b

Proper segregation of functional responsibilities calls for separation of: A) authorization, execution, and payment. B) authorization, recording, and custody. C) custody, execution, and reporting. D) authorization, payment, and recording.

b

Tests of controls are directed toward the control's: A) efficiency. B) effectiveness. C) cost and effectiveness. D) cost benefit ratio.

b

The document that details the specific audit procedures for each type of test is the: A) audit strategy. B) audit program. C) audit procedure. D) audit risk model.

b

The purpose of tests of controls is to provide reasonable assurance that the: A) accounting treatment of transactions and balances is valid and proper. B) internal control procedures are functioning as intended. C) entity has complied with GAAP disclosure requirements. D) entity has complied with requirements of quality control.

b

The reliance the auditor places on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily: A) parallel. B) inverse. C) direct. D) equal.

b

Which of the following best defines fraud in a financial statement auditing context? A) Fraud is an unintentional misstatement of the financial statements. B) Fraud is an intentional misstatement of the financial statements. C) Fraud is either an intentional or unintentional misstatement of the financial statements, depending on materiality. D) Fraud is either an intentional or unintentional misstatement of the financial statements, depending on consistency.

b

Which of the following is a correct statement regarding general controls? A) Auditors should evaluate the effectiveness of application controls before evaluating general controls. B) General controls have a pervasive effect on the effectiveness of application controls. C) Ineffective general controls have no impact on the potential for material misstatements across all system applications. D) General controls have no impact on audit testing.

b

You are auditing Rodgers and Company. After performing substantive analytical procedures you conclude that, for the accounts tested, the client's balance appears reasonable. This may indicate that: A) details test of balances can be eliminated for those accounts. B) certain tests of details of balances may be eliminated for those accounts. C) control tests may be eliminated for those accounts. D) control tests may be reduced for those accounts.

b

An example of a physical control is: A) a hash total. B) a parallel test. C) the matching of employee fingerprints to a database before access to the system is allowed. D) the use of backup generators to prevent data loss during power outages.

c

Analytical procedures must be performed in: A) the planning and test of control stages. B) conjunction with tests of transactions and tests of details of balances. C) the planning and completion stages. D) the planning, test of control, and completion stages.

c

Auditing standards specifically require auditors to identify ________ as a fraud risk in most audits. A) overstated assets B) understated liabilities C) improper revenue recognition D) overstated expenses

c

Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor's: A) audit strategy. B) tests of controls. C) risk assessment procedures. D) tests of transactions.

c

Computers process information consistently for all transactions. This creates a risk that: A) auditors will not be able to access data quickly. B) auditors will not be able to determine if data is processed consistently. C) erroneous processing can result in the accumulation of a great number of misstatements in a short period of time. D) all of the above.

c

Controls which are built in by the manufacturer to detect equipment failure are called: A) input controls. B) data integrity controls. C) hardware controls. D) manufacturer's controls.

c

Financial statement manipulation risk is arguably present for all companies' financial statements. However, the risk is elevated for companies that: A) are heavily regulated. B) have low amounts of debt. C) have to make significant judgments for accounting estimates. D) operate in stable economic environments.

c

General controls include all of the following except: A) systems development. B) online security. C) processing controls. D) hardware controls

c

In the context of an audit of financial statements, substantive tests are audit procedures that: A) may be eliminated under certain conditions. B) are designed to discover significant subsequent events. C) are designed to test for dollar misstatements. D) will increase proportionately with the auditor's reliance on internal control.

c

Many auditors perform extensive analytical procedures on audits because: A) they are required by GAAS. B) they pinpoint errors in accounts. C) they indicate areas of potential risk and misstatement. D) they are required for tests of controls.

c

The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on: A) the company's board of directors. B) the audit committee of the board of directors. C) management. D) the CFO and the independent auditors

c

The continued integration of IT in accounting systems can impact a company by: A) increasing the costs of handling a large amount of data. B) increasing the number of manual controls needed. C) giving management higher-quality information more quickly than a manual system, thus helping management in their decision making process. D) decreasing the segregation of duties.

c

When the auditor suspects that fraud may be present, auditing standards require the auditor to: A) terminate the engagement with sufficient notice given to the client. B) issue an adverse opinion or a disclaimer of opinion. C) obtain additional evidence to determine whether material fraud has occurred. D) re-issue the engagement letter.

c

Which of the following is a component of general controls? A) Processing controls B) Output controls C) Back-up and contingency planning D) Input controls

c

Which of the following is not a factor that relates to opportunities to commit fraudulent financial reporting? A) Lack of controls related to the calculation and approval of accounting estimates B) Ineffective oversight of financial reporting by the board of directors C) Management's practice of making overly aggressive forecasts D) High turnover of accounting, internal audit, and information technology staff

c

Which of the following parties is responsible for implementing internal controls to minimize the likelihood of fraud? A) External auditors B) Audit committee members C) Management D) Committee of Sponsoring Organizations

c

Which of the following procedures would most likely be performed in response to the auditor's assessment of the risk of monetary misstatements in the financial statements? A) Ratio analysis B) Tests of controls C) Tests of details of balances D) Risk assessment procedures

c

Who is most likely to perpetrate fraudulent financial reporting? A) Members of the board of directors B) Production employees C) Management of the company D) The internal auditors

c

Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the: A) adequacy of the computer system. B) proper implementation by management. C) ability of the internal audit staff to maintain it. D) competency and dependability of the people using it.

d

Old and new systems operating simultaneously in all locations is a test approach known as: A) pilot testing. B) horizontal testing. C) integrative testing. D) parallel testing.

d

Presentation and disclosure related audit objectives would be performed in which phase of the audit process? A) Plan and design audit approach B) Perform audit tests for controls and transactions C) Perform analytical procedures and tests of balances D) Complete the audit and issue the audit report

d

To promote operational efficiency, the internal audit department would ideally report to: A) line management. B) PCAOB. C) Chief Accounting Officer. D) audit committee.

d

Typical controls developed for manual systems which are still important in IT systems include: A) management's authorization of transactions. B) competent personnel. C) adequate preparation of input source documents. D) all of the above.

d

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