Internal Audit Chapter 6

COSO's Internal Control Framework consists of five internal control components and 17 principles for achieving effective internal control. Which of the following is/are (a) principle(s)? 1. The organization demonstrates a commitment to integrity and ethical values. II. Monitoring activities. III. A level of assurance that is supported by generally accepted auditing procedures and judgments. IV. A body of guiding principles that form a template against which organizations can evaluate a multitude of business practices. V. The organization selects, develops, and performs ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning. a II only. b. I and V only. c. II and IV only. d. I, II, III, IV, and V.

B is the best answer. I is principle 1 under Control Environment. V is principle 16 under Monitoring Activities. II is one of the five elements. III is the definition of reasonable assurance. IV is the definition of a framework.

When assessing the risk associated with an activity, an internal auditor should: a. Determine how the risk should best be managed. b. Provide assurance on the management of the risk. c. Update the risk management process based on risk exposures. d. Design controls to mitigate the identified risks.

B is the best answer. The other choices reflect activities that should be performed by management.

An adequate system of internal controls is most. likely to detect an irregularity perpetrated by a: a. Group of employees in collusion. b. Single employee. c. Group of managers in collusion. d. Single manager.

B is the best answer. To be designed adequately and operating effectively, ICFR should address the concepts of initiation, authorization, recording, processing, and reporting. Seeking is not addressed by ICFR.

Determining that engagement objectives have been met is ultimately the responsibility of the: a. Internal auditor. b. Audit committee. c. Internal audit supervisor. d. CAE.

D is the best answer. The CAE has ultimate responsibility for all activities performed by the internal audit function. Internal auditors and internal audit supervisors do not have the same level of responsi- bility as the CAE. The audit committee doesn't have this level of responsibility.

The requirement that purchases be made from suppliers on an approved vendor list is an example of a: a. Preventive control b. Detective control c. Compensating control d. Monitoring control

a. Preventive control

Which of the following best exemplifies a control activity referred to as independent verification? a. Reconciliation of bank accounts by someone who does not handle cash or record cash transactions b. Identification badges and security codes used to restrict entry to the production facility c. Accounting records and documents that provide a trail of sales and cash transactions d. Separating the physical custody of inventory from inventory accounting

a. Reconciliation of bank accounts by someone who does not handle cash or record cash transactions

Appropriate internal control for a multinational corporation's branch office that has a department responsible for the transfer of money requires that: a. The individual who initiates wire transfers does not reconcile the bank statement b. the branch manager must receive all wire transfers c. Foreign currency rates must be computed separately by two different employees d. Corporate management approves the hiring of employees in this department

a. The individual who initiates wire transfers does not reconcile the bank statement

An effective system of internal controls is most likely to detect a fraud perpetrated by a: a. Group of employees, in collusion b. Single employee c. Group of managers in collusion d. Single manager

b. Single employee

An internal auditor plans to conduct an audit of the adequacy of controls over investments in new financial instruments. Which of the following would not be required as part of such an engagement? a. Determine whether policies exist that describe the risks the treasurer may take and the types of instruments in which the treasurer may invest. b. Determine the extent of management oversight over investments in sophisticated instruments c. Determine whether the treasurer is getting higher or lower rates of return on investments than treasurers in comparable organizations d. Determine the nature of monitoring activities related to the investment portfolio

c. Determine whether the treasurer is getting higher or lower rates of return on investments than treasurers in comparable organizations

Reasonable assurance, as it pertains to internal control, means that: a. The objectives of internal control vary depending on the method of data processing being used b. A well-designed system of internal controls will prevent or detect all errors and fraud c. Inherent limitations of internal control preclude a system of internal control from providing absolute assurance that objectives will be achieved. d. Management cannot override controls and employees cannot circumvent controls through collusion

c. Inherent limitations of internal control preclude a system of internal control from providing absolute assurance that objectives will be achieved.

The risk assessment component of internal control involves the : a. independent outside auditor's assessment of residual risk b. internal audit function's assessment of control deficiencies c. Organization's identification and analysis of the risks that threaten the achievement of its objectives d. Organization's monitoring of financial information for potential material misstatements

c. Organization's identification and analysis of the risks that threaten the achievement of its objectives

The only control that would most likely ensure that payroll checks are written only for authorized amounts is to: a. Conduct periodic floor verification of employees on the payroll b. Require the return of undelivered checks to the cashier c. Require supervisory approval of employee timecards d.Periodically witness the distribution of payroll checks

c. Require supervisory approval of employee timecards

What is residual risk? a. Impact of Risk b. Risk that is under control c. Risk that is not managed d. Underlying risk in the environment

c. Risk that is not managed

Who has primary responsibility for the monitoring component of internal control? a. The organization's independent outside auditor b. The organization's internal audit function c. The organization's management d. The organization's board of directors

c. The organization's management

Which of the following best describes an internal auditor's purpose in reviewing the organization's existing governance, risk management, and control processes? a. To help determine the nature, timing, and extent of tests necessary to achieve engagement objectives. b. To ensure that weaknesses in the internal control system are corrected c. To provide reasonable assurance that the processes will enable the organization's objectives and goals to be met efficiently and economically d. To determine whether the processes ensure that the accounting records are correct and that financial statements are fairly stated.

c. To provide reasonable assurance that the processes will enable the organization's objectives and goals to be met efficiently and economically