Canvas MC: Chapter 11
23) Control activities help assure that the necessary actions are taken to address risks to the achievement of the company's objectives. List the five types of control activities.
1. adequate separation of duties 2. proper authorization of transactions and activities 3. adequate documents and records 4. physical control over assets and records 5. independent checks on performance Terms: Control activities Diff: Moderate Objective: LO 11-3 AACSB:
34) Match six of the terms (a-j) with the definitions provided below (1-6): a. Application controls b. Error listing c. General controls d. Hardware controls e. Input controls f. Output controls g Parallel simulation h. Parallel testing i Pilot testing j. Processing controls ________ 1. The new and old systems operate simultaneously in all locations. ________ 2. Controls that relate to all aspects of the IT system. ________ 3. Controls such as review of data for reasonableness, designed to assure that data generated by the computer is valid, accurate, complete, and distributed only to authorized people. ________ 4. Controls that apply to processing of transactions. ________ 5. A new system is implemented in one part of the organization while other locations continue to rely on the old system. ________ 6. Controls such as proper authorization of documents, check digits, and adequate documentation, designed to assure that the information to be entered into the computer is authorized, complete, and accurate.
1. h 2. c 3. f 4. a 5. i 6. e Terms: Application controls; General controls; parallel and pilot testing Diff: Moderate Objective: LO 11-4 AACSB:
26) Separation of duties is essential in preventing errors and intentional misstatements on the financial statements. List below the four general guidelines.
1. separation of custody of the assets from accounting 2. separation of the authorization of transactions from custody of related assets 3. separation of operational responsibility from record keeping responsibility 4. separation of IT duties from user departments Terms: General guidelines for separation of duties Diff: Moderate Objective: LO 11-3 AACSB:
14) 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.
A Terms: Application controls Diff: Moderate Objective: LO 11-4 AACSB:
16) 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 Terms: Auditor responsibilities for understanding internal control Diff: Moderate Objective: LO 11-2 AACSB:
5) 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 Terms: Collusion Diff: Easy Objective: LO 11-2 AACSB:
3) Which of the following factors may increase risks to an organization? A) Geographic dispersion of company operations Presence of new information technologies Yes Yes B) Geographic dispersion of company operations Presence of new information technologies No No C) Geographic dispersion of company operations Presence of new information technologies Yes No D) Geographic dispersion of company operations Presence of new information technologies No Yes
A Terms: Control activities; control risk Diff: Moderate Objective: LO 11-3 AACSB:
2) 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 Terms: Control environment components; Responsibility and authority Diff: Moderate Objective: LO 11-3 AACSB:
17) Controls which are designed to assure that the information entered into the computer is authorized, complete, and accurate are called A) input controls. B) processing controls. C) output controls. D) general controls.
A Terms: Controls designed to assure information processed by computer is authorized, complete, and accurate Diff: Moderate Objective: LO 11-4 AACSB:
12) 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 Terms: General controls Diff: Moderate Objective: LO 11-4 AACSB:
15) 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 Terms: General controls Diff: Moderate Objective: LO 11-4 AACSB:
4) Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies? A) Management Financial statement auditors Yes Yes B) Management Financial statement auditors No No C) Management Financial statement auditors Yes No D) Management Financial statement auditors No Yes
A Terms: Internal control effectiveness Diff: Easy Objective: LO 11-2 AACSB:
11) In performing the audit of internal control over financial reporting, the auditor emphasizes internal control over classes of transactions because A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing. B) the class of transaction is where most fraud schemes occur. C) account balances are less important to the auditor then the changes in the account balances. D) classes of transactions tests are the most efficient manner to compensate for inherent risk.
A Terms: Internal control over class of transactions Diff: Moderate Objective: LO 11-2 AACSB:
1) Who is responsible for establishing a private company's internal control? A) senior management B) internal auditors C) FASB D) audit committee
A Terms: Internal controls Diff: Easy Objective: LO 11-2 AACSB:
4) Internal controls are not designed to provide reasonable assurance that A) all frauds will be detected. B) transactions are executed in accordance with management's authorization. C) the company's resources are used efficiently and effectively. D) company personnel comply with applicable rules and regulations.
A Terms: Internal controls; Reasonable assurance Diff: Moderate Objective: LO 11-1 AACSB:
11) Output controls need to be designed for which of the following data integrity objectives? A) detecting errors after the processing is completed B) preventing errors before the processing is completed C) detecting errors in the general ledger adjustment process D) preventing errors in separation of duties for IT personnel
A Terms: Output controls need to be designed for Diff: Moderate Objective: LO 11-4 AACSB:
17) 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 Terms: Primary emphasis by auditors on controls Diff: Moderate Objective: LO 11-2 AACSB:
19) Reasonable assurance allows for A) low likelihood that material misstatements will not be prevented or detected by internal controls. B) no likelihood that material misstatements will not be prevented or detected by internal control. C) moderate likelihood that material misstatements will not be prevented or detected by internal control. D) high likelihood that material misstatements will not be prevented or detected by internal control.
A Terms: Reasonable assurance Diff: Easy Objective: LO 11-2 AACSB:
15) The Sarbanes-Oxley Act requires A) all public companies to issue reports on internal controls. B) all public companies to define adequate internal controls. C) the auditor of public companies to design effective internal controls. D) the auditor of public companies to withdraw from an engagement if internal controls are weak.
A Terms: Sarbanes-Oxley Act Diff: Challenging Objective: LO 11-2 AACSB:
6) Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements? A) a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting B) a statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting C) a statement that management, the board of directors, and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting D) a statement that the external auditors are solely responsible for establishing and maintaining an adequate system of internal control
A Terms: Sarbanes-Oxley; Internal control report Diff: Easy Objective: LO 11-2 AACSB:
20) 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 Terms: Section 404 of the Sarbanes-Oxley Act Diff: Easy Objective: LO 11-2 AACSB:
21) 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 A) management may establish appropriate policies and procedures but not act on them. B) the board of directors may not be aware of management's attitude toward the control environment. C) the auditor may believe that the policies and procedures are inappropriate for that particular entity. D) the policies and procedures may be so weak that no reliance is contemplated by the auditor.
A Terms: Substance of management's policies and procedures Diff: Challenging Objective: LO 11-3 AACSB:
32) Identify the three categories of application controls, and give one example of each.
Application controls fall into three categories: • Input controls — preformatted screens which prompt the data input personnel for the information to be entered • Processing controls — a reasonableness test for the unit selling price of a sale. • Output controls — postprocessing review of sales transactions by the sales department. Terms: Three categories of application controls Diff: Moderate Objective: LO 11-4 AACSB:
24) A(n) ________ total represents the summary total of codes from all records in a batch that do not represent a meaningful total. A) record B) hash C) output D) financial
B Terms: Batch input controls Diff: Moderate Objective: LO 11-4 AACSB:
13) 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 Terms: Competence of client personnel Diff: Moderate Objective: LO 11-3 AACSB:
13) When considering internal controls, A) auditors can ignore controls affecting internal management information. B) auditors are concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements. C) management is responsible for understanding and testing internal control over financial reporting. D) companies must use the COSO framework to establish internal controls.
B Terms: Effectively designed internal controls; testing of controls Diff: Moderate Objective: LO 11-2 AACSB:
23) 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 Terms: General controls and application controls Diff: Moderate Objective: LO 11-4 AACSB:
5) Authorizations can be either general or specific. Which of the following is not an example of a general authorization? A) automatic reorder points for raw materials inventory B) a sales manager's authorization for a sales return C) credit limits for various classes of customers D) a sales price list for merchandise
B Terms: General or specific authorizations Diff: Moderate Objective: LO 11-3 AACSB:
26) 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 Terms: Hash total for payroll IT application Diff: Moderate Objective: LO 11-4 AACSB:
3) Internal controls A) are implemented by and are the responsibility of the auditors. B) consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals. C) guarantee that the company complies with all laws and regulations. D) only apply to SEC companies.
B Terms: Internal controls Diff: Moderate Objective: LO 11-1 AACSB:
2) With 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 Terms: Management's assertions and internal control Diff: Easy Objective: LO 11-1 AACSB:
8) Which of the following deals with ongoing or periodic assessment of the quality of internal control by management? A) verifying activities B) monitoring activities C) oversight activities D) management activities
B Terms: Monitoring Diff: Moderate Objective: LO 11-3 AACSB:
1) 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 Terms: Not strengthen internal control Diff: Easy Objective: LO 11-3 AACSB:
30) The most important output control is A) distribution control, which assures that only authorized personnel receive the reports generated by the system. B) review of data for reasonableness by someone who knows what the output should look like. C) control totals, which are used to verify that the computer's results are correct. D) logic tests, which verify that no mistakes were made in processing.
B Terms: Output controls Diff: Moderate Objective: LO 11-4 AACSB:
9) The auditors primary purpose in auditing the client's system of internal control over financial reporting is A) to prevent fraudulent financial statements from being issued to the public. B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements. C) to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements. D) to efficiently conduct the Audit of Financial Statements.
B Terms: Primary purpose to audit system of internal control Diff: Moderate Objective: LO 11-2 AACSB:
11) Which of the following is not an underlying principle related to risk assessment? A) The organization should have clear objectives in order to be able to identify and assess the risks relating to the objectives. B) The auditors should determine how the company's risks should be managed. C) The organization should consider the potential for fraudulent behavior. D) The organization should monitor changes that could impact internal controls.
B Terms: Risk assessment procedures Diff: Easy Objective: LO 11-3 AACSB:
14) 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 Terms: Segregation of functional responsibilities Diff: Moderate Objective: LO 11-3 AACSB:
4) Which of the following statements is most correct with respect to separation of duties? A) A person who has temporary or permanent custody of an asset should account for that asset. B) Employees who authorize transactions should not have custody of related assets. C) Employees who open cash receipts should record the amounts in the subsidiary ledgers. D) Employees who authorize transactions should have recording responsibility for these transactions.
B Terms: Separation of duties Diff: Moderate Objective: LO 11-3 AACSB:
10) Which of the following is a risk assessment principle? A) accountability B) use relevant, quality information to support the functioning of internal controls C) consider the potential for fraud D) develop general controls over technology
C Terms: COSO components of internal control and risk assessment Diff: Moderate Objective: LO 11-3 AACSB:
2) 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 Terms: Component of general controls Diff: Easy Objective: LO 11-4 AACSB:
7) Which of the following best describes the purpose of control activities? A) the actions, policies and procedures that reflect the overall attitudes of management B) the identification and analysis of risks relevant to the preparation of financial statements C) the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity's objectives D) activities that deal with the ongoing assessment of the quality of internal control by management
C Terms: Control activities Diff: Moderate Objective: LO 11-3 AACSB:
16) 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 Terms: Controls built in by manufacturer to detect equipment failure Diff: Moderate Objective: LO 11-4 AACSB:
9) Which of the following controls prevent and detect errors while transaction data are processed? A) software B) application C) processing D) transaction
C Terms: Controls that prevent and detect errors while transaction data are processed Diff: Moderate Objective: LO 11-4 AACSB:
25) In an IT system, automated equipment controls or hardware controls are designed to A) correct errors in the computer programs. B) monitor and detect errors in source documents. C) detect and control errors arising from the use of equipment. D) arrange data in a logical sequential manner for processing purposes.
C Terms: Equipment or hardware controls Diff: Moderate Objective: LO 11-4 AACSB:
20) 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 Terms: General and application controls Diff: Moderate Objective: LO 11-4 AACSB:
4) General controls include all of the following except A) systems development. B) online security. C) processing controls. D) hardware controls.
C Terms: General controls Diff: Easy Objective: LO 11-4 AACSB:
28) Which of the following is not a general control? A) separation of IT duties B) systems development C) processing controls D) hardware controls
C Terms: General controls Diff: Moderate Objective: LO 11-4 AACSB:
10) When purchasing software or developing in-house software, A) cost should be the only factor. B) extensive testing of the software is generally not required. C) a team of both IT and non-IT personnel should be involved in the decision process. D) the librarian and the IT manager should be the only ones involved in the decision process.
C Terms: General controls Diff: Moderate Objective: LO 11-4 AACSB:
22) An internal control deficiency occurs when computer personnel A) participate in computer software acquisition decisions. B) design flowcharts and narratives for computerized systems. C) originate changes in customer master files. D) provide physical security over program files.
C Terms: Internal control deficiency Diff: Moderate Objective: LO 11-4 AACSB:
7) When management is evaluating the design of internal control, management evaluates whether the control can do which of the following? A) Detect material misstatements Correct material misstatements Yes Yes B) Detect material misstatements Correct material misstatements No No C) Detect material misstatements Correct material misstatements Yes No D) Detect material misstatements Correct material misstatements No Yes
C Terms: Internal control design Diff: Easy Objective: LO 11-2 AACSB:
2) 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 Terms: Internal control design and implementation Diff: Easy Objective: LO 11-2 AACSB:
10) The internal control framework used by most U.S. companies is the ________ framework. A) FASB B) PCAOB C) COSO D) SEC
C Terms: Internal control framework; COSO Diff: Moderate Objective: LO 11-2 AACSB:
8) 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 A) insufficient. B) inadequate. C) ineffective. D) inefficient.
C Terms: Internal control weakness; Public company Diff: Easy Objective: LO 11-2 AACSB:
15) Without an effective ________, the other components of the COSO framework are unlikely to result in effective internal control, regardless of their quality. A) risk assessment policy B) monitoring policy C) control environment D) system of control activities
C Terms: Internal controls Diff: Moderate Objective: LO 11-3 AACSB:
18) An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are A) the effectiveness and efficiency of the controls. B) the frequency and effectiveness of the controls. C) the design and operating effectiveness of the controls. D) the implementation and operating effectiveness of the controls.
C Terms: Key issues understanding client's internal controls Diff: Moderate Objective: LO 11-2 AACSB:
3) 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 Terms: PCAOB; internal control responsibility Diff: Easy Objective: LO 11-2 AACSB:
29) ________ is the information technology and internal control processes an organization has in place to protect computers, networks, programs, and data from unauthorized access. A) Encryption B) A firewall C) Cybersecurity D) A processing control
C Terms: Physical and online security Diff: Easy Objective: LO 11-4 AACSB:
5) Which of the following describes the process of implementing a new system in one part of the organization, while other locations continue to use the current system? A) parallel testing B) online testing C) pilot testing D) control testing
C Terms: Process implementing new system in one part of organization Diff: Easy Objective: LO 11-4 AACSB:
6) 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. A) software engineer B) chief computer operator C) librarian D) data control operator
C Terms: Separation of duties Diff: Easy Objective: LO 11-4 AACSB:
12) Which of the following is not one of the subcomponents of the control environment? A) management's philosophy and operating style B) organizational structure C) adequate separation of duties D) commitment to competence
C Terms: Subcomponents of control environment Diff: Moderate Objective: LO 11-3 AACSB:
19) Which of the following tests determines that every field in a record has been completed? A) validation B) sequence C) completeness D) programming
C Terms: Tests to determine that every field in a record has been completed Diff: Moderate Objective: LO 11-4 AACSB:
17) If a company has an effective internal audit department, A) the internal auditors can express an opinion on the fairness of the financial statements. B) their work cannot be used by the external auditors per PCAOB Standard 5. C) it can reduce external audit costs by providing direct assistance to the external auditors. D) the internal auditors must be CPAs in order for the external auditors to rely on their work.
C Terms: Understanding of internal audit functions Diff: Moderate Objective: LO 11-3 AACSB:
36) What are the two software testing strategies that companies typically use? Which strategy is more expensive?
Companies may use pilot testing and parallel testing to test new software. Pilot testing involves operating the new software at a limited number of facilities, while continuing to operate the old software at all other locations. Parallel testing involves operating the new and old software simultaneously. Terms: Software testing strategies Diff: Moderate Objective: LO 11-4 AACSB:
9) Which of the following best describes an entity's accounting information and communication system? A) Monitor transactions Record and process transactions Initiate transactions Yes Yes Yes B) Monitor transactions Record and process transactions Initiate transactions No No No C) Monitor transactions Record and process transactions Initiate transactions Yes No No D) Monitor transactions Record and process transactions Initiate transactions No Yes Yes
D Terms: Accounting information and communication system Diff: Moderate Objective: LO 11-3 AACSB:
3) 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 Terms: Application controls Diff: Easy Objective: LO 11-4 AACSB:
27) 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 Terms: Application controls Diff: Moderate Objective: LO 11-4 AACSB:
22) The ________ is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account. A) general ledger B) general journal C) trial balance D) chart of accounts
D Terms: COSO framework and control activities Diff: Moderate Objective: LO 11-3 AACSB:
16) 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 us of physical precautions. D) all of the above
D Terms: COSO framework and control activities Diff: Moderate Objective: LO 11-3 AACSB:
21) 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 Terms: Controls specific to IT Diff: Moderate Objective: LO 11-4 AACSB:
13) Controls that are designed for each software application and are intended to help a company satisfy the transaction-related audit objectives are A) user controls. B) general controls. C) audit controls. D) application controls.
D Terms: Controls which apply to a specific element of the system, Diff: Moderate Objective: LO 11-4 AACSB:
6) 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 prenumbered consecutively to facilitate control over missing documents.
D Terms: Design and use of business documents Diff: Moderate Objective: LO 11-3 AACSB:
19) 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 A) eliminate tests of controls. B) increase the depth of the study and evaluation of administrative controls. C) avoid duplicating the work performed by the internal audit staff. D) place limited reliance on the work performed by the internal audit staff.
D Terms: Internal audit Diff: Challenging Objective: LO 11-3 AACSB: Analytic thinking 20) 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 D) all of the above Answer: D Terms: External auditor reliance on internal auditors' work Diff: Challenging Objective: LO 11-3 AACSB:
12) 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 Terms: Internal control effectiveness Diff: Moderate Objective: LO 11-2 AACSB:
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 Terms: Internal control objectives Diff: Easy Objective: LO 11-1 AACSB:
14) 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 Terms: Internal controls Diff: Moderate Objective: LO 11-2 AACSB:
18) To promote operational efficiency, the internal audit department would ideally report to A) line management. B) the PCAOB. C) the Chief Accounting Officer. D) the audit committee.
D Terms: Monitoring Diff: Moderate Objective: LO 11-3 AACSB:
1) 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 Terms: Old and new systems operating simultaneously Diff: Easy Objective: LO 11-4 AACSB:
18) When dealing with the administration of the IT function and the segregation of IT duties A) in large organizations, management should assign technology issues to outside consultants. B) programmers should investigate all security breaches. C) the board of directors should not get involved in IT decisions since it is a routine function handled by middle management. D) in complex environments, management may establish IT steering committees.
D Terms: Programmers should be allowed access Diff: Moderate Objective: LO 11-4 AACSB:
7) Security controls should require that users enter a(n) ________ before being allowed access to software and other related data files. A) echo check B) parity check C) self-diagnosis test D) authorized password
D Terms: Required for access to IT programs or files from terminals Diff: Easy Objective: LO 11-4 AACSB:
8) 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 Terms: Typical controls developed for manual systems still important in IT systems Diff: Moderate Objective: LO 11-4 AACSB:
33) Auditing standards prohibit reliance on the work of internal auditors due to the lack of independence of the internal auditors.
FALSE Terms: Auditing standards; Internal auditors Diff: Moderate Objective: LO 11-3 AACSB:
35) An example of a specific authorization is management setting a policy authorizing the ordering of inventory when less than a one-week supply is on hand.
FALSE Terms: COSO framework and control activities Diff: Moderate Objective: LO 11-3 AACSB:
31) Adequate documents and records is a subcomponent of the control environment.
FALSE Terms: Control environment Diff: Easy Objective: LO 11-3 AACSB:
22) When a company designs and implements internal controls, cost of the controls is not a valid consideration.
FALSE Terms: Design and implement internal control; cost Diff: Easy Objective: LO 11-2 AACSB:
30) Control activities are a subcomponent of the information and communication component of internal control.
FALSE Terms: Internal control components Diff: Easy Objective: LO 11-3 AACSB:
21) Under the Dodd-Frank federal financial reform legislation, all public companies are required to obtain an audit report on internal control over financial reporting.
FALSE Terms: Internal control over financial reporting for public company Diff: Moderate Objective: LO 11-2 AACSB:
6) Section 404 of the Sarbanes-Oxley Act requires that both private and public companies issue an internal control report.
FALSE Terms: Sarbanes-Oxley Act Diff: Easy Objective: LO 11-1 AACSB:
27) The internal control framework developed by COSO includes five so-called "components" of internal control. Discuss each of these five components.
Five components of internal control are: • The control environment. The control environment consists of the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal control and its importance to the company. • Risk assessment. This is management's identification and analysis of risks relevant to the preparation of financial statements in accordance with appropriate accounting frameworks such as GAAP or IFRS. • Information and communication. These are the methods used to initiate, record, process, and report the entity's transactions and to maintain accountability for the related assets. • Control activities. These are the policies and procedures that management has established to meet its objectives for financial reporting. • Monitoring. This is management's ongoing and periodic assessment of the quality of internal control performance to determine whether controls are operating as intended and are modified when needed. Terms: Internal control framework; COSO Diff: Moderate Objective: LO 11-3 AACSB:
31) Define control for general controls and application controls. Also list the categories of controls included under general controls and application controls.
General controls are those that relate to all aspects of the IT function. They include controls related to administration, separation of IT duties, systems development, physical and on-line security, backup and contingency planning, and hardware controls. Application controls relate to the processing of individual transactions. Application controls are specific to certain software applications and typically do not affect all IT functions. They include input controls, processing controls, and output controls. Terms: General controls and application controls Diff: Easy Objective: LO 11-4 AACSB:
33) One category of general controls is physical and online access controls. Describe the control and give at two examples of implementation of the control.
Physical controls over computer equipment restrict access to hardware, software, and backup data files on magnetic tapes or disks, hard drives, CDs, and external disks. Examples of physical controls include: • keypad entrances • badge-entry systems • security cameras and security personnel • employee fingerprints or retina scanning and matching to database before access is allowed monitoring of cooling and humidity • installing fire-extinguishing equipment. Online access controls restrict access to software and related data files, reducing the likelihood that unauthorized changes are made to software applications and data files. Examples include: • proper user IDs and passwords • separate add-on security software packages • firewalls • encryption programs. Terms: General control of physical and online security Diff: Moderate Objective: LO 11-4 AACSB:
36) Personnel responsible for performing internal verification procedures must be independent of those originally responsible for preparing the data.
TRUE Terms: COSO framework and control activities Diff: Easy Objective: LO 11-3 AACSB:
34) If an auditor wishes to rely on the work of internal auditors (IA), the auditor must obtain satisfactory evidence related to the IA's competence, integrity, and objectivity.
TRUE Terms: Internal auditors Diff: Moderate Objective: LO 11-3 AACSB:
32) The chart of accounts is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.
TRUE Terms: Internal control components Diff: Easy Objective: LO 11-3 AACSB:
7) Management has a legal and professional responsibility to be sure that the financial statements are prepared in accordance with reporting requirements of applicable accounting frameworks.
TRUE Terms: Internal controls Diff: Moderate Objective: LO 11-1 AACSB:
28) Discuss what is meant by the term "control environment" and identify four control environment subcomponents that the auditor should consider.
The control environment consists of the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about control and its importance to the entity. Subcomponents include: • integrity and ethical values • commitment to competence • board of director or audit committee participation • accountability • organizational structure Terms: Control environment Diff: Moderate Objective: LO 11-3 AACSB:
5) Describe each of the three broad objectives management typically has for internal control. With which of these objectives is the auditor primarily concerned?
The three objectives are: • Reliability of financial reporting. Management has both a legal and professional responsibility to be sure that the information is fairly presented in accordance with reporting requirements such as U.S. GAAP and IFRS. • Efficiency and effectiveness of operations. Controls within an organization are meant to encourage efficient and effective use of its resources to optimize the company's goals. • Compliance with laws and regulations. Public, non-public, and not-for-profit organizations are required to follow many laws and regulations. Some relate to accounting only indirectly, such as environmental protection and civil rights laws. Others are closely related to accounting, such as income tax regulations and anti-fraud legal provisions. The auditor's focus in both the audit of financial statements and the audit of internal controls is on the controls over the reliability of financial reporting plus those controls over operations and compliance with laws and regulations that could materially affect financial reporting. Terms: Three broad objectives management has for internal control Diff: Easy Objective: LO 11-1 AACSB:
29) List the four underlying principles of risk assessment per the COSO framework
The underlying principles of risk assessment per the COSO framework are • have clear objectives in order to identify risks related to those objectives • determine how risks should be managed • consider the potential for fraud • monitor changes Terms: COSO components of internal control and risk assessment Diff: Moderate Objective: LO 11-3 AACSB:
25) Management's identification and analysis of risk is an ongoing process and is a critical component of effective internal control. An important first step is for management to identify factors that may increase risk. Identify at least five factors, observable by management, which may lead to increased risk in a typical business organization.
There are many factors that may lead to increased risk in an organization. Some examples include: • failure to meet prior objectives • quality of personnel • geographic dispersion of company operations • significance and complexity of core business processes • introduction of new information technologies • entrance of new competitors • economic downturns • rapid technology changes Terms: Factors which may lead to increased risk Diff: Moderate Objective: LO 11-3 AACSB:
35) Processing controls include the following tests: Validation Sequence Data Reasonableness Completeness Describe what each control is designed to do:
Validation: ensures that a particular type of transaction is appropriate for processing Sequence: determines that the data submitted for processing are in the correct order Data Reasonableness: determines whether the data exceeds prespecified amounts Completeness: determines that every field in a record has been completed Terms: Tests of processing controls Diff: Moderate Objective: LO 11-4 AACSB:
24) Certain principles dictate the proper design and use of documents and records. Briefly describe several of these principles.
• Documents should be prenumbered consecutively to facilitate control over missing documents and as an aid in locating documents when they are needed at a later date. • Documents and records should be prepared at the time a transaction takes place, or as soon as possible thereafter, to minimize timing errors. • Documents and records should be designed for multiple uses, when possible, to minimize the number of different forms. • Documents and records should be constructed in a manner that encourages correct preparation. This can be done by providing internal checks within the form or record. Terms: Principles for design and use of documents and records Diff: Moderate Objective: LO 11-3 AACSB: