Chapter 7 Multiple Choice

A significant deficiency: a. Differs from a material weakness in that it involves internal control over operations rather than internal control over financial reporting. b. Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality. c. Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting. d. Is less severe than a material weakness.

d. Is less severe than a material weakness.

A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their functions, to prevent or detect misstatements on a timely basis is referred to as a(n): a. inherent limitation of internal control. b. material weakness in internal control. c. significant deficiency. d. control deficiency.

d. control deficiency.

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: a. Knowledge necessary to determine the nature, timing, and extent of further audit procedures. b. Audit evidence to use in reducing detection risk. c. A basis for modifying tests of controls. d. An evaluation of the consistency of application of management policies.

a. Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned assessed level of control risk is at what level? a. Zero. b. Low. c. Moderate. d. Maximum.

d. Maximum.

Tests of controls ordinarily are designed to provide evidence of: a. Balance correctness. b. Control implementation. c. Disclosure adequacy. d. Operating effectiveness.

d. Operating effectiveness.

Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan? a. The auditors have determined that controls have been implemented (placed in operation) but, in accordance with the audit plan, have performed no tests of controls. b. Certain controls do not leave a trail of documentary evidence. c. Deviation rates were greater than zero and approached anticipated levels. d. The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

d. The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

Under PCAOB standards, when a significant deficiency exists, the auditors' report on internal control is most likely to include an opinion that is: a. disclaimer. b. qualified. c. adverse. d. unqualified.

d. unqualified.

Which of the following is not considered one of the five major components of internal control? a. risk assessment. b. Segregation of duties. c. Control activities. d. Monitoring.

b. Segregation of duties.

Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is most likely obtained in part by: a. performing substantive procedures. b. analyzing tests of trends and ratios. c. inspecting documents. d. preparing flowcharts.

c. inspecting documents.

An entity's ongoing monitoring activities often include: a. Periodic audits by internal auditors. b. The audit of the annual financial statements. c. Approval of cash disbursements. d. Management review of weekly performance reports.

d. Management review of weekly performance reports.

The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of internal and external reporting, the effectiveness and efficiency of operations, and: a. Compliance with applicable laws and regulations. b. Effectiveness of prevention of fraudulent occurrences. c. Safeguarding of entity equity. d. Incorporation of ethical business practice standards.

a. Compliance with applicable laws and regulations.

When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should: a. Consider the organizational level to which the internal auditors report the results of their work. b. Review the internal auditors' work. c. Consider the qualifications of the internal audit staff. d. Review the training program in effect for the internal audit staff.

a. Consider the organizational level to which the internal auditors report the results of their work.

An auditor's flowchart of a client's internal control is a diagrammatic representation which depicts the auditors': a. understanding of the system. b. program for tests of controls. c. planned tests of controls. d. documentation of control risk.

a. understanding of the system.

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? a. Checklist. b. Confirmation. c. Flowchart. d. Questionnaire.

b. Confirmation.

Which of the following is least likely to be evidence of operating effectiveness of controls? a. Cancelled supporting documents. b. Confirmations of accounts receivable. c. Records documenting usage of computer programs. d. Signatures on authorization forms.

b. Confirmations of accounts receivable.

Which of the following would be least likely to be considered an objective of internal control? a. Checking the accuracy and reliability of accounting data. b. Detecting management fraud. c. Encouraging adherence to managerial policies. d. Safeguarding assets.

b. Detecting management fraud.

When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will: a. Be less than the preliminary assessed level of control risk. b. Equal the preliminary assessed level of control risk. c. Equal the actual control risk. d. Be less than the actual control risk.

b. Equal the preliminary assessed level of control risk.

Which of the following is ordinarily considered a test of a control? a. Obtain or prepare reconciliations of bank accounts as of the balance sheet date. b. Examine signatures on checks. c. Send confirmation letters to financial institutions. d. Count and list cash on hand.

b. Examine signatures on checks.

Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)? a. Its applicability is largely limited to internal auditing applications. b. It is a 'process' effected by individuals. c. It emphasizes the effectiveness and efficiency of operations over the reliability of financial reporting. d. It suggests that it is important to view internal control as an end product as contrasted to a process or means to obtain an end.

b. It is a 'process' effected by individuals.

Which of the following is most likely to provide an auditor with the most assurance about the effectiveness of the operation of internal control? a. Inquiry of client personnel. b. Observation of client personnel applying the control. c. Recomputation of account balance amounts. d. Confirmation with outside parties.

b. Observation of client personnel applying the control.

The effectiveness of controls is not generally tested by: a. Inspection of documents and reports. b. Performance of analytical procedures. c. Observation of the application of accounting policies and procedures. d. Inquiries of appropriate client personnel.

b. Performance of analytical procedures.

The preliminary assessments of control risk are often referred to as: a. The assessed level of control risk. b. The planned assessed level of control risk. c. Control risk. d. Internal control objectives risk.

b. The planned assessed level of control risk.

On financial statement audits, it is required that the auditors obtain an understanding of internal control, including: a. Its operating effectiveness. b. Whether it has been implemented (placed in operation). c. Performing tests of controls for all material controls. d. Its ability to provide reasonable assurance.

b. Whether it has been implemented (placed in operation).

At the completion of the audit, the auditors are least likely to know: a. The assessed level of control risk. b. The planned assessed level of control risk. c. Actual control risk. d. The scope of tests of controls.

c. Actual control risk.

Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? a. Management's failure to renegotiate unfavorable long-term purchase commitments. b. Recurring operating losses that may indicate going concern problems. c. Evidence of a lack of objectivity by those responsible for accounting decisions. d. Management's current plans to reduce its ownership equity in the entity.

c. Evidence of a lack of objectivity by those responsible for accounting decisions.

After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform tests of controls. The auditor most likely decided that: a. Additional evidence to support a reduction in the assessed level of control risk is not available. b. An increase in the assessed level of control risk is justified for certain financial statement assertions. c. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures. d. There were many internal control deficiencies that would allow misstatements to enter the accounting system.

c. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures.

Which of the following is least likely to be a test of controls? a. Inquiries of client personnel. b. Inspection of documents. c. Observation of confirmations. d. Reperformance of controls.

c. Observation of confirmations.

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? a. Segregation of duties over cash disbursements. b. Requiring approval of purchase transactions. c. Preparing bank reconciliations. d. Maintaining backup copies of key transactions.

c. Preparing bank reconciliations.

An auditor may compensate for a weakness in internal control by increasing the extent of: a. Tests of controls. b. Detection risk. c. Substantive tests of details. d. Inherent risk.

c. Substantive tests of details.

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they must: a. Modify their report for any significant deficiencies identified. b. Use a "bottom-up" approach to identify controls to test. c. Test controls for all significant accounts. d. Perform a separate assessment of controls over operations.

c. Test controls for all significant accounts.

Monitoring is considered: a. the primary asset safeguarding technique. b. an element of the control environment. c. a component of internal control. d. a portion of the information and communication system.

c. a component of internal control.

Auditors must communicate internal control significant deficiencies to: a. the Public Company Accounting Oversight Board. b. the shareholders. c. the audit committee. d. the SEC.

c. the audit committee.

Which of the following is most likely to be considered a risk assessment procedure relating to internal control? a. Confirm accounts receivable. b. Perform a test of a control relating to payroll. c. Take test counts of the year-end inventory. d. Trace a transaction through the information system relevant to financial reporting.

d. Trace a transaction through the information system relevant to financial reporting.

Taylor Sales Co. maintains a large full time internal audit staff which reports directly to the chief accountant. Audit reports prepared by the internal auditors indicate that internal control is functioning as it should and that the accounting records are reliable. The external auditor, after assessing competence and objectivity will probably: a. avoid duplicating the work performed by the internal audit staff. b. eliminate tests of controls. c. increase the depth of the consideration of administrative controls. d. make limited use of the work performed by the internal audit staff.

d. make limited use of the work performed by the internal audit staff.

Tests of controls are most likely in which of the following situations? a. The cost of tests of controls is likely to exceed the savings brought about by a resulting decrease in the scope of substantive procedures. b. Few transactions have occurred, but for very material amounts. c. When substantive procedures are being used as the only further audit procedures. d. the assessed level of the risk of misstatement includes a presumption that controls operate effectively.

d. the assessed level of the risk of misstatement includes a presumption that controls operate effectively.