chapter 7

Which of the following best illustrates the concept of sampling risk? Multiple Choice A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. The documents related to the chosen sample may not be available for inspection. An auditor may select audit procedures that are not appropriate to achieve the specific objective. An auditor may fail to recognize errors in the documents examined for the chosen sample.

A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.

Which of the following steps or procedures is least likely to be performed as part of management's assessment of the effectiveness of internal controls? A) Engaging the external auditors to conduct cutoff tests. B) Determining the locations or business units to be evaluated. C) Evaluating the design effectiveness and operating effectiveness of selected controls. D) Communication of its findings to the external auditors.

A) Engaging the external auditors to conduct cutoff tests.

Identify the correct statement regarding integrated audits. Multiple Choice The term "integrated audit" refers to the cooperation between internal and external auditors in preparing audited financial statements. Evaluating internal controls is often a vital part of an integrated audit. An integrated audit involves providing an opinion on the financial statements and the internal control effectiveness of a company. The AICPA began requiring integrated audits in response to accounting scandals such as Enron.

An integrated audit involves providing an opinion on the financial statements and the internal control effectiveness of a company.

Which of the following is not a requirement for management under Section 404 of the Sarbanes-Oxley Act of 2002? Multiple Choice Guarantee effectiveness of the entity's ICFR. Present a written assessment regarding the effectiveness of the entity's ICFR as of the end of the most recent fiscal year. Accept responsibility for the effectiveness of the entity's ICFR. Support the evaluation of the entity's ICFR with sufficient evidence, including documentation.

Guarantee effectiveness of the entity's ICFR.

The requirements of Section 404 of the Sarbanes-Oxley Act of 2002 apply to Multiple Choice All companies that are subject to an independent audit. All companies with sales in excess of $500 million. Most publicly-held companies. All privately-held companies.

Most publicly-held companies.

Which of the following statements concerning control deficiencies is true? Multiple Choice All control deficiencies are significant deficiencies. All significant deficiencies are material weaknesses. An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.

The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.

The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR for large public companies. Which of the following statements concerning these requirements is false? Multiple Choice Management's report should state its responsibility for establishing and maintaining an adequate internal control system. The auditor should evaluate whether internal controls over financial reporting are designed and operating effectively. Management should identify material weaknesses in its report. The auditor should provide recommendations for improving internal control in the audit report.

The auditor should provide recommendations for improving internal control in the audit report.

Which of the following statements is false concerning the audit requirements of the Sarbanes-Oxley Act of 2002 and the PCAOB's auditing standard related to internal controls? Multiple Choice The auditor should provide recommendations to the audit committee for improving internal control as part of the auditor's assessment. Management should identify material weaknesses in its report. The auditor should evaluate whether the internal controls are effective in accurately and fairly reflecting the entity's transactions. Management's report should state its responsibility for establishing and maintaining effective internal control.

The auditor should provide recommendations to the audit committee for improving internal control as part of the auditor's assessment.

All of the following factors should be considered by the auditor when deciding on the extent of controls testing except: Multiple Choice The importance of the control. The frequency with which the control is applied. The time the auditor has to test controls before a report must be issued. The nature of the control to be tested.

The time the auditor has to test controls before a report must be issued.

Which of the following statements concerning control deficiencies is true? Multiple Choice Auditors are required to report all control deficiencies to the audit committee. The two dimensions of control deficiencies are likelihood of occurrence and magnitude. Significant deficiencies are a subset of material weaknesses that must be reported to the public. A control deficiency is a type of significant deficiency.

The two dimensions of control deficiencies are likelihood of occurrence and magnitude.

Which of the following statements is correct concerning statistical sampling in tests of controls? Multiple Choice There is an inverse relationship between the sample size and the tolerable deviation rate. Deviations from controls at a given rate usually result in misstatements at a higher rate. As the population size doubles, the sample size should also double. The qualitative aspects of deviations are not considered by the auditor.

There is an inverse relationship between the sample size and the tolerable deviation rate.

A primary advantage of using generalized audit software packages to audit the financial statements of an entity that uses an IT system is that the auditor may: Multiple Choice reduce the level of required tests of controls to a relatively small amount. consider increasing the use of substantive tests of transactions in place of analytical procedures. substantiate the accuracy of data through self-checking digits and hash totals. access information stored on computer files while having a limited understanding of the entity's hardware and software features.

access information stored on computer files while having a limited understanding of the entity's hardware and software features.

In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue?

an unqualified report

Which of the following types of statistical testing is likely to be used for a test of controls? Multiple Choice Classical variables sampling. Probability-proportional-to-size sampling. Attribute sampling. Monetary-unit sampling.

attribute sampling

Which of the following controls would most likely be tested during an interim period? Multiple Choice controls over transactions that involve a high degree of subjectivity controls over the period-end financial reporting process controls that operate on a continuous basis controls over nonroutine transactions

controls that operate on a continuous basis

Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the following is not an entity-level control? Multiple Choice management's risk assessment process the period-end financial reporting process controls to monitor results of operations controls to monitor the inventory taking process

controls to monitor the inventory taking process

A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a: Multiple Choice deficiency in operation. deficiency in design. significant deficiency. material weakness.

deficiency in operation.

AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the entity hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the entity's internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control?

disclaimer of opinion

Samples to test internal controls are intended to provide a basis for an auditor to conclude whether: Multiple Choice the risk of incorrect acceptance is too high. materiality for planning purposes is at a sufficiently low level. the controls are operating effectively. the financial statements are materially misstated.

the controls are operating effectively.

Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance? Multiple Choice the nature of the financial statement accounts, disclosures, and assertions involved the interaction or relationship of the control with other controls the susceptibility of the related assets or liability to loss or fraud the financial statement amounts exposed to the deficiency

the financial statement amounts exposed to the deficiency

When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period? Multiple Choice the walkthrough of the control system conducted at interim any significant changes that occurred in internal control subsequent to the interim date the length of the remaining period the specific controls tested prior to the "as of" date and the results of those tests

the walkthrough of the control system conducted at interim

A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to: trace a transaction from every class of transactions from origination through the entity's information system. tour the organization's facilities and locations before beginning any audit work. trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports. trace a transaction from each major class of transactions from origination through the entity's information system.

trace a transaction from each major class of transactions from origination through the entity's information system until it is reflected in the entity's financial reports.

The role of the registered independent auditing firm relative to its clients' internal controls under the Sarbanes-Oxley Act of 2002 is to Multiple Choice Provide report feedback but disclaim an opinion on management's assessment. Express an opinion on the effectiveness of the entity's internal control. Express an opinion on whether the entity is subject to all provisions of the Securities Exchange Act of 1934. Report to both the PCAOB and SEC those entities with unsatisfactory internal controls.

Express an opinion on the effectiveness of the entity's internal control.

Which of the following statements best describes how the requirements under Sarbanes-Oxley changed the auditor's responsibility for issuing an opinion in connection with the audits of most public companies? CPA firms are now required to add a second opinion related to the timeliness of the financial information provided to the public in addition to an opinion on the overall fairness of the financial statements. While the CPA firm is required to issue an additional opinion, that opinion is for internal use only and does not need to be made available in the entity's annual report. CPA firms are required to rely less on their own direct evidence to support their opinion regarding the effectiveness of controls. CPA firms are now required to issue a second opinion related to their evaluation of the effectiveness of internal controls in addition to an opinion on the overall fairness of the financial statements.

CPA firms are now required to issue a second opinion related to their evaluation of the effectiveness of internal controls in addition to an opinion on the overall fairness of the financial statements.

"Remediation" refers to Multiple Choice Management's required annual communication to the Audit Committee regarding changes in the ICFR. Management's testing of a new control designed to eliminate a previous material weakness. The auditor's required annual communication to the Audit Committee regarding weaknesses found in the ICFR. Corrective actions taken by management to eliminate a material weakness.

Corrective actions taken by management to eliminate a material weakness.

Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls? Desired Confidence Level Tolerable Deviation Rate Expected Population Deviation Rate

Desired Confidence Level = decrease Tolerable Deviation Rate = decrease Expected Population Deviation Rate = increase

Which of the following types of audit reports would not be appropriate for an auditor to issue on the effectiveness of an entity's internal controls? Multiple Choice Adverse [a material weakness exists]. Unqualified [no material weaknesses identified]. Qualified [a significant deficiency exists]. Disclaimer [unable to perform key audit procedures].

Qualified [a significant deficiency exists].

Section 404a of the Sarbanes-Oxley (SOX) Act of 2002 requires the annual report of all issuers to include which of the following? Multiple Choice Management's assessment of the effectiveness of internal control over financial reporting Reasonable assurances that fraud will be identified before the issuance of the company's annual report. Representations from the company's external auditors that the company has effective internal control over operations. Management representations that the company's external auditors have examined its internal control over compliance with laws and regulations.

Reasonable assurances that fraud will be identified before the issuance of the company's annual report.

An employee wants to create a fake employee identification number as part of a fraud scheme. Which of the following controls would be most likely to prevent the employee from creating the fake identification number? Multiple Choice Controls over management override. Reconciliation of the bank account used for payroll. Reconciliation of control totals. Self-checking digits.

Self-checking digits.