Audit Ch 10
Which of the following is the correct definition of "control deficiency"?
A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis.
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 statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
Which of the following is correct with respect to the design and use of business documents?
Documents designed for external use must be prenumbered.
Which of the following statements is most correct with respect to separation of duties?
Employees who authorize transactions should not have custody of related assets.
Section 404 requires auditors to evaluate the effectiveness of the audit committee's oversight of the company's:
External financial reporting & Internal control over financial reporting; NOT Efficiency of operations
In performing an audit of internal control over financial reporting which of the following is the auditor required to do?
Form an opinion on the effectiveness of internal for financial reporting.
Which of the following factors may increase risks to an organization?
Geographic dispersion of company operations & Presence of new information technologies
To determine if significant internal control deficiencies are material weaknesses, they must be evaluated on their:
Likelihood & Significance
In the audit of a private company, the auditor will test internal controls when control risk is initially assessed at:
Low & Moderate; NOT Hight
Which of the following groups establishes and maintains the company's internal controls?
Management
Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies?
Management & Financial Statement Auditors
Which of the following deal with ongoing or periodic assessment of the quality of internal control by management?
Monitoring activities
Which of the following components of the control environment define the existing lines of responsibility and authority?
Organizational Structure
Which of the following is responsible for establishing a private company's internal control?
Senior Management
Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes Oxley Act?
The audits of internal control and the financial statements provide reasonable assurance as to misstatements.
You are performing the audit of internal control for Clifton Company. Which of the following would represent a material weakness in internal control?
The company's CFO was indicted for embezzling from the company.
The employee in charge of authorizing credit to the company's customers does not fully understand the concept of credit risk. This lack of knowledge would constitute:
a deficiency in operation of internal controls.
When planning an audit, the auditor's assessed level of control risk is:
a judgment issue, based on auditor knowledge.
A company frequently sells products at a price below inventory cost. Essential controls in the risk assessment process would include:
adequate controls that address the risk of overstating inventory.
Internal controls are not designed to provide reasonable assurance that:
all frauds will be detected
Which of the following is most correct for audits of non-public companies?
an audit of internal control is not required
When auditing a private company, the auditor should obtain an understanding of internal control sufficient to:
assess control risk.
Which of the following is not one of the three primary objectives of effective internal control?
assurance of elimination of business risk
To promote operational efficiency, the internal audit department would ideally report to:
audit committee
Significant deficiencies and material weaknesses in internal control of a public company must be reported in writing to which of the following?
audit committee of the company's board of directors
Proper segregation of functional responsibilities calls for separation of:
authorization, recording, and custody.
The primary emphasis by auditors is on controls over:
classes of transactions.
An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as:
collusion
Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the:
competency and dependability of the people using it.
When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the:
concept allows for only a remote likelihood that material misstatements will not be prevented or detected on a timely basis.
The financial statements may not correctly reflect accounting frameworks such as AAP or IFRS if the:
controls affecting the reliability of financial reporting are inadequate.
Which of the following deficiency exists if a necessary control is missing or not properly formulated?
design
The person responsible for reconciling sales invoices to customer orders does not access to the company's master price list in order to correctly compute sales. This is an example of a(n):
design deficiency.
The purpose of phase 3 in the "process for understanding internal control and assessing control risk" is to:
design, perform and evaluate tests of controls.
Audit evidence concerning proper segregation of duties normally is best obtained by:
direct personal observation of the employee who applies control procedures.
Which of the following is correct regarding management's documentation of internal controls?
documentation needs to have some focus on controls designed to detect fraud
Narratives, flowcharts, and internal control questionnaires are three common methods of:
documenting the auditor's understanding of internal controls.
To issue a report on internal control over financial reporting for a public company, an auditor must:
evaluate management's assessment process and independently assess the design and operating effectiveness of internal control.
Management must disclose material weaknesses in internal control in its audit report:
if the weakness exists at the end of the year.
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:
ineffective
Two key concepts that underlie management's design and implementation of internal control are:
inherent limitations and reasonable assurance.
When a compensating control exists, the absence of a key control:
is no longer a concern because there is no longer a significant deficiency or material weakness.
Which of the following may represent the biggest challenge smaller public companies face in implementing effective internal control?
limited resources
Which of the following activities would be least likely to strengthen a company's internal control?
maintaining insurance for fire and theft
Once auditors determine that entity level controls are designed and placed in the operation they:
make a preliminary assessment for each transaction-related audit objective for each major type of transaction.
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:
management may establish appropriate policies and procedures but not act on them.
An audit procedure that would most likely be used by an auditor in performing tests of control procedures in which the segregation of functions and that leaves no "audit" trail is:
observation
Audit evidence regarding the separation of duties is normally best obtained by:
observation of employees applying control activities.
When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be:
performing a walk-through.
Which of management's assertions with respect to implementing internal controls is the auditor primarily concerned?
reliability of financial reporting
The Public Company Accounting Oversight Board states that reasonable assurance allows a:
remote likelihood that material misstatements will not be prevented or detected by internal control.
The auditor's consideration of a private company's internal control is:
required by GAAS.
The PCAOB places responsibility for the reliability of internal controls over the financial reporting process to:
the CEO and the CFO.
In performing the audit of internal control over financial reporting the auditor emphasizes internal control over class of transactions because:
the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.
An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are:
the design and implementation of the controls.
A control available in a small company, which may be necessitated because of lack of competent personnel, is:
the owner-manager's direct involvement in the control process.
Which of the following best describes the purpose of control activities?
the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity's objectives
Significant deficiencies need to be communicated to the company's audit committee because:
they represent significant design flaws in internal controls.
The auditors primary purpose in auditing the client's system of internal control over financial reporting is:
to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements.
The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor's study and evaluation of internal control because the:
work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures.
