Auditing Chapter 7- Internal Control Mcgraw Hill questions

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

Confirmation.

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 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.

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

To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except: a) Establish internal control with no material weakness. b) Accept responsibility for the effectiveness of internal control. c) Evaluate the effectiveness of internal control using suitable control criteria. d) Support the evaluation with sufficient evidence

a) Establish internal control with no material weakness.

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.

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: a) Employment of temporary personnel to aid in the separation of duties. b) Direct participation by the owner in key record-keeping and control activities of the business. c) Engaging a CPA to perform monthly write-up work. Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee.

b) Direct participation by the owner in key record-keeping and control activities of the business

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 An increase in the substantive procedures will decrease detection risk, and thereby compensate for the increased level of control risk due to a weakness in internal control. Tests of controls is incorrect because if the weakness exists, increasing the extent of tests will only provide more evidence on the weakness—not evidence that compensates for the weakness. Detection risk and Inherent risk are incorrect because a decrease in detection risk or inherent risk, not an increase, would compensate. Also, in the case of inherent risk, it may not be possible to change the assessment since it is a function of the firm's environment.

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should: 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.

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. Preparing bank reconciliations will detect a variety of misstatements related to cash and is a detective control in the sense that it does not prevent the misstatement from occurring, but may detect it. Segregation of duties over cash disbursements and requiring approval of purchase transactions are incorrect because segregating duties and requiring approvals are primarily designed to prevent misstatements. Maintaining backup copies of key transactions is incorrect because the primary purpose of keeping backup copies of key transactions (or all transactions) is prevent loss of information in the event of an information system failure

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.