Chapter 7 Internal Control

Which of the following is least likely to be considered a risk assessment procedure relating to internal control? A) Counting marketable securities at year-end. B) Inquiries of client personnel. C) Inspecting documents and reports. D) Observing the application of specific controls.

A) Counting marketable securities at year-end.

Which of the following would be least likely to be considered a benefit of effective internal control? A) Eliminating all employee fraud. B) Restricting access to assets. C) Detecting ineffectiveness. D) Ensuring authorization of transactions.

A) Eliminating all employee fraud.

Which of the following is an advantage of describing internal control through the use of a standardized questionnaire? A) Questionnaires highlight weaknesses in the system. B) Questionnaires are more flexible than other methods of describing internal control. C) Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system. D) Questionnaires provide a clearer and more specific portrayal of a client's system than other methods of describing internal control.

A) Questionnaires highlight weaknesses in the system.

Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies? A) Salaried sales personnel. B) Implementation of a new information system. C) Rapid growth of the organization. D) Corporate restructuring.

A) Salaried sales personnel.

Which of the following would be LEAST likely to be regarded as a test of control? A) Test of the additions to property by physical inspection B) comparisons of the signatures on cancelled checks to the authorized check signer list C) tests of signatures on POs D) recalculation of payroll deductions

A) Test of the additions to property by physical inspection

When performing an audit of internal control under PCAOB requirements, auditors evaluate control: Design Effectiveness Operating Effectiveness A) Yes Yes B) Yes No C) No Yes D) No No

A) Yes Yes

Which of the following must the auditor communicate to the audit committee? A) significant deficiencies and material weaknesses B) only significant deficiencies C) only material weaknesses D) neither significant deficiencies nor material weaknesses

A) significant deficiencies and material weaknesses

The provisions of the Foreign Corrupt Practices Act apply to:

All corporations that must file under the Securities Exchange Act of 1934.

In a financial statement audit performed following AICPA Professional Standards, how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely upon in the current year?

At least every third audit.

The auditors who become aware of an internal control significant deficiency are required to communicate this to the:

Audit committee.

To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the:

Audit committee.

Which of the following is correct with respect to control deficiencies discovered during an audit? A) Auditors must communicate and recommend corrections relating to all material weaknesses in internal control to management. B) All material weaknesses in internal control should be reported to the audit committee. C) All such matters must be communicated to the audit committee and regulatory agencies. D) All control deficiencies are also significant deficiencies.

B) All material weaknesses in internal control should be reported to the audit committee.

Which of the following is not a responsibility that should be assigned to a company's internal audit department? A) Evaluating internal control. B) Approving disbursements. C) Reporting on the effectiveness of operating segments. D) Investigating potential merger candidates.

B) Approving disbursements.

Which statement is correct concerning the relevance of various types of controls to a financial statement audit? A) An auditor may ordinarily ignore the consideration of controls when a substantive audit approach is used. B) Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant. C) Controls over safeguarding assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant. D) All controls are ordinarily relevant to an audit.

B) Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.

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 recognized in the Statements on Auditing Standards. 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 recognized in the Statements on Auditing Standards.

Which of the following is not a component of the control environment? A) Integrity and ethical values. B) Risk assessment. C) Commitment to competence. D) Organizational structure.

B) Risk assessment.

Which of the following is intended to detect deviations from prescribed controls? A) Substantive procedures specified by a standardized audit program. B) Tests of controls designed specifically for the client. C) Analytical procedures as set forth in an industry audit guide. D) Computerized analytical procedures tailored for the configuration of the computer equipment in use.

B) Tests of controls designed specifically for the client.

Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits? A) An understanding of the control environment, information and communication, risk assessment and monitoring is necessary; an understanding of control activities is only necessary for areas in which the auditor is performing tests of controls. B) The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit. C) When tests of controls have been performed, control risk must be assessed at a level less than the maximum. D) An understanding of the control environment is necessary, but no understanding of the other components is necessary unless control risk is to be assessed at a level less than the maximum.

B) The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit.

Which of the following is not a factor that is considered a part of the client's overall control environment? A) The organizational structure. B) The information system. C) Management philosophy and operating style. D) Board of directors.

B) The information system.

Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of misstatement requires special audit consideration? A) Complex calculations are involved. B) The rate of technological change is moderate in the industry. C) The potential for fraud seems high. D) Various subjective methods of application of a key accounting policy exist.

B) The rate of technological change is moderate in the industry.

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

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

The Sarbanes-Oxley Act of 2002 requires that the audit committee:

Be directly responsible for the appointment, compensation and oversight of the work of the CPA firm.

Which of the following would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? A) Management's failure to negotiate 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

When performing an internal control audit under PCAOB requirements, one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): Qualified Adverse A) Yes Yes B) Yes No C) No Yes D) No No

C) No Yes

Which of the following is least likely to be considered a risk assessment procedure? A) Analytical procedures. B) Inspection of documents. C) Observation of the counting of inventory. D) Observation of the performance of certain accounting procedures.

C) Observation of the counting of inventory.

Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the design of the relevant controls and to determine whether they have been implemented (placed in operation)? A) Previous experience with the entity. B) Inquiries of appropriate management personnel. C) Performance of substantive procedures. D) Inspection of document and records.

C) Performance of substantive procedures.

For effective internal control, which of the following functions should not be assigned to the company's accounting department? A) Reconciling accounting records with existing assets. B) Recording financial transactions. C) Signing payroll checks. D) Preparing financial reports.

C) Signing payroll checks.

Which of the following audit tests would be regarded as a test of a control? A) Tests of the specific items making up the balance in a given general ledger account. B) Tests confirming receivables. C) Tests of the signatures on canceled checks to board of director's authorizations. D) Tests of the additions to property, plant, and equipment by physical inspection.

C) Tests of the signatures on canceled checks to board of director's authorizations.

Which of the following statements is correct concerning the understanding of internal control needed by auditors? A) The auditors must understand the information system, not the accounting system. B) The auditors must understand monitoring and all preliminary accounting controls. C) The auditors must have a sufficient understanding to assess the risks of material misstatement. D) The auditors must understand the control environment, risk assessment, and all control activities.

C) The auditors must have a sufficient understanding to assess the risks of material misstatement.

Which of the following is true about the auditors' consideration of internal control in a financial statement audit? A) The auditors must assess control risk at a level lower than the maximum. B) The auditors must prepare a flowchart description of internal control for their working papers. C) The auditors must obtain an understanding of the steps in processing major types of transactions. D) The auditors must perform tests of controls.

C) The auditors must obtain an understanding of the steps in processing major types of transactions.

This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with laws and regulations:

Committee of Sponsoring Organizations

If the independent auditors decide that the work performed by the internal auditors may have a bearing on their own procedures, they should consider the internal auditors':

Competence and objectivity.

The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of financial reporting, the effectiveness and efficiency of operations, and:

Compliance with applicable laws and regulations

A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect material misstatements on a timely basis is referred to as a:

Control deficiency.

An auditor's purpose for performing tests of controls is to provide reasonable assurance that:

Controls are operating effectively.

Which of the following would be least likely to be included in an auditor's tests of controls? A) Inspection. B) Observation. C) Inquiry. D) Analytical procedures.

D) Analytical procedures.

Which of the following is NOT ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? A) Checklist B) Flowchart C) Questionnaire D) Confirmation

D) Confirmation

Of the following statements about internal control, which one is not valid? 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 control procedures on a test basis. D) Control activities reasonably insure that collusion among employees cannot occur.

D) Control activities reasonably insure that collusion among employees cannot occur.

Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level? A) Assign more experienced staff. B) Incorporate additional elements of unpredictability in the selection of audit procedures. C) Increase the scope of auditor procedures. D) Emphasize the need to remain neutral, rather than to exercise professional skepticism.

D) Emphasize the need to remain neutral, rather than to exercise professional skepticism.

When performing an internal control audit under PCAOB standards, one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): Qualified Disclaimer A) Yes Yes B) Yes No C) No Yes D) No No

D) No No

Which of the following is not part of the definition of internal control? A) Safeguard assets B) Encourage employees to follow company policy C) Promote operational efficiency D) Separation of duties

D) Separation of duties

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.

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.

Which is most likely when the assessed level of control risk increases? A) Change from performing substantive procedures at year-end to an interim date B) Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity C) use the maximum number of dual purpose tests D) use larger sample sizes for substantive procedures

D) use larger sample sizes for substantive procedures

During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to:

Design further audit procedures.

The program flowcharting symbol representing a decision is a:

Diamond.

When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will:

Equal the preliminary assessed level of control risk.

If the auditors' assessment of the design of internal control reveals that it cannot be relied upon, the auditors are NOT required to prepare any documentation of internal control for their working papers

False

In a financial statement audit, CPAs are required to assess the operating effectiveness of most significant accounting oriented controls.

False

Internal auditors should preferably report to the chief accounting officer of the company.

False

The Foreign Corrupt Practices Act prohibits bribes to foreign corporate officials to obtain business.

False

The auditors' communication of internal control significant deficiencies should be addressed only to senior management of the company.

False

The relatively low number of types of transactions incurred by small firms makes the segregation of duties impossible.

False

Well-designed internal control will prevent all fraud by top management.

False

Controls are not designed to provide assurance that:

Fraud will be eliminated.

Which of the following factors would most likely be considered an inherent limitation to an entity's internal control? A) The complexity of the information processing system. B) Human judgment in the decision making process. C) The ineffectiveness of the board of directors. D) The lack of management incentives to improve the control environment.

Human judgment in the decision making process.

Tests of controls are most likely to be performed when:

Inadequate substantive procedures exist to restrict audit risk to an acceptable level.

The major components of internal control include all of the following, except:

Internal auditing.

In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the:

Internal auditor's compliance with professional internal auditing standards.

An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and:

Internal control over financial reporting.

The scope of substantive procedures as compared to the scope of tests of controls generally vary:

Inversely.

A significant deficiency:

Is less severe than a material weakness.

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:

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

A material weakness involves an amount that could result in a misstatement that is:

Material.

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?

Maximum

The use of fidelity bonds protects a company from embezzlement loses and also:

Minimizes the possibility of employing persons with dubious records in positions of trust.

In the consideration of internal control, the auditor is basically concerned that it provides reasonable assurance that:

Misstatements have been prevented or detected.

In assessing the objectivity of a client's internal auditors, the CPA would be most likely to consider internal auditor:

Organizational status within the company

The effectiveness of controls is not generally tested by:

Performance of analytical procedures.

At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness?

Reasonable possibility.

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both:

Record and conceal fraudulent transactions in the normal course of assigned tasks.

After considering the client's internal control the auditors have concluded that it is well designed and is functioning as anticipated. Under these circumstances the auditors would most likely:

Reduce substantive procedures in areas where the internal control was found to be effective.

The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States:

SEC registrants

A control deficiency that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting is referred to as a(n):

Significant deficiency.

In the consideration of internal control, the operating effectiveness of controls is tested by:

Tests of controls.

A report on internal control performed in accordance with PCAOB Standard No. 5 includes an opinion on internal control for:

The "as of date."

Well-designed internal control that is functioning effectively is most likely to detect a fraud arising from:

The fraudulent action of an individual employee.

The independent auditors might consider the procedures performed by the internal auditors because:

They are employees whose work might affect the independent auditors' work.

If the auditors do not perform tests of controls for certain assertions:

They must assess control risk at the maximum level for those assertions.

CPA firms may use written narratives to describe internal control in their audit working papers

True

Incompatible duties exist when an employee is in a position to perpetrate and conceal errors or fraud.

True

Internal control is concerned with the reliability of financial information.

True

After documenting the client's prescribed internal control, the auditors will often perform a walk-through of each transaction cycle. An objective of a walk-through is to:

Verify that the controls have been implemented (placed in operation).

On financial statement audits, it is required that the auditors obtain an understanding of internal control, including:

Whether it has been implemented (placed in operation).

Tests of controls do NOT ordinarily address:

the cost effectiveness of the way a control was applied