chapter 7 smartbook

After documenting internal control, auditors typically perform a(n)___ ___, which traces one or two transactions through each step in the cycle.

walk through

One feature of well-designed forms and documents that can be used to control the number of documents issued and account for sequence of documents is_____ numbers.

serial

Two controls that both address the existence of accounts receivable are referred to as _____ controls.

redundant

If the test of controls results indicate the controls are not operating as effectively as planned, the assessed level of control risk needs to be ______ the planned assessed level. Multiple choice question. the same as lower than higher than

higher than

Many CPA firms consider a(n) ______ to be more effective than the other methods for documenting their understanding of a client's accounting information system and related control activities. Multiple choice question. systems flowchart internal control questionnaire written narrative of internal control

systems flowchart

The foundation for the other internal control components is ______. Multiple choice question. the internal audit department the control environment adherence to applicable laws and regulations

the control environment

All of the following are examples of control activities except ______. Multiple choice question. tone at the top performance reviews physical controls authorizations verifications

tone at the top

Specific authorization occurs when transactions are authorized on an individual basis while _____authorization occurs when management establishes criteria for acceptance of a certain type of transaction.

general

The three categories of objectives of ___ _____are reporting, operations, and compliance

internal controls

Internal auditors are representatives of ______. Multiple choice question. external auditors the board of directors top management all company employees

top management

Internal control addresses the achievement of objectives in the following areas except ______. Multiple choice question. internal and external reporting effectiveness and efficiency of operations company profitability and growth compliance with laws and regulations

company profitability and growth

Controls that assess whether other transaction control activities are operating properly and are usually focused on high risk transactions are called_____controls.

supervisory

Independence from management and proper oversight of the development and performance of the organization's internal control should be demonstrated by the board of directors and its ____ ______

audit committee

In making a judgment about the extent of the understanding of _____ ______ necessary, auditors should realize the information will be used to identify types of potential misstatements and consider factors that affect the risks of material misstatement.

internal control

The traditional method of describing internal control is to complete a(n) ______. Multiple choice question. internal control questionnaire written narrative of internal control flowchart of internal control

internal control questionnaire

When an organization has senior management and a board of directors that establish values and expectations regarding appropriate behavior and lead by example, it is said to have a strong_____ at the_____

tone top

When an organization has senior management and a board of directors that establish values and expectations regarding appropriate behavior and lead by example, it is said to have a strong ______. Multiple choice question. tone at the top system of control activities management and board

tone at the top

True or false: To assist auditors with describing internal control in their working papers, auditors typically perform a walk-through of one or two transactions.

false

The development of significant accounting estimates and preparation of the notes and selection and application of significant accounting policies are examples of risks at the ___ ____ level.

financial statement

To increase the evidence from a test of control, the number of items tested should be increased for ______. Multiple choice question. automated controls only all controls non-automated controls only

non-automated controls only

If the assessed level of control risk is high, the auditor should plan to perform more ____ procedures.

substantive

True or false: The COSO definition of internal control emphasizes that internal control is an end in and of itself.

False

Factors that may indicate increased financial reporting risk include ______. Multiple select question. changes in personnel consistent use of accounting information system consistent use of accounting principles new business models

changes in personnel new business models

Most internal control questionnaires are designed so that a ______ answer to a question indicates a weakness in internal control. Multiple choice question. yes no not applicable

no

Auditors use their understanding of which internal control component to identify risks of material misstatement that relate directly to the recording of transactions such as the recording of routine transactions like revenue? Multiple choice question. Monitoring Control environment Control activities Information system

information system

Auditors should identify and assess the risks of material misstatement at both the financial ___ level and the ____ ____ level.

statement relevant assertion

True or false: The division of responsibilities between finance and accounting illustrates how accounting is involved in the financial operations of the business but separated from the custody of assets.

False

The acceptable level of variation in performance relative to the achievement of objectives is called ______. Multiple choice question. avoidable risk risk tolerance risk assessment

risk tolerance

One feature of well-designed forms and documents that can be used to control the number of documents issued and account for sequence of documents is ______. Multiple choice question. general authorization serial numbers segregation of duties copies of documents

serial numbers

True or false: If the auditors do an extensive job of identifying and assessing risk of material misstatement at the relevant assertion level, it is not necessary to assess risk at the financial statement level.

False

A deficiency in internal control over financial reporting (or combination of deficiencies) such that there is a reasonable possibility that a material misstatement of the company's financial statements will not be prevented or detected on a timely basis is a(n)___ ____

material weakness

When assessing the risk of material misstatement, auditors rely on the ______ effectiveness of internal control. Multiple choice question. actual desired expected

expected

The basic principles of the control environment include all of the following except a(n) ______. Multiple choice question. commitment to attract, develop, and retain competent employees commitment to integrity and ethical values effective risk assessment process effective board of directors

effective risk assessment process

True or false: When obtaining an understanding of the control environment, it is important that auditors focus on the substance of controls, rather than their form.

true

Procedures to obtain an understanding of internal control include ______. Multiple select question. inquiry of entity personnel performance of analytical procedures inspection of documents and reports tracing of transactions through information system

inquiry of entity personnel inspection of documents and reports tracing of transactions through information system

After assessing the risks of material misstatement, auditors should design further audit procedures such as substantive procedures and tests of controls if planned assessed level of control risk is ______. Multiple choice question. low high

low

The risk of misstatement is composed of _____ risk and _____ risk.

inherent control

Segregation of duties is a control that does not leave documentary evidence so it should be tested by ______. Multiple select question. inquiring as to who performed these duties inspecting evidence of segregation of duties observing the client's employees performing the duties

inquiring as to who performed these duties observing the client's employees performing the duties

This document clearly describes the entity's methods of treating transactions which provides employees guidance that allows for proper and uniform handling of transactions. Multiple choice question. Journals including general journals Manual of accounting policies and procedures Ledgers including general ledger Chart of accounts

Manual of accounting policies and procedures

Policies and procedures that help mitigate the risk that the organization's objectives are not met are called control ____

activities

Clear guidance that will allow proper and uniform handling of transactions and events is provided by an accounting information system's ______. Multiple select question. chart of accounts journals, ledgers, and other record-keeping devices policies and procedures manual

chart of accounts policies and procedures manual

Control activities designed to ensure separation of duties may be circumvented by _____ among two or more people.

collusion

Before performing tests of controls to determine whether they are operating effectively, auditors must first ______. Multiple choice question. identify the controls likely to prevent or detect material misstatements perform substantive procedures on the controls perform analytical procedures on the controls likely to prevent or detect material misstatements

identify the controls likely to prevent or detect material misstatements

The goal of segregation of duties is not to allow an individual to have ______ duties.

incompatible

Auditors typically use a management letter to communicate deficiencies that are ______ than significant. Multiple choice question. less more

less

Management needs to assess risks that threaten their ability to meet their objectives in the areas of ______. Multiple choice question. operations and reporting reporting and compliance operations, reporting, and compliance operations and compliance

operations, reporting, and compliance

The preliminary assessments of control risk are often referred to as the _____ assessed level of control risk.

planned

To obtain an understanding of internal control auditors use

risk assessment procedure

Auditors understanding of internal control should include not only the design of controls but also whether they ______. Multiple choice question. are operating effectively are in place at other companies have been implemented

have been implemented

Proper segregation of duties should be applied to ______. Multiple choice question. management and non-management departments only individuals only departments and individuals

departments and individuals

A policy requiring the preparation of a monthly bank reconciliation is an example of a ______ control. Multiple choice question. preventive detective corrective

detective

A symbolic representation of a series of procedures with each procedure shown in sequence is an example of a systems____

flowchart

To enhance the control environment, management should do all of the following except ______. Multiple choice question. establish policies describing appropriate business practices make sure one person authorizes transactions, records transactions, and has custody of assets clearly define authority and responsibility within the organization develop job descriptions

make sure one person authorizes transactions, records transactions, and has custody of assets

Deficiencies that are less than significant are generally communicated in a(n) ____ letter.

management

Internal control is a process designed to provide ______ assurance regarding the achievement of objectives relating to operations, reporting, and compliance. Multiple choice question. reasonable no minimal absolute

reasonable

When auditors assess risk at the ____ assertion level instead of the financial statement level, they consider both the design of the control and its implementation.

relevant

Controls that assess whether other transaction control activities are operating properly and are usually focused on high risk transactions are called ______ controls. Multiple choice question. application fraud prevention general supervisory

supervisory

Controls that assess whether other transaction control activities are operating properly and are usually focused on high risk transactions are called ______ controls. Multiple choice question. application general fraud prevention supervisory

supervisory

A service department Type ______ report addresses the suitability of the design of controls. Multiple choice question. 1 2

1

A service department Type ______ report addresses the operating effectiveness of controls. Multiple choice question. 2 1

2

The policies and procedures for processing a particular type of transactions is referred to as the transaction_____

cycle

Which of the following is NOT a reason that internal control can only provide reasonable assurance from fraud and waste? Multiple choice question. All designed controls to address fraud and waste are adopted. Mistakes may be made in the performance of controls. Employee collusion can circumvent segregation of duties. Errors in judgments in designing controls can occur.

All designed controls to address fraud and waste are adopted.

This component of internal control assesses the quality of internal control performance over time. Multiple choice question. Control environment Risk assessment Monitoring Control activities

Monitoring

Internal auditors monitor ______. Multiple select question. departments management external auditors branches

departments management branches

True or false: The general approach to increasing evidence from a test of control is to increase the extent of the test, except in the case of automated controls.

True

Controls that may be most relevant in an audit include those that ______. Multiple select question. affect the reliability of data used to perform audit procedures pertain to the reliability of financial reporting affect efficiency and effectiveness of operations only

affect the reliability of data used to perform audit procedures pertain to the reliability of financial reporting

Risk assessment is management's process for ______. Multiple select question. analyzing risks ignoring risks identifying risks controlling risks

analyzing risks identifying risks

For the control environment component, professional standards require auditors should obtain sufficient knowledge about the company's ______. Multiple choice question. antifraud program internal audit staff risk management program

antifraud program

The major difference between control objectives and management assertions is that control objectives ______. Multiple choice question. are narrower in scope relate only to financial reporting are broader in scope

are broader in scope

Auditors use their understanding of internal control to do all of the following except ______. Multiple choice question. consider factors that affect risks of material misstatements design tests of controls and substantive procedures identify types of potential misstatements assess detection risk for use in the audit risk model

assess detection risk for use in the audit risk model

The organizational structure of an organization should separate responsibilities for _____of transactions, record keeping for transactions, and _____ of assets.

authorization custody

Exiting an activity that gives rise to a risk is an example of risk___

avoidance

The company has one control that requires reconciliations of bank statements and another that requires all cash disbursements to be authorized. This is an example of ______ controls. Multiple choice question. complementary redundant compensating

complementary

While obtaining an understanding of the other control components, auditors generally obtain some knowledge about the client's ______. Multiple choice question. control environment control activities accounting information system risk assessment monitoring

control activities

The difference between control objectives of internal control and management assertions is that ______. Multiple choice question. management assertions relate to operations, compliance, and financial reporting management assertions relate to operations only control objectives relate to financial reporting only control objectives relate to operations, compliance, and financial reporting

control objectives relate to operations, compliance, and financial reporting

Auditors perform tests of controls to obtain evidence about operating _____ of controls

effectiveness

An accounting information system should ______. Multiple select question. ensure appropriate segregation of duties ensure transactions are recorded in the proper time period identify and record all valid transactions measure the proper value of transactions

ensure transactions are recorded in the proper time period identify and record all valid transactions measure the proper value of transactions

AICPA standards require that tests of controls be performed ______ audit. Multiple choice question. every every fourth every third every other

every third

True or false: The auditors should obtain an understanding of the client's processes for eliminating business risks.

false

A client uses a service organization to perform its payroll function. To obtain a sufficient understanding of the controls at the service organization, external auditors can do all of the following except ______. Multiple choice question. obtain and consider the report of a service auditor on the service organization's internal controls ignore the relevant controls at the service organization and only consider the controls in place at the client visit the service organization to review and possibly test relevant controls

ignore the relevant controls at the service organization and only consider the controls in place at the client

In addition to the typical journals, ledgers, and other record-keeping devices, a chart of accounts and manual of accounting policies and procedures should be included in an accounting___ ____

information system

The methods and records established to initiate, authorize, record, process, summarize, and report an entity's transactions and maintain accountability for assets, liabilities, and equity is an organization's accounting___ _____

information system

Regarding deficiencies and weaknesses in internal control, auditing standards require auditors to communicate in writing ______. Multiple select question. material weaknesses internal control deficiencies significant deficiencies

material weaknesses significant deficiencies

The three categories of objectives of internal control are reporting,_____ , and____

operations compliance

The audit committee ______. Multiple select question. should have one member that is an officer of the organization oversees development and performance of the organization's internal control looks to senior management to resolve any differences with the auditing firm is directly responsible for the CPA firm performing public company audits

oversees development and performance of the organization's internal control is directly responsible for the CPA firm performing public company audits

Segregation of duties is a ______ control. Multiple choice question. corrective detective preventive

preventive

Segregation of duties is a ______ control. Multiple choice question. corrective preventive detective

preventive

COSO's definition of internal control emphasizes that it is a(n)____ , or a means to an end.

process

A well-designed organizational structure ______. Multiple select question. provides a basis for planning, directing, and controlling operations ensures appropriate segregation of duties is based upon centralized management decision making

provides a basis for planning, directing, and controlling operations ensures appropriate segregation of duties

Risks at the financial statement level ______. Multiple select question. require considerable judgment for the auditor have no impact on the audit can easily be isolated and do not affect more than one account or assertion potentially affect many relevant assertions

require considerable judgment for the auditor potentially affect many relevant assertions

In general, auditors want evidence on operating effectiveness throughout the audit, so they ______ the year. Multiple choice question. test all controls performed from the last month of test all controls performed throughout sample throughout sample only from the last month of

sample throughout

Processing services are offered to user entities by____ _____

service organizations

Regarding deficiencies and weaknesses in internal control, auditing standards require auditors to communicate in writing ______. Multiple select question. significant deficiencies material weaknesses internal control deficiencies

significant deficiencies material weaknesses

The rule that management must approve all credit sales over $75,000 is an example of a(n) ______ authorization.

specific

Tests of controls address ______. Multiple select question. the consistency with which controls were applied how controls were applied by whom or by what means the controls were applied the design of the internal controls

the consistency with which controls were applied how controls were applied by whom or by what means the controls were applied

Tests of controls are generally performed ______. Multiple choice question. only at year-end only during the actual audit throughout the year

throughout the year