Chapter 5

List the 5 components of the COSO Framework

1. Control Environment 2. Risk Assessment 3. Control Activities 4. Info & Communications 5. Monitoring

Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following: The frequency of the performance of the control by the company during the period being audited. The length of time that the auditor is planning to rely on the operating efficiency of the control activity. The expected rate of deviation for a control activity. All of the above are matters that could affect the necessary extent of testing of a control.

All of the above are matters that could affect the necessary extent of testing of a control.

The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, including: The auditor's testing of controls for the audit of internal control on a public company. Misstatements detected during the financial statement audit. Any control deficiencies identified during the audit. All of the above.

All of the above.

A transaction-level internal control activity is best described as: An action taken by auditors to obtain evidence. An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company. A method for recording, summarizing, and reporting financial information. The functioning of the board of directors in support of its audit committee.

An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company.

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client? A narrative memorandum describing the control system. An internal control questionnaire. A flowchart of the documents and procedures used by the company. All of the above.

An internal control questionnaire.

In most audits of large entities, control risk assessment contributes to audit efficiency, which means that: Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs. Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls. The cost of control evaluation work will exceed the cost of substantive procedures. The cost of substantive procedures will exceed the cost of control evaluation work.

Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs.

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the: Operational responsibility from the record-keeping responsibility. Administrative controls from the internal accounting controls. Authorization of transactions from the custody of related assets. Human resources function from the controllership function.

Authorization of transactions from the custody of related assets.

When completing the audit of internal controls for a public company, AS 5 requires auditors to test: Operating effectiveness only. Design effectiveness only. Both operating and design effectiveness. Neither operating nor design effectiveness

Both operating and design effectiveness.

When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on: Whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. Whether the account has a history of errors. The magnitude of the potential misstatement resulting from the deficiency or the deficiencies. Both the magnitude of the potential misstatement resulting from the deficiency or the deficiencies and whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure. All of these are correct.

Both the magnitude of the potential misstatement resulting from the deficiency or the deficiencies and whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure.

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for: Inquiry of client personnel. Inspection of documentation. Observation of company operations. Confirmation of balances.

Confirmation of balances.

According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to: Determine whether the company's controls are processing company data effectively. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed. Determine that the company's employees are processing the controls according to the policy and procedure manuals at the company. None of the above.

Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed.

The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to: Provide a basis for making constructive suggestions in a management letter. Provide information for a communication of internal control-related matters to management. Determine the nature, timing, and extent of further audit tests to be performed in the audit. Provide the rationale for the inherent risk assessment at the financial statement assertion level.

Determine the nature, timing, and extent of further audit tests to be performed in the audit.

If the auditors encounter a significant scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate? Unqualified opinion or adverse opinion. Qualified opinion or adverse opinion. Unqualified opinion or disclaimer of opinion. Disclaimer of opinion.

Disclaimer of opinion.

Which report would not be appropriate for a public accounting firm to provide on financial reporting controls? Unqualified—no material weaknesses found. Disclaimer of opinion—unable to perform all necessary procedures. Disclaimer of opinion—significant deficiencies exist. Adverse—material weaknesses exist.

Disclaimer of opinion—significant deficiencies exist.

Name the purpose (control/substantive/dual) and assertion related to the test: Vouch recorded sales invoices to supporting shipping documents.

Dual purpose Occurence/existence

Name the purpose (control/substantive/dual) and assertion related to the test: Select a sample of shipping documents from the shipping department file and trace shipments to recorded sales invoices.

Dual-Purpose Completeness

Name the purpose (control/substantive/dual) and assertion related to the test: Trace recorded sales invoices to posting in the general ledger control account and in the correct customer's account.

Dual-Purpose Completeness

Name the purpose (control/substantive/dual) and assertion related to the test: Vouch sales invoices and shipping documents.

Dual-Purpose Occurence/existence

Name the purpose (control/substantive/dual) and assertion related to the test: Recalculate the arithmetic accuracy of the recorded sales invoices.

Dual-Purpose Accuracy/Valuation

Name the purpose (control/substantive/dual) and assertion related to the test: Compare the shipment date of recorded sales invoices with the invoice record date.

Dual-Purpose Cut-off/completeness

Once the auditor detects a control deficiency, which of the following steps must he or she take first? Test the deficient control, assuming a maximum level of risk. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion. Modify the planned substantive procedures as a result of the deficiency. Perform tests of other controls related to the same assertion as the control deemed ineffective.

Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion.

When planning the audit of internal controls for an issuer, the audit team should: Identify significant accounts, locations, and assertions. Conduct a walkthrough of the internal control process. Make inquiries of employees regarding the existence of control activities. Reperform control activities performed by client employees to determine their effectiveness.

Identify significant accounts, locations, and assertions.

When testing a control activity's operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include Inquiry of appropriate personnel and reperformance of the control activity. Reading over the company's code of conduct. Inquiry of appropriate personnel. Reperformance of the control activity.

Inquiry of appropriate personnel and reperformance of the control activity.

A material weakness is a situation in which: It is reasonably possible that an immaterial misstatement would not be detected on a timely basis. It is reasonably possible that a material misstatement would not be detected on a timely basis. It is probable that an immaterial financial statement misstatement would not be detected on a timely basis. There is a remote likelihood that a material misstatement would be detected on a timely basis.

It is reasonably possible that a material misstatement would not be detected on a timely basis.

When completing the audit of internal controls for a public company, AS 5 requires auditors to report on Management's Report on Internal Control An Audit of Internal Control Yes Yes No No No Yes Yes No

Management's Report on Internal Control An Audit of Internal Control No Yes

If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must Assess control risk at less than the maximum for all relevant assertions. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting. Perform only substantive procedures. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

Tests of controls in a GAAS audit are required for: Obtaining evidence about the operating effectiveness of client control activities. Obtaining evidence about the financial statement assertions. Accomplishing control over the occurrence of recorded transactions. Applying analytical procedures to financial statement balances.

Obtaining evidence about the operating effectiveness of client control activities.

Which of the following would probably not be considered an indication of a material weakness? Immaterial fraud committed by senior management. Overproduction by the manufacturing plant. Ineffective oversight by the audit committee. Evidence of a material misstatement.

Overproduction by the manufacturing plant.

The most important fundamental component of an entity's internal control is: People who operate the control system. Compliance with applicable laws and regulations. Reliability of financial reporting. Effectiveness and efficiency of operations.

People who operate the control system.

Effectiveness of audit procedures would be reduced by: Deciding to obtain external evidence instead of internal evidence. Performing procedures during the interim period as opposed to at the fiscal year-end date. Selecting larger sample sizes for audit. Performing audit procedures at the fiscal year-end date as opposed to the interim period.

Performing procedures during the interim period as opposed to at the fiscal year-end date.

Which of the following is a preventive control? Detailed fluctuation analysis completed by the CFO for revenue. Separation of duties between the payroll and personnel departments. Reconciliation of a bank account. Recalculation of a sample of payroll entries by internal auditors.

Separation of duties between the payroll and personnel departments.

Which of the following information would be included in the introductory paragraph of the auditors' report on internal control over financial reporting if the report is presented separately from the auditors' report on the entity's financial statements? A reference to the auditors' report and opinion on the entity's financial statements. The fact that the auditors conducted an audit of the entity's financial statements. Statements identifying the responsibility of the auditors and management for internal control over financial reporting. The definition of a material weakness in internal control over financial reporting.

Statements identifying the responsibility of the auditors and management for internal control over financial reporting.

Name the purpose (control/substantive/dual) and assertion related to the test: Send confirmations to all customers regarding accounts receivable.

Substantive test Existence

Name the purpose (control/substantive/dual) and assertion related to the test: Evaluate the adequacy of the allowance for doubtful accounts.

Substantive test Valuation

Name the purpose (control/substantive/dual) and assertion related to the test: Obtain financial statements or credit reports on large past due accounts and inquire of the credit manager about collections.

Substantive test Valuation

Name the purpose (control/substantive/dual) and assertion related to the test: Calculate an estimate of the allowance for doubtful accounts using prior relations of write-offs and sales.

Substantive test Valuation

Which of the following does not accurately summarize auditors' requirements regarding internal control? Public Entity Nonpublic Entity Evaluating control risk Yes Yes Understanding Yes Yes Test controls Yes Yes Documenting Yes Yes

Test controls Yes Yes

Name the purpose (control/substantive/dual) and assertion related to the test: Scan recorded sales invoices and shipping documents for missing numbers in sequence.

Test of controls ???

Name the purpose (control/substantive/dual) and assertion related to the test: Vouch recorded sales invoices prices to the approved price list.

Test of controls Accuracy

Name the purpose (control/substantive/dual) and assertion related to the test: Inspect recorded sales invoices for credit approval.

Test of controls Valuation,Occurrence

Which of the following statements is not true with respect to the auditors' report on internal control over financial reporting? The auditor will issue an adverse opinion if one or more material weaknesses exist. The report may be presented with the report on the entity's financial statements as a combined report. The report will be dated as of the date of the financial statements. The report will express an opinion on the effectiveness of internal control over financial reporting.

The report will be dated as of the date of the financial statements.