ACCY 401 Chapter 11
In performing the audit of internal control over financial reporting, the auditor emphasizes internal control over classes of transactions because A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing. B) the class of transaction is where most fraud schemes occur. C) account balances are less important to the auditor then the changes in the account balances. D) classes of transactions tests are the most efficient manner to compensate for inherent risk.
A
Internal controls are not designed to provide reasonable assurance that A) all frauds will be detected. B) transactions are executed in accordance with management's authorization. C) the company's resources are used efficiently and effectively. D) company personnel comply with applicable rules and regulations.
A
Reasonable assurance allows for A) low likelihood that material misstatements will not be prevented or detected by internal controls. B) no likelihood that material misstatements will not be prevented or detected by internal control. C) moderate likelihood that material misstatements will not be prevented or detected by internal control. D) high likelihood that material misstatements will not be prevented or detected by internal control.
A
The primary emphasis by auditors is on controls over A) classes of transactions. B) account balances. C) both A and B, because they are equally important. D) both A and B, because they vary from client to client.
A
Which of the following components of the control environment define the existing lines of responsibility and authority? A) organizational structure B) management philosophy and operating style C) human resource policies and practices D) management integrity and ethical values
A
Which of the following factors may increase risks to an organization? A) Geographic dispersion of company operations Presence of new information technologies Yes Yes B) Geographic dispersion of company operations Presence of new information technologies No No C) Geographic dispersion of company operations Presence of new information technologies Yes No D) Geographic dispersion of company operations Presence of new information technologies No Yes
A
Which of the following is an accurate statement regarding the auditor's responsibility for understanding internal control? A) Transaction-related audit objectives typically have no impact on the rights and obligations objectives. B) Transaction-related audit objectives typically have a significant impact on the balance-related audit objective of realizable value. C) Auditors generally emphasize internal control over account balances rather than classes of transactions. D) Auditors and management are both equally concerned about controls that affect the efficiency and effectiveness of company operations.
A
Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes-Oxley Act? A) The audits of internal control and the financial statements provide reasonable assurance as to misstatements. B) The audit of internal control provides absolute assurance of misstatement. C) The audit of financial statements provides absolute assurance of misstatement. D) The audits of internal control and the financial statements provide absolute assurance as to misstatements.
A
Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies? A) Management Financial statement auditors Yes Yes B) Management Financial statement auditors No No C) Management Financial statement auditors Yes No D) Management Financial statement auditors No Yes
A
Internal controls A) are implemented by and are the responsibility of the auditors. B) consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals. C) guarantee that the company complies with all laws and regulations. D) only apply to SEC companies.
B
It is important for the CPA to consider the competence of the clients' personnel because their competence has a direct impact upon the A) cost/benefit relationship of the system of internal control. B) achievement of the objectives of internal control. C) comparison of recorded accountability with assets. D) timing of the tests to be performed.
B
Proper segregation of functional responsibilities calls for separation of A) authorization, execution, and payment. B) authorization, recording, and custody. C) custody, execution, and reporting. D) authorization, payment, and recording.
B
When considering internal controls, A) auditors can ignore controls affecting internal management information. B) auditors are concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements. C) management is responsible for understanding and testing internal control over financial reporting. D) companies must use the COSO framework to establish internal controls.
B
Which of the following activities would be least likely to strengthen a company's internal control? A) separating accounting from other financial operations B) maintaining insurance for fire and theft C) fixing responsibility for the performance of employee duties D) carefully selecting and training employees
B
Which of the following deals with ongoing or periodic assessment of the quality of internal control by management? A) verifying activities B) monitoring activities C) oversight activities D) management activities
B
An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are A) the effectiveness and efficiency of the controls. B) the frequency and effectiveness of the controls. C) the design and operating effectiveness of the controls. D) the implementation and operating effectiveness of the controls.
C
If a company has an effective internal audit department, A) the internal auditors can express an opinion on the fairness of the financial statements. B) their work cannot be used by the external auditors per PCAOB Standard 5. C) it can reduce external audit costs by providing direct assistance to the external auditors. D) the internal auditors must be CPAs in order for the external auditors to rely on their work.
C
The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on A) the company's board of directors. B) the audit committee of the board of directors. C) management. D) the CFO and the independent auditors.
C
The internal control framework used by most U.S. companies is the ________ framework. A) FASB B) PCAOB C) COSO D) SEC
C
Two key concepts that underlie management's design and implementation of internal control are A) costs and materiality. B) absolute assurance and costs. C) inherent limitations and reasonable assurance. D) collusion and materiality.
C
When management is evaluating the design of internal control, management evaluates whether the control can do which of the following? A) Detect material misstatements Correct material misstatements Yes Yes B) Detect material misstatements Correct material misstatements No No C) Detect material misstatements Correct material misstatements Yes No D) Detect material misstatements Correct material misstatements No Yes
C
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 A) insufficient. B) inadequate. C) ineffective. D) inefficient.
C
Which of the following best describes the purpose of control activities? A) the actions, policies and procedures that reflect the overall attitudes of management B) the identification and analysis of risks relevant to the preparation of financial statements C) the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity's objectives D) activities that deal with the ongoing assessment of the quality of internal control by management
C
Which of the following is a risk assessment principle? A) accountability B) use relevant, quality information to support the functioning of internal controls C) consider the potential for fraud D) develop general controls over technology
C
Which of the following is not one of the subcomponents of the control environment? A) management's philosophy and operating style B) organizational structure C) adequate separation of duties D) commitment to competence
C
External financial statement auditors must obtain evidence regarding what attributes of an internal audit (IA) department if the external auditors intend to rely on IA's work? A) integrity B) objectivity C) competence D) all of the above
D
Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the A) adequacy of the computer system. B) proper implementation by management. C) ability of the internal audit staff to maintain it. D) competency and dependability of the people using it.
D
Of the following statements about internal controls, which one is least likely to be correct? 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 controls on a test basis. D) Control procedures reasonably ensure that collusion among employees cannot occur.
D
The ________ is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account. A) general ledger B) general journal C) trial balance D) chart of accounts
D
To promote operational efficiency, the internal audit department would ideally report to A) line management. B) the PCAOB. C) the Chief Accounting Officer. D) the audit committee.
D
Which of the following best describes an entity's accounting information and communication system? A) Monitor transactions Record and process transactions Initiate transactions Yes Yes Yes B) Monitor transactions Record and process transactions Initiate transactions No No No C) Monitor transactions Record and process transactions Initiate transactions Yes No No D) Monitor transactions Record and process transactions Initiate transactions No Yes Yes
D
Which of the following is an accurate statement regarding control activities? A) As the level of complexity of IT systems increases, the separation of duties often becomes blurred. B) Segregation of duties would be violated if the same person authorizes the payment of a vendor's invoice and also approves the disbursement of funds to pay the bill. C) The most important type of protective measure for safeguarding assets and records is the us of physical precautions. D) all of the above
D
Which of the following is correct with respect to the design and use of business documents? A) The documents should be in paper format. B) Documents should be designed for a single purpose to avoid confusion in their use. C) Documents should be designed to be understandable only by those who use them. D) Documents should be prenumbered consecutively to facilitate control over missing documents.
D
Which of the following is not one of the three primary objectives of effective internal control? A) reliability of financial reporting B) efficiency and effectiveness of operations C) compliance with laws and regulations D) assurance of elimination of business risk
D
An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as A) collusion. B) a material weakness. C) a control deficiency. D) a significant deficiency.
A
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) a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting B) a statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting C) a statement that management, the board of directors, and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting D) a statement that the external auditors are solely responsible for establishing and maintaining an adequate system of internal control
A
The Sarbanes-Oxley Act requires A) all public companies to issue reports on internal controls. B) all public companies to define adequate internal controls. C) the auditor of public companies to design effective internal controls. D) the auditor of public companies to withdraw from an engagement if internal controls are weak.
A
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 A) management may establish appropriate policies and procedures but not act on them. B) the board of directors may not be aware of management's attitude toward the control environment. C) the auditor may believe that the policies and procedures are inappropriate for that particular entity. D) the policies and procedures may be so weak that no reliance is contemplated by the auditor.
A
Who is responsible for establishing a private company's internal control? A) senior management B) internal auditors C) FASB D) audit committee
A
Authorizations can be either general or specific. Which of the following is not an example of a general authorization? A) automatic reorder points for raw materials inventory B) a sales manager's authorization for a sales return C) credit limits for various classes of customers D) a sales price list for merchandise
B
The auditors primary purpose in auditing the client's system of internal control over financial reporting is A) to prevent fraudulent financial statements from being issued to the public. B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements. C) to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements. D) to efficiently conduct the Audit of Financial Statements.
B
Which of the following is not an underlying principle related to risk assessment? A) The organization should have clear objectives in order to be able to identify and assess the risks relating to the objectives. B) The auditors should determine how the company's risks should be managed. C) The organization should consider the potential for fraudulent behavior. D) The organization should monitor changes that could impact internal controls.
B
Which of the following statements is most correct with respect to separation of duties? A) A person who has temporary or permanent custody of an asset should account for that asset. B) Employees who authorize transactions should not have custody of related assets. C) Employees who open cash receipts should record the amounts in the subsidiary ledgers. D) Employees who authorize transactions should have recording responsibility for these transactions.
B
With which of management's assertions with respect to implementing internal controls is the auditor primarily concerned? A) efficiency of operations B) reliability of financial reporting C) effectiveness of operations D) compliance with applicable laws and regulations
B
Without an effective ________, the other components of the COSO framework are unlikely to result in effective internal control, regardless of their quality. A) risk assessment policy B) monitoring policy C) control environment D) system of control activities
C
Hanlon Corp. maintains a large internal audit staff that reports directly to the accounting department. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably A) eliminate tests of controls. B) increase the depth of the study and evaluation of administrative controls. C) avoid duplicating the work performed by the internal audit staff. D) place limited reliance on the work performed by the internal audit staff.
D
