Audit Chapter 10
A company frequently sells products at a price below inventory cost. Essential controls in the risk assessment process would include: A) adequate controls that address the risk of overstating inventory. B) adequate controls that address the risk of not including a purchased item in inventory. C) adequate controls that address the risk of understatement of inventory. D) adequate controls that address the risk of overstatement of cost of goods sold.
A
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
Audit evidence concerning proper segregation of duties normally is best obtained by: A) direct personal observation of the employee who applies control procedures. B) making inquiries of co-workers about the employee who applies control procedures. C) preparation of a flowchart of duties performed and available personnel. D) inspection of third-party documents containing the initials of who applied control procedures.
A
Before making the final assessment of internal control at the end of an integrated audit, the auditor must: A) Test controls Perform substantive tests of details Yes Yes B) Test controls Perform substantive tests of details No No C) Test controls Perform substantive tests of details Yes No D) Test controls Perform substantive tests of details No Yes
A
In performing the audit of internal control over financial reporting the auditor emphasizes internal control over class 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) access to assets is permitted only in accordance with management's authorization. D) company personnel comply with applicable rules and regulations
A
Once auditors determine that entity level controls are designed and placed in the operation they: A) make a preliminary assessment for each transaction-related audit objective for each major type of transaction. B) make a preliminary assessment of control risk. C) obtain an understanding of the design and implementation of internal control. D) prepare audit documentation in order to opine on the company's internal control system.
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
A
Section 404 requires auditors to evaluate the effectiveness of the audit committee's oversight of the company's: A) External financial reporting Efficiency of operations Internal control over financial reporting Yes No Yes B) External financial reporting Efficiency of operations Internal control over financial reporting No No Yes C) External financial reporting Efficiency of operations Internal control over financial reporting Yes Yes No D) External financial reporting Efficiency of operations Internal control over financial reporting No Yes No
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 ICFR. D) the auditor of public companies to provide recommendations to correct material weaknesses.
A
The employee in charge of authorizing credit to the company's customers does not fully understand the concept of credit risk. This lack of knowledge would constitute: A) a deficiency in operation of internal controls. B) a deficiency in design of internal controls. C) a deficiency of management. D) not constitute a deficiency
A
The financial statements may not correctly reflect accounting frameworks such as AAP or IFRS if the: A) controls affecting the reliability of financial reporting are inadequate. B) company's controls do not promote efficiency. C) company's controls do not promote effectiveness. D) company's controls do not promote compliance with applicable rules and regulations.
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
The purpose of phase 3 in the "process for understanding internal control and assessing control risk" is to: A) design, perform and evaluate tests of controls. B) obtain and document an understanding of internal control design an operation. C) assess control risk. D) decide planned detection risk and substantive tests.
A
To determine if significant internal control deficiencies are material weaknesses, they must be evaluated on their: A) Likelihood Significance Yes Yes B) Likelihood Significance No No C) Likelihood Significance Yes No D) Likelihood Significance No Yes
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
When a compensating control exists, the absence of a key control: A) is no longer a concern because there is no longer a significant deficiency or material weakness. B) is still a major concern to the auditor. C) could cause a material loss, so it must be tested using substantive procedures. D) is magnified and must be removed from the sampling process and examined in its entirety
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 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 is responsible for establishing a private company's internal control? A) Senior Management B) Internal Auditors C) Senior Management and auditors D) Audit committee
A
Which of the following is the correct definition of "control deficiency"? A) A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis. B) A control deficiency exists if one or more deficiencies exist that adversely affect a company's ability to prepare external financial statements reliably. C) A control deficiency exists if the design or operation of controls results in a more than remote likelihood that controls will not prevent or detect misstatements. D) A control deficiency exists if the design or operation of controls results in a more than probable likelihood that controls will prevent or detect 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
An audit procedure that would most likely be used by an auditor in performing tests of control procedures in which the segregation of functions and that leaves no "audit" trail is: A) inspection. B) observation. C) reperformance. D) reconciliation.
B
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
If the results of tests of controls support the design and operations of controls as expected, the auditor uses ________ control risk as the preliminary assessment. A) a lower B) the same C) a higher D) either a lower or higher
B
In performing an audit of internal control over financial reporting which of the following is the auditor required to do? A) Test routine and nonroutine transactions equally. B) Form an opinion on the effectiveness of internal for financial reporting. C) Rely on the work on internal auditors in order to promote audit efficiency. D) Use the audit conclusions before starting the audit of financial statements
B
Internal controls normally include procedures designed to provide reasonable assurance that: A) employees act with integrity when performing their assigned tasks. B) transactions are executed in accordance with management's authorization. C) decision processes leading to management's authorization of transactions are sound. D) collusive activities would be detected by segregation of employee duties
B
It is important for the CPA to consider the competence of the clients' personnel because their competence bears directly and importantly 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
Narratives, flowcharts, and internal control questionnaires are three common methods of: A) testing the internal controls. B) documenting the auditor's understanding of internal controls. C) designing the audit manual and procedures. D) documenting the auditor's understanding of a client's organizational structure
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
Significant deficiencies are matters that come to an auditor's attention and should be communicated to an entity's audit committee because they represent: A) material frauds perpetrated by high-level management. B) internal control deficiencies that could adversely affect a company's ability to initiate, record, process, or report external financial statements reliably. C) flagrant violations of the entity's documented conflict-of-interest policies. D) intentional attempts by client personnel to limit the scope of the auditor's field work.
B
Significant deficiencies need to be communicated to the company's audit committee because: A) they represent material weaknesses that allow fraud to be perpetrated. B) they represent significant design flaws in internal controls. C) they represent falsification of accounting records. D) they represent disclosure of information related to issuance of a "going-concern" opinion.
B
The Public Company Accounting Oversight Board states that reasonable assurance allows a: A) small likelihood of ineffective internal controls. B) remote likelihood that material misstatements will not be prevented or detected by internal control. C) 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
B
The auditor's consideration of a private company's internal control is: A) required by GAAP. B) required by GAAS. C) required by the IRS. D) recommended by the SEC.
B
The auditor's 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
The person responsible for reconciling sales invoices to customer orders does not access to the company's master price list in order to correctly compute sales. This is an example of a(n): A) operating deficiency. B) design deficiency. C) training deficiency. D) management deficiency
B
When auditing a private company, the auditor should obtain an understanding of internal control sufficient to: A) provide reasonable protection against client fraud and defalcations by client employees. B) assess control risk. C) provide a basis for suggestions to the client for improving the accounting system. D) provide a method for safeguarding assets, checking the accuracy and reliability of accounting data, promoting operational efficiency, and encouraging adherence to prescribed managerial policies.
B
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
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 deal with ongoing or periodic assessment of the quality of internal control by management? A) Quality monitoring activities B) Monitoring activities C) Oversight activities D) Management activities
B
Which of the following is most correct for audits of non-public companies? A) an audit of internal control is required B) an audit of internal control is not required C) an audit of the design of internal controls is required D) an audit of the operational effectiveness of internal controls is required
B
Which of the following statements is most correct with respect to separation of duties? A) Employees should not have temporary and permanent custody of assets. B) Employees who authorize transactions should not have custody of related assets. C) It is permissible to allow an employee to open cash receipts and record those receipts. D) Employees who authorize transactions should have recording responsibility for these transactions.
B
You are performing the audit of internal control for Clifton Company. Which of the following would represent a material weakness in internal control? A) The company's audit committee has experienced unusual turnover of members. B) The company's CFO was indicted for embezzling from the company. C) Bank reconciliations are done monthly. D) The CEO was forced to resign due to an inappropriate relationship with an outside vendor.
B
After considering a client's internal controls, an auditor has concluded that it is well designed and is functioning as intended. Under these circumstances the auditor would most likely: A) perform tests of controls to the extent outlined in the audit program. B) determine the control procedures that should prevent or detect errors and irregularities. C) not increase the extent of predetermined substantive tests. D) determine whether transactions are recorded to permit preparation of financial statements in conformity with generally accepted accounting principles.
C
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 implementation of the controls. D) the implementation and efficiency of the controls.
C
Audit evidence regarding the separation of duties is normally best obtained by: A) preparing flowcharts of operational processes. B) preparing narratives of operational processes. C) observation of employees applying control activities. D) inquiries of employees applying control activities.
C
Even with the most effectively designed internal control, the auditor must obtain audit evidence, beyond testing the controls, for every: A) transaction. B) financial statement account. C) material financial statement account. D) financial statement account that will be relied upon by third parties
C
How must significant deficiencies and material weaknesses be communicated to those charged with governance? A) Either oral or written communication is acceptable. B) Oral communication is required. C) Written communication is required. D) Written communication is required for material weaknesses, but oral communication is allowed for significant deficiencies
C
In the audit of a private company, the auditor will test internal controls when control risk is initially assessed at: A) Low Moderate High Yes No Yes B) Low Moderate High No No Yes C) Low Moderate High Yes Yes No D) Low Moderate High No Yes No
C
Management must disclose material weaknesses in internal control in its audit report: A) whenever the weakness is deemed significant to a single class of transactions. B) whenever the weakness is significant to overall financial reporting objectives. C) if the weakness exists at the end of the year. D) only if the auditor identifies the weakness as significant.
C
Significant deficiencies and material weaknesses in internal control of a public company must be reported in writing to which of the following? A) the Public Company Accounting Oversight Board B) members of management who are responsible for the related area of the company C) audit committee of the company's board of directors D) the AICPA
C
The PCAOB places responsibility for the reliability of internal controls over the financial reporting process to: A) the company's board of directors. B) the audit committee of the board of directors. C) the CEO and the CFO. D) the CFO and the Independent Auditors.
C
The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor's study and evaluation of internal control because the: A) audit programs, working papers, and reports of internal auditors can often be used as a substitute for the work of the independent auditor's staff. B) procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control. C) work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures. D) understanding of the internal audit function is an important substantive test to be performed by the independent auditor.
C
To issue a report on internal control over financial reporting for a public company, an auditor must: A) evaluate management's assessment process. B) independently assess the design and operating effectiveness of internal control. C) evaluate management's assessment process and independently assess the design and operating effectiveness of internal control. D) test controls over significant account balances.
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
When planning an audit, the auditor's assessed level of control risk is: A) determined by using actuarial tables. B) calculated by using the audit risk model. C) a judgment issue, based on auditor knowledge. D) calculated by using the formulas provided in the AICPA's auditing standards.
C
When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be: A) tracing. B) vouching. C) performing a walk-through. D) testing controls.
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 deficiency exists if a necessary control is missing or not properly formulated? A) control B) significant C) design D) operating
C
Which of the following groups establishes and maintains the company's internal controls? A) Internal auditors B) Board of Directors C) Management D) Audit committee
C
Which of the following is correct regarding management's documentation of internal controls? A) inadequate documentation is not a control deficiency B) documentation needs to focus on interim controls C) documentation needs to have some focus on controls designed to detect fraud D) documentation should only focus on system design
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
Which of the following may represent the biggest challenge smaller public companies face in implementing effective internal control? A) a lack of expertise B) reduced importance C) limited resources D) limited available guidance
C
A control available in a small company, which may be necessitated because of lack of competent personnel, is: A) a wider segregation of duties. B) a voucher system. C) fewer transactions to process. D) the owner-manager's direct involvement in the control process.
D
An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls. Which of the following would generally NOT be used? A) make inquiries of appropriate client personnel B) examine documents, records, and reports C) reperform client procedures D) inspect design documents
D
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
Hanlon Corp. maintains a large internal audit staff that reports directly to the chief financial officer. 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
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
To promote operational efficiency, the internal audit department would ideally report to: A) line management. B) senior management. C) Chief Accounting Officer. D) audit committee.
D
When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the: A) segregation of incompatible functions is necessary to ascertain that internal control is effective. B) employment of competent personnel provides assurance that the objectives of internal control will be achieved. C) establishment and maintenance of internal control is an important responsibility of the management and not of the auditor. D) concept allows for only a remote likelihood that material misstatements will not be prevented or detected on a timely basis
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 correct with respect to the design and use of business documents? A) Not all documents used for internal purposes need to be prenumbered. B) Documents should be designed for single purposes only to avoid confusion in their use. C) Documents should be designed to be understandable only by those who use them. D) Documents designed for external use must be prenumbered
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
