Audit Chapter 7

The report of a service auditor may provide assurance on whether: Controls are implemented Operating effectiveness of controls A. Yes Yes B. Yes No C. No Yes D. No No

A

Which of the following would least likely be included in an auditor's tests of controls? Inspection. Observation. Inquiry. Analytical procedures.

Analytical procedures.

The Sarbanes-Oxley Act of 2002 requires that the audit committee: Annually reassess control risk using information from the CPA firm. Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm. Require that the company's CPA firm rotate the partner in charge of the audit. Review the level of management compensation.

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

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

C

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: Foreign Corrupt Practices Corporation. Committee of Sponsoring Organizations. Cohen Commission. Financial Accounting Standards Board.

Committee of Sponsoring Organizations.

If the external auditors decide that the work performed by the internal auditors may be used, they should consider the internal auditors': Competence, objectivity, and approach. Efficiency and experience. Independence and review skills. Training and supervisory skills.

Competence, objectivity, and approach.

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. Material weakness. Reportable condition. Significant deficiency.

Control deficiency.

During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to: Assess inherent risk. Design further audit procedures. Assess compliance with the Foreign Corrupt Practices Act. Provide a reasonable basis for an opinion on compliance with applicable laws.

Design further audit procedures.

Which of the following would be least likely to be considered an objective of internal control? Checking the accuracy and reliability of accounting data. Detecting management fraud. Encouraging adherence to managerial policies. Safeguarding assets.

Detecting management fraud.

Which of the following would be least likely to be considered a benefit of effective internal control? Enhancing profitability. Restricting access to assets. Detecting ineffectiveness. Ensuring authorization of transactions.

Enhancing profitability.

An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and: Compliance with laws. Internal control over asset safeguarding. Internal control over financial reporting. Suitable criteria.

Internal control over financial reporting.

An entity's ongoing monitoring activities often include: Periodic audits by internal auditors. The audit of the annual financial statements. Approval of cash disbursements. Management review of weekly performance reports.

Management review of weekly performance reports.

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. Reduces the company's need to obtain expensive business interruption insurance. Allows the company to substitute the fidelity bonds for various parts of internal control. Protects employees who made unintentional errors from possible monetary damages resulting from such errors.

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: Management cannot override the system. Operational efficiency has been achieved in accordance with management plans. Misstatements have been prevented or detected. Controls have not been circumvented by collusion.

Misstatements have been prevented or detected.

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)? Previous experience with the entity. Inquiries of appropriate management personnel. Performance of substantive procedures. Inspection of document and records.

Performance of substantive procedures.

At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness? More than remote. Probable. Reasonable possibility. Sufficient.

Reasonable possibility.

Which of the following is not a component of the control environment? Integrity and ethical values. Risk assessment. Commitment to attracting, developing, and retaining competent employees. Organizational structure.

Risk assessment.

When a client uses a service organization to process certain transactions (e.g., its employee benefit plan), the auditor is least likely to obtain an understanding relating to these transactions by Contacting the service organization to obtain specific information. Visiting the service organization and performing procedures. Sending a confirmation request to the service organization. Obtaining and reading a Type 1 or Type 2 report from the service organization.

Sending a confirmation request to the service organization.

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

Signing payroll checks.

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

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

All material weaknesses in internal control must be reported to the audit committee in writing.

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

Approving credit.

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? Monthly. Each audit. At least every second audit. At least every third audit.

At least every third audit.

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? Checklist. Confirmation. Flowchart. Questionnaire.

Confirmation.

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? Checklist. Flowchart. Questionnaire. Confirmation.

Confirmation.

Which of the following is least likely to be evidence of operating effectiveness of controls? Cancelled supporting documents. Confirmations of accounts receivable. Records documenting usage of computer programs. Signatures on authorization forms.

Confirmations of accounts receivable.

When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA's procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should: Consider the organizational level to which the internal auditors report the results of their work. Review the internal auditors' work. Consider the qualifications of the internal audit staff. Review the training program in effect for the internal audit staff.

Consider the organizational level to which the internal auditors report the results of their work.

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

D

When obtaining an understanding of internal control relevant to planning of a financial statement audit, the auditor should obtain adequate knowledge about the _____. Design of controls. Controls related to audit engagement assessment. Operating effectiveness of all controls. Safeguards over realization transactions.

Design of controls.

A service auditor's report on a service center should include a(n) Detailed description of the service center's internal control. Statement that the user of the report may assess control risk at the minimum level. Indication that no assurance is provided. Opinion on the operating effectiveness of the service center's internal control.

Detailed description of the service center's internal control.

The program flowcharting symbol representing a decision is a: Triangle. Circle. Rectangle. Diamond.

Diamond.

Applying a data analytical approach to tests of controls is least likely to result in which of the following? Testing a number of control simultaneously electronically. Documenting the engagement through an electronic representation letter obtained monthly. Testing all incidents of operation of a control during the year. Following up sample results with an analysis of the entire population.

Documenting the engagement through an electronic representation letter obtained monthly.

Which of the following is not an advantage of establishing an enterprise risk management system within an organization? Reduces operational surprises. Provides integrated responses to multiple risks. Eliminates all risks. Identifies opportunities.

Eliminates all risks.

controls are not designed to provide assurance that: Transactions are executed in accordance with management's authorization. Fraud will be eliminated. Access to assets is permitted only in accordance with management's authorization. The recorded accountability for assets is compared with the existing assets at reasonable intervals.

Fraud will be eliminated.

Tests of controls do not address: How controls were applied. How controls were originated. The consistency with which controls were applied. By what means the controls were applied.

How controls were originated.

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

Human judgment in the decision making process.

Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)? Its applicability is largely limited to internal auditing applications. It is a 'process' effected by individuals. It emphasizes the effectiveness and efficiency of operations over the reliability of financial reporting. 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.

It is a 'process' effected by individuals.

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with _____. Knowledge necessary to assess the risks of material misstatements. Evidence to use to assess inherent risk. A basis for modifying tests of controls. An evaluation of the consistency of application of management's policies.

Knowledge necessary to assess the risks of material misstatements.

A material weakness involves an amount that could result in a misstatement that is: Smaller than inconsequential. Larger than inconsequential. Tolerable. Material.

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? Zero. Low. Moderate. Maximum.

Maximum.

Which of the following statements regarding auditor documentation of the client's internal control is correct? Documentation must include flowcharts. Documentation must include procedural write-ups. No documentation is necessary, although it is desirable. No one particular form of documentation is necessary, and the extent of documentation may vary.

No one particular form of documentation is necessary, and the extent of documentation may vary.

Which of the following is least likely to be a test of controls? Inquiries of client personnel. Inspection of documents. Observation of confirmations. Reperformance of controls.

Observation of confirmations.

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

Observation of the counting of inventory.

Which of the following is a likely approach for testing the segregation of duties? Personal inquiry and confirmation. Counting variations of performance. Analytical procedures. Observing employee performance of processes.

Observing employee performance of processes.

Tests of controls ordinarily are designed to provide evidence of: Balance correctness. Control implementation. Disclosure adequacy. Operating effectiveness.

Operating effectiveness.

The effectiveness of controls is not generally tested by: Inspection of documents and reports. Performance of analytical procedures. Observation of the application of accounting policies and procedures. Inquiries of appropriate client personnel.

Performance of analytical procedures.

Which of the following is not considered one of the five major components of internal control? Risk assessment. Physical controls. Control activities. Monitoring.

Physical controls.

Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control? Segregation of duties over cash disbursements. Requiring approval of purchase transactions. Preparing bank reconciliations. Maintaining backup copies of key transactions.

Preparing bank reconciliations.

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

Questionnaires highlight weaknesses in the system.

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both: Journalize cash receipts and disbursements and prepare the financial statements. Monitor internal controls and evaluate whether the controls are operating as intended. Adopt new accounting pronouncements and authorize the recording of transactions. Record and conceal fraudulent transactions in the normal course of assigned tasks.

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: Cease to perform further substantive procedures. Reduce substantive procedures in areas where the internal control was found to be effective. Increase the extent of anticipated analytical procedures. Perform all tests of controls to the extent outlined in the preplanned audit plan.

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? All companies. SEC registrants. Only those companies included in the Fortune 500. All nonpublic companies.

SEC registrants.

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? Salaried sales personnel. Implementation of a new information system. Rapid growth of the organization. Corporate restructuring.

Salaried sales personnel.

which of the following must the auditor communicate to the audit committee? Significant deficiencies and material weaknesses. Only significant deficiencies. Only material weaknesses. Neither significant deficiencies nor material weaknesses.

Significant deficiencies and material weaknesses.

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): Control deficiency. Inherent limitation. Reportable deficiency. Significant deficiency.

Significant deficiency.

An auditor may compensate for a weakness in internal control by increasing the extent of: Tests of controls. Detection risk. Substantive tests of details. Inherent risk.

Substantive tests of details.

When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should: Modify their report for any significant deficiencies identified. Use a "bottom-up" approach to identify controls to test. Test controls for all significant accounts. Perform a separate assessment of controls over operations.

Test controls for all significant accounts.

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

Tests of controls designed specifically for the client.

Well-designed internal control that is functioning effectively is most likely to detect a fraud arising from: The fraudulent action of several employees. The fraudulent action of an individual employee. Informal deviations from the official organization chart. Management fraud.

The fraudulent action of an individual employee.

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

The information system.

Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan? 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. Certain controls do not leave a trail of documentary evidence. Deviation rates were greater than zero and approached anticipated levels. The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

The preliminary assessments of control risk are often referred to as: The assessed level of control risk. The planned assessed level of control risk. Control risk. Internal control objectives risk.

The planned assessed level of control risk.

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? Complex calculations are involved. The rate of technological change is moderate in the industry. The potential for fraud seems high. Various subjective methods of application of a key accounting policy exist.

The rate of technological change is moderate in the industry.

The external auditors might consider the procedures performed by the internal auditors because: They are employees whose work must be reviewed during substantive testing. They are employees whose work might affect the external auditors' work. Their work impacts upon the cost/benefit tradeoff in evaluating inherent limitations. Their degree of independence may be inferred by the nature of their work.

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

If the auditors do not perform tests of controls for certain assertions: They have performed a substandard audit. They are not required to communicate significant deficiencies relating to those accounts to management and the board of directors. They must issue a qualified opinion. They must assess control risk at the maximum level for those assertions.

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

which of the following is most likely to be considered a risk assessment procedure relating to internal control? Confirm accounts receivable. Perform a test of a control relating to payroll. Take test counts of the year-end inventory. Trace a transaction through the information system relevant to financial reporting.

Trace a transaction through the information system relevant to financial reporting.

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). Replace tests of controls. Evaluate the major strengths and weaknesses in the client's internal control. Identify weaknesses to be communicated to management in the management letter.

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

The provision of the Foreign Corrupt Practices Act that require implementing an internal control system apply to: All U.S. corporations. All U.S. corporations that engage in foreign operations. All corporations under the jurisdiction of the SEC. All U.S. partnerships and corporations.

All corporations under the jurisdiction of the SEC.

A report on internal control performed in accordance with PCAOB Standard No. 5 includes an opinion on internal control for: The entire year. The prior quarter. The "as-of date." The end of each quarter.

The "as-of date."

On financial statement audits, it is required that the auditors obtain an understanding of internal control, including: Its operating effectiveness. Whether it has been implemented (placed in operation). Performing tests of controls for all material controls. Its ability to provide reasonable assurance.

Whether it has been implemented (placed in operation).

At the completion of the audit, the auditors are least likely to know: The assessed level of control risk. The planned assessed level of control risk. Actual control risk. The scope of tests of controls.

Actual control risk.

The auditors who become aware of an internal control significant deficiency are required to communicate this to the: Client's legal counsel. Compensation committee. Audit committee. Internal auditors.

Audit committee.

to provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the: Financial vice-president. Corporate controller. Audit committee. Corporate stockholders.

Audit committee.

The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of internal and external reporting, the effectiveness and efficiency of operations, and: Compliance with applicable laws and regulations. Effectiveness of prevention of fraudulent occurrences. Safeguarding of entity equity. Incorporation of ethical business practice standards.

Compliance with applicable laws and regulations.

Of the following statements about internal control, which one is not valid? No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. Transactions must be properly authorized before such transactions are processed. Because of the cost/benefit relationship, a client may apply control procedures on a test basis. Control activities ensure all fraud will be eliminated.

Control activities ensure all fraud will be eliminated.

An auditor's purpose for performing tests of controls is to provide reasonable assurance that: Controls are operating effectively. The risk that the auditor may unknowingly fail to modify the opinion on the financial statements is minimized. Transactions are executed in accordance with management's authorization and access to assets is limited by a segregation of functions. Transactions are recorded as necessary to permit the preparation of the financial statements in conformity with generally accepted accounting principles.

Controls are operating effectively.

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

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

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

Counting marketable

Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by: Employment of temporary personnel to aid in the separation of duties. Direct participation by the owner in key record-keeping and control activities of the business. Engaging a CPA to perform monthly write-up work. Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee.

Direct participation by the owner in key record-keeping and control activities of the business.

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

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

When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will: Be less than the preliminary assessed level of control risk. Equal the preliminary assessed level of control risk. Equal the actual control risk. Be less than the actual control risk.

Equal the preliminary assessed level of control risk.

To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except: Establish internal control with no material weakness. Accept responsibility for the effectiveness of internal control. Evaluate the effectiveness of internal control using suitable control criteria. Support the evaluation with sufficient evidence.

Establish internal control with no material weakness.

Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? Management's failure to renegotiate unfavorable long-term purchase commitments. Recurring operating losses that may indicate going concern problems. Evidence of a lack of objectivity by those responsible for accounting decisions. Management's current plans to reduce its ownership equity in the entity.

Evidence of a lack of objectivity by those responsible for accounting decisions.

the major components of internal control include all of the following, except: Risk assessment. The control environment. Internal auditing. Control activities.

Internal auditing.

In assessing the competence of a client's internal auditor, an external auditor most likely would consider the: Internal auditor's compliance with professional internal auditing standards. Client's policies that limit the internal auditor's access to management salary data. Evidence supporting a further reduction in the assessed level of control risk. Results of ratio analysis that may identify unusual transactions and events.

Internal auditor's compliance with professional internal auditing standards.

The scope of substantive procedures as compared to the scope of tests of controls generally vary: In a parallel manner. Inversely. Directly. Equally.

Inversely.

A significant deficiency: Differs from a material weakness in that it involves internal control over operations rather than internal control over financial reporting. Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality. Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting. Is less severe than a material weakness.

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: Additional evidence to support a reduction in the assessed level of control risk is not available. An increase in the assessed level of control risk is justified for certain financial statement assertions. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures. There were many internal control deficiencies that would allow misstatements to enter the accounting system.

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

A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: Knowledge necessary to determine the nature, timing, and extent of further audit procedures. Audit evidence to use in reducing detection risk. A basis for modifying tests of controls. An evaluation of the consistency of application of management policies.

Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

In assessing the objectivity of a client's internal auditors, the CPA would be most likely to consider internal auditor's: Education levels. Experience. Organizational status within the company. Training and supervisory skills.

Organizational status within the company.

In the consideration of internal control, the operating effectiveness of controls is tested by: Flowcharts verification. Tests of controls. Substantive procedures. Decision tables.

Tests of controls.

Which of the following would be least likely to be regarded as a test of a control? Tests of the additions to property by physical inspection. Comparisons of the signatures on cancelled checks to the authorized check signer list. Tests of signatures on purchase orders. Recalculation of payroll deductions.

Tests of the additions to property by physical inspection.

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

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

Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits? 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. 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. When tests of controls have been performed, control risk must be assessed at a level less than the maximum. 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.

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.

Tests of controls are most likely to be performed when: Controls seem weak and must be properly documented. The auditor plans to rely on the controls. The auditor wishes to assess control risk at the maximum. The client's control environment appears weak.

The auditor plans to rely on the controls.

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

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? The auditors must assess control risk at a level lower than the maximum. The auditors must prepare a flowchart description of internal control for their working papers. The auditors must obtain an understanding of the steps in processing major types of transactions. The auditors must perform tests of controls.

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

Tests of controls do not ordinarily address: By whom a control was applied. How a control was applied. The consistency with which a control was applied. The cost effectiveness of the way a control was applied.

The cost effectiveness of the way a control was applied.

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

Use larger sample sizes for substantive procedures.