Auditing -- Ch. 5 MC

Which internal control documentation method provides the auditor with the best visual understanding of a system and can be used as a means for analyzing complex operations? A) A flowcharting approach. B) A questionnaire approach. C) A matrix approach. D) A detailed narrative approach.

A) A flowcharting approach

An entity's internal control consists of the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved. Only some of these objectives, policies, and procedures are relevant to a financial statement audit. Which one of the following would most likely be considered for testing in a financial statement audit? A) Timely reporting and review of quality control results. B) Maintenance of control over unused checks. C) Marketing analysis of sales generated by advertising projects. D) Maintenance of statistical production analyses.

B) Maintenance of control over unused checks

The primary responsibility for establishing and maintaining internal controls rests with A) The internal auditors. B) Management. C) The Public Company Accounting Oversight Board. D) The external auditors.

B) Management

In addition to gaining an understanding of the internal controls for a private company, an external auditor, at minimum, would be expected to A) Evaluate the internal auditors' work as an important part of the accounting system element of the internal controls. B) Observe client employees to determine the extent of their compliance with quality control standards. C) Document their understanding of the internal control system. D) Study organization charts to obtain an understanding of the informal lines of communication.

C) Document their understanding of the internal control system.

An internal control questionnaire (ICQ) contains the following question: "Does a single individual receive and list cash receipts and perform posting to sales and general ledgers?" What action should an auditor take if the manager of accounting responds "yes" to the question? A) No action is required because "yes" responses on an ICQ indicate the presence of good control. B) Statistically sample the response along with all other "yes" responses to verify their accuracy. C) Treat it as a potential control weakness and perform appropriate testing. D) Include it with other reportable findings in next year's audit report.

C) Treat it as a potential control weakness and perform appropriate testing.

An advantage of an internal control questionnaire is A) Flexibility in design and application. B) Its strict adherence to a yes/no format. C) That it always provides sufficient data for the assessment of control risk. D) Its relative ease of completion.

D) Its relative ease of completion

Internal controls are designed to provide reasonable assurance that A) Management's plans have not been circumvented by worker collusion. B) The internal auditing department's guidance and oversight of management's performance is accomplished effectively and efficiently. C) Management's planning, organizing, and directing processes are properly evaluated. D) Material errors or fraud would be prevented or detected and corrected within a timely period by employees in the course of performing their assigned duties.

D) Material errors or fraud would be prevented or detected and corrected within a timely period by employees in the course of performing their assigned duties.

Which of the following is an inherent limitation of any client's internal control? A) The benefits expected to be derived from effective internal controls usually do not exceed the costs of effective internal controls. B) The competence and integrity of client personnel provide an environment conducive to control and provides assurance that effective control will be achieved. C) Procedures designed to assure the execution and recording of transactions in accordance with proper authorizations are effective against frauds perpetrated by management. D) Procedures whose effectiveness depends on separation of duties can be circumvented by collusion.

D) Procedures whose effectiveness depends on separation of duties can be circumvented by collusion.

An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about A) The efficiency of management's decision making process. B) Appropriate prices the entity should charge for its products. C) Methods of assigning production tasks to employees. D) The entity's ability to process and summarize financial data.

D) The entity's ability to process and summarize financial data.

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

a. Authorization of transactions from the custody of related assets.

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

a. Identify significant accounts, locations, and assertions.

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 a. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance. b. Assess control risk at less than the maximum for all relevant assertions. c. Perform only substantive procedures. d. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting.

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

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

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

A transaction-level internal control activity is best described as a. An action taken by auditors to obtain evidence. b. 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. c. A method for recording, summarizing, and reporting financial information. d. The functioning of the board of directors in support of its audit committee.

b. 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. A narrative memorandum describing the control system. b. An internal control questionnaire. c. A flowchart of the documents and procedures used by the company. d. All of the above.

b. An internal control questionnaire.

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

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

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 a. Determine whether the company's controls are processing company data effectively. b. 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. c. Determine that the company's employees are processing the controls according to the policy and procedures manuals at the company. d. None of the above.

b. 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 a. Provide a basis for making constructive suggestions in a management letter. b. Determine the nature, timing, and extent of further audit tests to be performed. c. Provide the rationale for the inherent risk assessment at the financial statement asser- tion level. d. Provide information for a communication of internal control-related matters to management.

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

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

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

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

b. People who operate the control system.

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

c. Both operating and design effectiveness.

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

c. Confirmation of balances.

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

c. Disclaimer of opinion—significant deficiencies exist.

When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over a. Operations. b. Compliance with regulations. c. Financial reporting. d. All of the above.

c. Financial reporting.

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

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

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

c. 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 sepa- rately from the auditors' report on the entity's financial statements? a. The fact that the auditors conducted an audit of the entity's financial statements. b. The definition of a material weakness in internal control over financial reporting. c. Statements identifying the responsibility of the auditors and management for internal control over financial reporting. d. A reference to the auditors' report and opinion on the entity's financial statements.

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

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

d. All of the above.

When completing the audit of internal controls for an issuer, the severity of an internal con- trol deficiency depends on: a. 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. b. Whether the account has a history of errors. c. The magnitude of the potential misstatement resulting from the deficiency or the deficiencies. d. Both a and c are correct. e. All of the above are correct.

d. Both a and c are correct.

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

d. Both a and c are correct.

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? a. Unqualified opinion or adverse opinion. b. Qualified opinion or adverse opinion. c. Unqualified opinion or disclaimer of opinion. d. Disclaimer of opinion.

d. Disclaimer of opinion.

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

d. 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? a. Evidence of a material misstatement. b. Ineffective oversight by the audit committee. c. Immaterial fraud committed by senior management. d. Overproduction by the manufacturing plant.

d. Overproduction by the manufacturing plant.

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

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

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: a. The frequency of the performance of the control by the company during the period being audited. b. The length of time that the auditor is planning to rely on the operating efficiency of the control activity. c. The expected rate of deviation for a control activity. d. The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity.

d. The relevance and reliability of the audit evidence to be obtained to test the operating effectiveness of a control activity.