Auditing - Chapter 7 Smartbook

The major difference between control objectives and management assertions is that control objectives ______.

are broader in scope

Control activities designed to ensure separation of duties may be circumvented by _____ among two or more people.

collusion

In addition to the typical journals, ledgers, and other record-keeping devices, a chart of accounts and manual of accounting policies and procedures should be included in an accounting

information system

The controls that are most relevant to an audit are those that pertain to the ______.

reliability of financial reporting

Internal auditors are representatives of ______.

top management

Match the type of control with its description.

Preventive Aimed at avoiding the occurrence of misstatements Detective Designed to discover misstatements after they have occurred Corrective Needed to remedy a situation after a misstatement is discovered

Due to numerous instances of fraudulent reporting in the 1970s and 1980s, the _____ Commission was formed to study the issue and make recommendations. (Enter only one word per blank.)

Treadway

Exiting an activity that gives rise to a risk is an example of risk

avoidance

Auditors understanding of internal control should include not only the design of controls but also whether they ______.

have been implemented

Risk assessment is management's process for ______.

identifying risks analyzing risks

The risk of misstatement is composed of _____ risk and _____ risk.

inherent, control

This component of internal control assesses the quality of internal control performance over time.

monitoring

Factors that may indicate increased financial reporting risk include ______.

new business models changes in personnel

The Treadway Commission was formed in response to ______.

numerous instances of fraudulent financial reporting

The audit committee ______.

oversees development and performance of the organization's internal control is directly responsible for the CPA firm performing public company audits

One feature of well-designed forms and documents that can be used to control the number of documents issued and account for sequence of documents is ______.

serial numbers

Controls that assess whether other transaction control activities are operating properly and are usually focused on high risk transactions are called ______ controls.

supervisory

The foundation for the other internal control components is ______.

the control environment

When an organization has senior management and a board of directors that establish values and expectations regarding appropriate behavior and lead by example, it is said to have a strong ______.

tone at the top

Which of the following is of particular significance to corporate governance?

control environment

The traditional method of describing internal control is to complete a(n) ______.

internal control questionnaire

Purchasing an insurance policy to protect assets is an example of risk ______.

sharing

Categorize each item as related to either the finance department or the accounting department.

Finance department Under the direction of the treasurer Has custody of liquid assets Plans future cash requirements Conducts financial activities Accounting department Under the direction of the controller Often designs and implements internal control Records financial transactions Establishes accountability over assets

Auditors use their understanding of internal control to do all of the following except ______.

assess detection risk for use in the audit risk model

Accounting estimates are particularly difficult for management to control and often have a high risk of material misstatement because of the ______ estimates.

assumptions needed to make subjective nature of complexity of

Independence from management and proper oversight of the development and performance of the organization's internal control should be demonstrated by the board of directors and its __ committee.

audit

The organizational structure of an organization should separate responsibilities for _____ of transactions, record keeping for transactions and _____ of assets.

authorization, custody

Match the risk response with its description.

avoidance exiting the activity that gives rise to the risk reduction managing the risk or adding additional controls to process it sharing insurance, hedging, and outsourcing acceptance taking no action

Internal auditors monitor ______.

departments branches management

The three categories of objectives of internal control are reporting,

operations and compliance

The Foreign Corrupt Practices Act was passed to ______.

prevent payments of bribes and kick-backs to officials in foreign businesses require organizations to maintain an effective system of internal control

Proper segregation of duties should be applied to ______.

departments and individuals

Specific authorization occurs when transactions are authorized on an individual basis while _____ authorization occurs when management establishes criteria for acceptance of a certain type of transaction.

general

The fact that internal control weaknesses are not identified as prominently as in questionnaires is a possible disadvantage of system

flowcharts

In making a judgment about the extent of the understanding of _____ _____ necessary, auditors should realize the information will be used to identify types of potential misstatements and consider factors that affect the risks of material misstatement.

internal controls

Internal control is a process designed to provide ______ assurance regarding the achievement of objectives relating to operations, reporting, and compliance.

reasonable

All organizations under the jurisdiction of the SEC are required to maintain a system of internal control that will provide certain reasonable assurances under The ______.

Foreign Corrupt Practices Act

Match the major transaction cycle with its description of processes, procedures, and policies.

Revenue cycle Obtaining orders from customers, approving credit, shipping merchandise, billing customers, and collecting payment. Acquisition cycle Initiating purchases of inventory, placing purchase order, receiving goods, authorizing, and making payment to vendors. Conversion cycle Storing materials, placing materials into production, assigning production costs to inventories, and accounting for cost of goods sold. Payroll cycle Hiring, terminating, and determining pay rates; timekeeping, computing payroll, maintaining payroll records, and preparing and distributing paychecks. Financing cycle Authorizing, executing, and recording transactions involving bank loans, leases, bonds payable, and capital stock.

While obtaining an understanding of the other control components, auditors generally obtain some knowledge about the client's control

activities

For the control environment component, professional standards require auditors should obtain sufficient knowledge about the company's ______.

antifraud program

Controls over the authorization and processing of payroll are

application

Components included in the 2017 enterprise risk management framework include governance and _____; _____ and objective-setting; and _____.

culture, strategy, performance

The company has one control that requires reconciliations of bank statements and another that requires all cash disbursements to be authorized. This is an example of ______ controls.

complementary

Match the control term with its description.

complementary Controls that function together to achieve the same control objective redundant Controls that address the same financial statement assertion or control objective compensating Control that reduces the risk that an existing or potential control weakness will result in a misstatement

While obtaining an understanding of the other control components, auditors generally obtain some knowledge about the client's ______.

control activities

The basic principles of the control environment include all of the following except a(n) ______.

effective risk assessment process

True or false: The COSO definition of internal control emphasizes that internal control is an end in and of itself.

false

True or false: The auditors should obtain an understanding of the client's processes for eliminating business risks.

false

True or false: The division of responsibilities between finance and accounting illustrates how accounting is involved in the financial operations of the business but separated from the custody of assets.

false

True or false: To assist auditors with describing internal control in their working papers, auditors typically perform a walk-through of one or two transactions.

false

The goal of segregation of duties is not to allow an individual to have _____ duties.

incompatible

The three categories of objectives of _____ (internal/external) control are reporting, operations, and compliance.

internal

For a corporation, the major components of corporate governance include all of the following except ______.

management of the company

An accounting information system should ______.

measure the proper value of transactions ensure transactions are recorded in the proper time period identify and record all valid transactions

Segregation of duties is a ______ control.

preventive

COSO's definition of internal control emphasizes that it is a(n) ______ or a means to an end.

process

Which of the following is NOT one of the components of the 2017 risk management framework?

profitability

A well-designed organizational structure ______.

provides a basis for planning, directing, and controlling operations ensures appropriate segregation of duties

The acceptable level of variation in performance relative to the achievement of objectives is called ______.

risk tolerance

All of the following are examples of control activities except ______.

tone at the top

True or false: When obtaining an understanding of the control environment, it is important that auditors focus on the substance of controls, rather than their form.

true