Multiple Choice- Ch. 12
What type of report is issued when one or more material internal control weaknesses exist? A) unqualified opinion B) disclaimer of opinion C) adverse opinion D) qualified opinion
Answer: C
Which type of evidence is not used by the auditor to obtain an understanding of the design and implementation of internal control? A) inquiry B) observation C) confirmation D) inspection
Answer: C
A(n) ________ control is a control elsewhere in the system that offsets the absence of a key control. A) significant B) alternate C) design D) compensating
Answer: D
An auditor will use the test data approach to obtain certain assurances with respect to the 1. Input data 2. Machine capacity 3. Procedures contained within the program 4. Degree of data entry accuracy
Answer: 3
Before processing, the system validates the sequence of items to identify any break in sequence of input documents. This automated control is primarily designed to ensure the 1. accuracy of input 2. authorization of data entry 3. completeness of input 4. restriction of duplicate entries
Answer: 3
Which of the following is an example of an operation deficiency in internal control? 1. The company does not have a code of conduct for employees to consider 2. The cashier has online ability to post write-offs to A/R accounts 3. Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of misstatements that could occur in those accounts 4. Management does not have a process to identify and assess risks on a recurring basis
Answer: 3
An auditor uses assessed control risk to 1. evaluate the effectiveness of the entity's internal controls 2. identify transactions and account balances where inherent risk is at the maximum 3. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high 4. determine the acceptable level of detection risk for financial statement assertions
Answer: 4
To determine if significant internal control deficiencies are material weaknesses, they must be evaluated on their A) Likelihood: Y Significance: Y B) Likelihood: N Significance: N C) Likelihood: Y Significance: N D) Likelihood: N Significance: Y
Answer: A
Which of the following is true regarding the auditor's opinion on the effectiveness of internal control? A) The auditor is attesting to the effectiveness of internal controls as of the end of the fiscal year. B) If the client remedies a material weakness before the end of the fiscal year, the auditor must still issue a qualified opinion or a disclaimer of opinion. C) A scope limitation requires the auditor to issues an adverse opinion. D) Section 404 requires that the auditor design the audit to detect all deficiencies in internal control.
Answer: A
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
Answer: B
The auditor designs and performs a combination of tests of controls and substantive procedures to obtain reasonable assurance that the financial statements are fairly stated when control risk A) is assessed above the maximum. B) is assessed below the maximum. C) cannot be assessed. D) none of the above
Answer: B
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.
Answer: C
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
Answer: D
When determining what type of report to issue on internal control under Section 404, A) an adverse opinion on internal control must be given if any weaknesses in a key internal control is discovered. B) a scope limitation requires the auditor to disclaim an opinion on internal controls. C) if the auditor gives a qualified opinion on the financial statements, they must give a qualified opinion on internal controls. D) a scope limitation requires the auditor to express a qualified opinion or a disclaimer of opinion on internal controls.
Answer: D
The auditor assesses control risk for each related audit objective and supports control risk assessments with tests of controls.
Answer: True
When assessing control risk, A) many auditors use actuarial tables to assist in the control risk assessment process. B) each control can be used to satisfy only one audit objective. C) many auditors use a control risk matrix to assist in the control risk assessment process. D) all controls, including key controls, should be considered.
Answer: C
In the audit of a private company, the auditor will test internal controls when control risk is initially assessed at A) Low: Y Moderate: N High: Y B) Low: N Moderate: N High: Y C) Low: Y Moderate: Y High: N D) Low: N Moderate: Y High: N
Answer: C
The auditor will issue an unqualified opinion on internal control over financial reporting when A) there are no identified material weaknesses as of the end of the fiscal year. B) there have been no restrictions on the scope of the auditor's work. C) both a and b D) either a or b
Answer: 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 walkthrough. D) testing controls.
Answer: C
Which deficiency exists if a necessary control is missing or not properly implemented? A) control B) significant C) design D) operating
Answer: C
Which of the following computer-assisted auditing techniques inserts an audit module in the client's application system to identify specific types of transactions? A) parallel simulation testing B) test data approach C) embedded audit module D) generalized audit software testing
Answer: C
Which of the following may represent the biggest challenge smaller public companies and nonpublic companies face in implementing effective internal control? A) a lack of competent, trustworthy personnel B) no clear lines of authority C) no adequate separation of duties D) a lack of adequate documents and records
Answer: C
Auditors often identify less significant internal control-related issues, as well as opportunities for the client to make operational improvements in the A) adverse opinion. B) Section 404 report. C) management letter. D) Type 1 report.
Answer: C
In which of the following scenarios would an auditor most likely increase tests of controls? 1. When the client's IT system is extensively integrated throughout the company's accounting system 2. When the client's accounting system is largely based on manual processes 3. When the auditor has decided not to rely on internal controls and instead elects to increase substantive testing 4. When the auditor's assessment of inherent risk is low
Answer: 1
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.
Answer: A
A material weakness in internal control represents a control deficiency that 1. more than remotely adversely affects a company's ability to initiate, authorize, record, process, or report external financial statements reliably 2. results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements 3. exists because a necessary control is missing or not properly designed 4. reduces the efficiency and effectiveness of the entity's operations
Answer: 2
Jefferson, CPA, has identified five significant deficiencies in internal control during the audit of Portico Industries, a nonpublic company. Two of these conditions are considered to be material weaknesses. Which best describes Jefferson's communication requirements? 1. Communicate the two material weaknesses to Portico's management and those charged with governance, but not the three significant deficiencies that are not material weaknesses. 2. Communicate all five significant deficiencies to Portico's management and those charged with governance, distinguishing between material weaknesses and significant deficiencies 3. Communicate all five significant deficiencies to Portico's management and those charge with governance, but only require a management response with respect to two material weaknesses 4. Communicate all five significant deficiencies to Portico's management and those charged with governance, without distinction among the deficiencies.
Answer: 2
The auditor's tests of controls revealed that required approvals of cash disbursements were absent for a large number of sample transactions examined. Which of the following is least likely to be the appropriate auditor response? 1. The auditor will communicate the deficiency to those charged with governance 2. The auditor will increase the planned detection risk 3. The auditor will not select more sample items to audit 4. The auditor will perform more extensive substantive tests surrounding cash disbursements
Answer: 2
As general IT control weaken, the auditor is most likely to... 1. reduce testing of automated application controls done by the computer 2. increase testing of general IT controls to conclude whether they are operating effectively 3. expand testing of automated application controls used to reduce control risk to cover greater portions of the fiscal year under audit 4. ignore obtaining knowledge about the design of general IT controls and whether they have been implemented
Answer: 3
An auditor of a large public company identifies a material weakness in internal control. The auditor 1. will be unable to issue an unqualified opinion on the financial statements 2. must issue a qualified or disclaimer of opinion on internal control over financial reporting 3. may still be able to issue an unqualified opinion on internal control over financial reporting 4. must issue an adverse opinion on internal control over financial reporting
Answer: 4
During the planning stage of an audit, the auditor initially assessed both inherent risk and control risk at a high level. Further testing of the client's internal controls led the auditor to reduce the assessment of control risk. Which of the following will most likely occur as a result? 1. The auditor may reduce the assessment of inherent risk to match the control risk, since they were assess at the same level during the initial planning 2. The auditor may decrease the allowed level of detection risk 3. The auditor may rely solely on analytical procedures, with no substantive procedures performed 4. The auditor may reduce the amount of substantive procedures performed
Answer: 4
On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level that is substantially the same as the planned audit risk level, the auditor will... 1. Increase inherent risk 2. Increase materiality levels 3. Decrease substantive testing 4. Decrease planned detection risk
Answer: 4
Auditing by testing automated internal controls and account balances electronically, generally because effective general controls exist, is known as A) auditing through the computer. B) auditing around the computer. C) embedded audit module approach. D) parallel simulation testing.
Answer: A
Before making the final assessment of internal control at the end of an audit, the auditor must A) Test controls: Y Perform substantive tests: Y B) Test controls: N Perform substantive tests: N C) Test controls: Y Perform substantive tests: N D) Test controls: N Perform substantive tests: Y
Answer: A
For financial statement audits, auditors need to understand controls that are relevant to the audit in order to A) identify and assess the risks of material misstatements. B) perform preliminary analytical procedures. C) detect fraud. D) assess inherent risk.
Answer: 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 express their opinion on the company's internal control system.
Answer: A
Tests of controls A) are the procedures used to test the effectiveness of controls in support of a reduced assessed control risk. B) are used to support the ending balances in the balance sheet and income statement accounts. C) are performed at the end of the audit. D) are designed to detect fraud.
Answer: A
The auditor should identify and include only ________ controls since they will be sufficient to achieve the transaction-related audit objectives and will also provide audit efficiency. A) key B) significant C) material D) compensating
Answer: A
The auditor's objective in determining whether the client's computer program correctly processes valid and invalid transactions is accomplished through the A) test data approach. B) generalized audit software approach. C) microcomputer-aided auditing approach. D) generally accepted auditing standards.
Answer: 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 A) constitute a deficiency in operation of internal controls. B) constitute a deficiency in design of internal controls. C) constitute a deficiency of management. D) not constitute a deficiency.
Answer: A
When assessing whether the financial statements are auditable, the auditor must consider A) that the integrity of management and the adequacy of accounting records are the two primary factors determining auditability. B) that the integrity of management and the adequacy of risk management are the two primary factors determining auditability. C) that if all of the transaction information is available only in electronic form without a visible audit trail, the company cannot be audited. D) the control risk before determining if the entity is auditable.
Answer: A
When using the test data approach, A) test data should include data that the client's system should accept or reject. B) application programs tested by the auditor's test data must be different from those used by the client throughout the year. C) select data may remain in the client system after testing. D) None of the above statements is correct.
Answer: A
Which of the following best describes the test data approach? A) Auditors process their own test data using the client's computer system and application program. B) Auditors process their own test data using their own computers that simulate the client's computer system. C) Auditors use auditor-controlled software to do the same operations that the client's software does, using the same data files. D) Auditors use client-controlled software to do the same operations that the client's software does, using auditor created data files.
Answer: A
Which of the following is a correct statement? A) The auditor uses the control risk assessment and results of tests of controls to determine planned detection risk. B) The auditor links the inherent risk assessments to the balance-related audit objectives. C) The audit risk model is used determine the level of audit risk. D) All of the above are correct statements.
Answer: 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.
Answer: A
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.
Answer: B
When a client uses a service center for processing transactions, A) the auditor can assume that the controls are adequate because it is an independent enterprise. B) auditing standards require the auditor to test the service center's controls if the service center application involves processing significant financial data. C) and the user auditor decides to rely on the service auditor's report, the user audit must make reference to the report of the service auditor in the opinion on the user organization's financial statements. D) none of the above
Answer: B
When dealing with the documentation of internal control, A) in a narrative, most questions simply require a "yes" or "no" response. B) questionnaires offer useful checklists to remind the auditor of the many different types of internal controls that should exist. C) questionnaires and flowcharts should not be used together. D) flowcharts fail to show the segregation of duties in the company.
Answer: B
When making a preliminary assessment of control risk, the starting point for most auditors is A) IT assessment controls. B) assessment of entity level controls. C) transaction-related controls. D) fraud controls.
Answer: B
When using the test data approach, A) auditors process test data supplied by the client. B) auditors often obtain assistance from a computer audit specialist. C) the tests must be performed at the end of the year. D) the test data must remain in the client's records.
Answer: B
Which of the following is an accurate statement relating to the extent of procedures? A) If an auditor wants a lower assessed control risk than the preliminary assessed control risk, the number of controls tested increases while the extent of the tests for each control decrease. B) The extent of testing depends on the frequency of the operation of the controls. C) All controls must be tested only at year-end. D) The frequency of testing is the same for both manual and computer controls.
Answer: 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.
Answer: B
Which of the following is not seen as an advantage to using generalized audit software (GAS)? A) Auditors can learn the software in a short period of time. B) It can be applied to a variety of clients after detailed customization. C) It can be applied to a variety of clients with minimal adjustments to the software. D) It greatly accelerates audit testing over manual procedures.
Answer: 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 retired after twenty years of service to the company.
Answer: B
A ________ exists if one or more control deficiencies exist that are less severe than a material weakness, but are important enough to merit attention by those responsible for oversight of the company's financial reporting. A) potential misstatement B) significant weakness C) significant deficiency D) fraud symptom
Answer: C
An auditor traces the sales prices to the authorized price list in effect at the date of the transaction. Which of the following procedures has the auditor performed? A) inquiry B) observation C) reperformance D) examination
Answer: C
Which of the following represents a correct statement regarding internal control testing? A) When auditors plan to use evidence about the operating effectiveness of internal control contained in prior audits, auditing standards require tests of the controls' effectiveness at least every other year. B) The greater the risk, the less audit evidence the auditor should obtain that controls are operating effectively. C) The auditor uses control risk assessment and results of tests of controls to determine planned detection risk and the related substantive tests for the financial statement audit. D) Testing of internal controls can only be performed by the auditor at the end of the fiscal year.
Answer: C
A five-step approach can be used to identify deficiencies, significant deficiencies, and material weaknesses. The first step in this approach is A) identify the absence of key controls. B) consider the possibility of compensating controls. C) determine potential misstatements that could result. D) identify existing controls.
Answer: D
It is generally possible for small companies to have all of the following except for A) adequate documents and records. B) physical controls over assets. C) competent, trustworthy personnel. D) internal auditors.
Answer: D
When identifying audit objectives and existing controls, A) audit objectives are identified for classes of transactions, account balances, and presentation and disclosure. B) the auditor identifies controls to satisfy each objective. C) it is helpful for the auditor to use the five control activities as reminders of controls. D) all of the above
Answer: D
When testing manual or automated controls, A) automated controls are always subject to random error or manipulation. B) automated controls cannot be altered by making a change to the software application. C) when there are effective general controls and automated application controls, the auditor will need to select a larger sample size of transactions to verify. D) the extent of testing depends on whether it is a manual or automated control.
Answer: D
Which of the following is true regarding the relationship between tests of controls and procedures to obtain an understanding? A) In obtaining an understanding of internal control, the procedures to obtain an understanding are applied to all controls identified during that phase. B) Tests of controls are applied only when the assessed control risk has not been satisfied by the procedures to obtain an understanding. C) Procedures to obtain an understanding are performed only on one or a few transactions. D) All of the above are correct.
Answer: D
