7 Internal Control

Question 1

The control environment

Answer 1

reflects the overall attitude, awareness and actions of those charged with governance concerning the importance of control and its emphasis in the entity

Question 2

Proper segregation of duties reduces

Answer 2

the opportunities for any individual to both perpetrate and conceal errors or fraud.

Question 3

Management’s emphasis on meeting projected profit goals would significantly influence an entity’s control environment when

Answer 3

a significant portion of management compensation is represented by stock options, because management would then have a personal interest that might be at odds with accurate financial reporting

Question 4

he control environment element of an entity’s internal control relates to

Answer 4

the tone of the organization, which includes human resource policies and practices.

Question 5

An auditor uses the knowledge provided by the understanding of internal control and the final assessed risk of material misstatement primarily to determine the nature, timing, and extent of

Answer 5

the substantive tests to be performed.

Question 6

The ultimate purpose of assessing control risk

Answer 6

to contribute to the auditor’s evaluation of the risk that material misstatements exist in the financial statements

Question 7

In obtaining an understanding of an entity’s internal control, an auditor is required to obtain knowledge about the:
Operating effectiveness of controls

Design of controls

Answer 7

No - Yes.

In obtaining an understanding of an entity’s internal control, an auditor is required to obtain knowledge about the design of controls and whether they have been implemented.

The auditor is not required to obtain knowledge about the “operating effectiveness of controls” as part of obtaining an understanding of internal control.

Question 8

Internal control includes

Answer 8

Control Environment

Risk Assessment

Information and Communication Systems

Monitoring

Existing Control Activities

Question 9

The entity’s management is responsible for

Answer 9

establishing, maintaining, and monitoring the entity’s internal controls, considering whether those controls are operating as intended, and modifying controls as conditions change.

Question 10

Internal control is relevant to

Answer 10

the entity, its operating units, and its business functions

Question 11

An understanding of internal control relevant to

Answer 11

An understanding of internal control relevant to an entity’s financial reporting objective

Question 12

An auditor’s primary consideration in evaluating controls

Answer 12

specific controls affect financial statement assertions, since ultimately the auditor must render an opinion on whether those assertions are fairly stated.

Question 13

In obtaining an understanding of a manufacturing entity’s internal control concerning inventory balances, an auditor would most likely

Answer 13

review the entity’s descriptions of inventory controls.

Question 14

Inherent limitations in internal controls are

Answer 14

limitations that exist despite implementation of appropriate controls

faulty human judgment

Question 15

The auditor’s ultimate purpose of assessing control risk is

Answer 15

evaluate the risk of financial statement misstatement

Question 16

herent limitations of internal control include

Answer 16

collusion, human error, and management override

Question 17

In every audit, the auditor should obtain a sufficient understanding of the

Answer 17

design of relevant internal controls pertaining to financial reporting in each of the five internal control components.

Question 18

Knowledge about the design and implementation of relevant internal controls should be used to

Answer 18

identify types of misstatements that could occur

Question 19

An advantage of using systems flowcharts

Answer 19

internal information is that flowcharts provide a visual depiction of clients’ activities

Question 20

Automated controls are more suitable than manual controls where

Answer 20

transactions are high-volume and recurring.

Question 21

hen a service organization provides services that affect the initiation, execution, processing, or reporting of a user company’s transactions, those services are considered to be part of the

Answer 21

Considered to be part of the user company’s information system.

Question 22

When evaluating a client’s internal controls, the auditor must first obtain an understanding of the design of the controls and then determine if the controls have been

Answer 22

Implemented

Question 23

The best compensating control for the lack of segregation of duties in smaller organizations

Answer 23

more mgt oversight

Question 24

The COSO framework for internal control consists of five interrelated components

Answer 24

C
R
I
M
E

Question 25

an auditor would most likely perform

Answer 25

risk-assessment procedures to evaluate the design of relevant controls when obtaining an initial understanding of internal control sufficient to assess the risk of material misstatement of the financial statements.

Question 26

e classes of transactions in the issuer’s operations that are significant to the issuer’s financial statements are typically assessed when

Answer 26

the auditor is obtaining an understanding of the information and communication component of internal control.