Ch. 5 HW

Question 1

1. The primary reason for conducting an evaluation of a company’s internal control is to provide a basis for communicating significant
   deficiencies.
   True
   False

Answer 1

False

Question 2

2. The audit task of control risk assessment involves finding out what the company does to prevent, detect, and correct errors and fraud.
   True
   False

Answer 2

True

Question 3

3. The audit team is responsible for the client’s internal control.
   True
   False

Answer 3

False

Question 4

4. The attitudes of managers and directors are probably the most pervasive influences on the control environment.
   True
   False

Answer 4

True

Question 5

5. The most important feature of an internal control system is the people who make the system work.
   True
   False

Answer 5

True

Question 6

6. A control activity is an action taken to prevent, detect, and correct errors and frauds in transactions.
   True
   False

Answer 6

True

Question 7

7. The COSO report indicates that internal control should be considered a process, not an end in itself.
   True
   False

Answer 7

True

Question 8

8. Auditors of public companies do not need to determine the quality of a client’s internal control; they only need to know enough to plan the audit
   work.
   True
   False

Answer 8

False

Question 9

9. The primary reason to evaluate internal control is to formulate constructive suggestions for improvement.
   True
   False

Answer 9

False

Question 10

10. The most efficient means of gathering evidence about a client’s internal control is to prepare a flowchart of the system.
    True
    False

Answer 10

False

Question 11

11. The strengths and weaknesses of a control system should be documented in bridge working papers connecting the control evaluation to
    subsequent audit procedures.
    True
    False

Answer 11

True

Question 12

12. Auditors do not need to perform tests of controls on internal control activities that are evaluated as weak just to prove the weaknesses
    actually exist.
    True
    False

Answer 12

True

Question 13

13. To reduce the final control risk assessment to a low level, auditors need only to determine the required degree of compliance with the control
    policies and procedures.
    True
    False

Answer 13

False

Question 14

14. Auditors perform tests of control activities to determine how the company’s controls actually functioned during the period under audit.
    True
    False

Answer 14

True

Question 15

15. Control systems generally provide absolute assurance that the objectives of internal control are satisfied.
    True
    False

Answer 15

False

Question 16

16. Dual-purpose audit tests are procedures that produce both control and substantive evidence.
    True
    False

Answer 16

True

Question 17

17. The key person in the internal control system of a small business is the independent auditor.
    True
    False

Answer 17

False

Question 18

18. Evaluation of internal control systems of a nonpublic entity should not be subject to cost-benefit considerations.
    True
    False

Answer 18

False

Question 19

19. Tests of controls consist of procedures designed to produce evidence of how effectively the client’s controls work in practice.
    True
    False

Answer 19

True

Question 20

20. Auditors can stop the assessment of control risk for nonpublic entities for either effectiveness or efficiency reasons.
    True
    False

Answer 20

True

Question 21

21. PCAOB Auditing Standard No. 5 only applies to public companies.
    True
    False

Answer 21

True

Question 22

22. The auditor’s opinion on internal control under AS 5 relates only to controls existing at the end of the year.
    True
    False

Answer 22

True

Question 23

23. Auditors should begin their evaluation of internal controls over financial reporting on a bottom-up basis, starting with the account level assertion and working up to entity-level controls.
    True
    False

Answer 23

False

Question 24

24. Which of the following is not one of COSO’s objectives for internal controls?
    A. Efficiency and effectiveness of operations.
    B. Compliance with applicable laws and regulations.
    C. Reliability of financial reporting.
    D. Maximization of profit.

Answer 24

D. Maximization of profit.

Question 25

25. Which of the following is not one of the elements of the control environment?
    A. Process for recording transactions and preparing financial statements.
    B. Presence of an internal auditing function.
    C. A company’s organizational structure.
    D. Methods of assigning authority and responsibility.

Answer 25

A. Process for recording transactions and preparing financial statements.

Question 26

26. Which of the following would not be considered a control activity?
A. Performance reviews.
B. Physical controls.
C. Information processing controls.
D. Assessment of control risk.

Answer 26

D. Assessment of control risk.

Question 27

27. An action taken to prevent, detect, and correct errors and frauds in transactions is referred to as a
A. Dual-purpose test.
B. Control objective.
C. Control activity.
D. Risk assessment.

Answer 27

C. Control activity.

Question 28

28. Accounting for the numerical sequence of shipping documents is a control procedure designed to achieve the internal control objective of
A. Validity.
B. Accounting.
C. Accuracy.
D. Completeness.

Answer 28

D. Completeness.

Question 29

29. Auditors obtain an understanding of the internal control through all of the following except
    A. A walk-through of one or more transactions.
    B. Previous experience with the company.
    C. Responses to inquiries directed to client personnel.
    D. A substantive testing audit plan.

Answer 29

D. A substantive testing audit plan.

Question 30

30. The most efficient means of gathering evidence about the internal control is to conduct a formal interview with knowledgeable managers and
    A. Write a narrative description of each important control.
    B. Prepare a flowchart illustrating the internal control.
    C. Prepare a well-indexed file of audit documentation.
    D. Use an internal control questionnaire.

Answer 30

D. Use an internal control questionnaire.

Question 31

31. The five internal control components do not include
A. Control activities.
B. Monitoring.
C. Control risk.
D. Risk assessment.

Answer 31

C. Control risk.

Question 32

32. Significant deficiencies are defined as conditions that
    A. Could adversely affect the organization’s ability to initiate, record, process, and report financial data in the financial statements.
    B. Relate to either a necessary control that is missing or an existing control that is so poorly designed that it fails to satisfy the control’s objective.
    C. Exist when the design or operation of a control does not allow the company’s management or employees to detect or prevent
    misstatements in a timely fashion.
    D. Result in a reasonable possibility that a material misstatement exists in financial statements.

Answer 32

A. Could adversely affect the organization’s ability to initiate, record, process, and report financial data in the financial statements.

Question 33

33. AS #5 requires the audit team to do all the following except
    A. Evaluate the severity of each control deficiency that comes to his or her attention.
    B. Test all internal controls in the company.
    C. Document the process used to determine significant accounts and disclosures and major classes of transactions.
    D. AS #5 requires all the above.

Answer 33

B. Test all internal controls in the company.

Question 34

34. A. case illustrates specific control activities from a client’s revenue cycle (accounts receivable/sales). For each of the procedures, (a) identify which management assertions apply and (b) what potential category of errors and frauds can be prevented.
    Control Procedure:
    A. Credit sales over $1,000 require prior approval by the credit manager.

Answer 34

Assertion: Valuation

Error or Fraud: Unauthorized transactions are executed and recorded

Question 35

34. B. case illustrates specific control activities from a client’s revenue cycle (accounts receivable/sales). For each of the procedures, (a) identify which management assertions apply and (b) what potential category of errors and frauds can be prevented.
    Control Procedure:
    B. All shipping documents must be prenumbered and matched with sales invoices daily.

Answer 35

Assertion: Completeness

Error or Fraud: Valid transactions are omitted from the accounts

Question 36

34. C. case illustrates specific control activities from a client’s revenue cycle (accounts receivable/sales). For each of the procedures, (a) identify which management assertions apply and (b) what potential category of errors and frauds can be prevented.
    Control Procedure:
    C. Recorded sales must be supported by invoices, shipping documents, and customer orders.

Answer 36

Assertion: Occurrence

Fraud or Error: Invalid transactions are recorded

Question 37

34. D. case illustrates specific control activities from a client’s revenue cycle (accounts receivable/sales). For each of the procedures, (a) identify which management assertions apply and (b) what potential category of errors and frauds can be prevented.
    Control Procedure:
    D. Sales invoices must be reviewed for correct quantities and mathematical accuracy.

Answer 37

Assertion: Accuracy

Error or Fraud: Transaction amounts are inaccurate

Question 38

34. E. case illustrates specific control activities from a client’s revenue cycle (accounts receivable/sales). For each of the procedures, (a) identify which management assertions apply and (b) what potential category of errors and frauds can be prevented.
    Control Procedure:
    E. All sales on credit must be charged to customers’ individual accounts.

Answer 38

Assertion: Classification

Error or Fraud: Transaction accounting is incomplete