Ch. 5 HW Flashcards
1
Q
- The primary reason for conducting an evaluation of a company’s internal control is to provide a basis for communicating significant
deficiencies.
True
False
A
False
2
Q
- The audit task of control risk assessment involves finding out what the company does to prevent, detect, and correct errors and fraud.
True
False
A
True
3
Q
- The audit team is responsible for the client’s internal control.
True
False
A
False
4
Q
- The attitudes of managers and directors are probably the most pervasive influences on the control environment.
True
False
A
True
5
Q
- The most important feature of an internal control system is the people who make the system work.
True
False
A
True
6
Q
- A control activity is an action taken to prevent, detect, and correct errors and frauds in transactions.
True
False
A
True
7
Q
- The COSO report indicates that internal control should be considered a process, not an end in itself.
True
False
A
True
8
Q
- 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
A
False
9
Q
- The primary reason to evaluate internal control is to formulate constructive suggestions for improvement.
True
False
A
False
10
Q
- The most efficient means of gathering evidence about a client’s internal control is to prepare a flowchart of the system.
True
False
A
False
11
Q
- 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
A
True
12
Q
- 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
A
True
13
Q
- 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
A
False
14
Q
- Auditors perform tests of control activities to determine how the company’s controls actually functioned during the period under audit.
True
False
A
True
15
Q
- Control systems generally provide absolute assurance that the objectives of internal control are satisfied.
True
False
A
False
16
Q
- Dual-purpose audit tests are procedures that produce both control and substantive evidence.
True
False
A
True
17
Q
- The key person in the internal control system of a small business is the independent auditor.
True
False
A
False
18
Q
- Evaluation of internal control systems of a nonpublic entity should not be subject to cost-benefit considerations.
True
False
A
False
19
Q
- Tests of controls consist of procedures designed to produce evidence of how effectively the client’s controls work in practice.
True
False
A
True
20
Q
- Auditors can stop the assessment of control risk for nonpublic entities for either effectiveness or efficiency reasons.
True
False
A
True
21
Q
- PCAOB Auditing Standard No. 5 only applies to public companies.
True
False
A
True
22
Q
- The auditor’s opinion on internal control under AS 5 relates only to controls existing at the end of the year.
True
False
A
True
23
Q
- 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
A
False
24
Q
- 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.
A
D. Maximization of profit.
25
Q
- 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.
A
A. Process for recording transactions and preparing financial statements.
26
Q
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.
A
D. Assessment of control risk.
27
Q
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.
A
C. Control activity.
28
Q
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.
A
D. Completeness.
29
Q
- 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.
A
D. A substantive testing audit plan.
30
Q
- 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.
A
D. Use an internal control questionnaire.
31
Q
31. The five internal control components do not include A. Control activities. B. Monitoring. C. Control risk. D. Risk assessment.
A
C. Control risk.
32
Q
- 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.
A
A. Could adversely affect the organization’s ability to initiate, record, process, and report financial data in the financial statements.
33
Q
- 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.
A
B. Test all internal controls in the company.
34
Q
- 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.
A
Assertion: Valuation
Error or Fraud: Unauthorized transactions are executed and recorded
35
Q
- 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.
A
Assertion: Completeness
Error or Fraud: Valid transactions are omitted from the accounts
36
Q
- 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.
A
Assertion: Occurrence
Fraud or Error: Invalid transactions are recorded
37
Q
- 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.
A
Assertion: Accuracy
Error or Fraud: Transaction amounts are inaccurate
38
Q
- 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.
A
Assertion: Classification
Error or Fraud: Transaction accounting is incomplete
