chap 11 management and auditor responsibilities for internal control

Question 1

T/F responsibilities for internal controls differ between management and the auditor

Answer 1

T

Question 2

Managements test results for the operating effectiveness of controls must be _____

Answer 2

documented

Question 3

section 404 of the Sarbanes-Oxley Act requires management of all public companies to issue an internal control report that includes what (2)

Answer 3

1. a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting 2. an assessment of the effectiveness of the internal control structure and procedures for financial reporting as of the end of the companys fiscal year

Question 4

why do auditors emphasize internal control over classes of transactions rather than account balances?

Answer 4

because the accuracy of accoung system outputs ( account balances) depends heavily on the accuracy of inputs and processing (transactions)

Question 5

auditors should not ignore controls affecting internal managment info such as ?(2)

Answer 5

1. budgets 2. internal performance reports

Question 6

managment must evaluate whether the controls are designed and put in place to ____ or _____ material misstatements in the FSs

Answer 6

prevent detect

Question 7

management must disclose any _____ weakness in internal control

Answer 7

material

Question 8

what is managment responsible for in regards to internal control? (2)

Answer 8

1. establishing and maintaining the entity’s internal controls 2. publicly reprt on the operating effectiveness of those controls

Question 9

even though auditors emphasize transaction related controls, the auditor must also gain an understanding of controls over what 2 objectives

Answer 9

1. ending account blance objectives 2. presentation and disclosure objectives

Question 10

why is the auditor less concerned with controls that affect the efficiency and effectivenss of company operations?

Answer 10

because such controls may not influence the fair presentation of FSs

Question 11

becaquse of the emphasis on classes of transactions, auditors are primarily concerned with what audit objectives when assessing internal controls over financial reporting?

Answer 11

transaction-related audit objectives

Question 12

to express an opinion on internal controls over financial reporting , the auditor obtains an understanding of and performs tests of controls for all significant what ?(4)

Answer 12

1. account balances 2. classes of transactions 3. disclosures 4. related assertions

Question 13

unlike management , the auditor is less concerned with controls that affect what?

Answer 13

the efficiency and effectivenss of company operations

Question 14

auditors are primarily concerned about what 2 controls?

Answer 14

1. controls over the reliability of financial reporting 2. controls over classes of transactions

Question 15

the SEC requires management to include its report on internal control in its annual form ______ report filed with the SEC

Answer 15

10K

Question 16

a company should develop internal controls that provide ____ assurance that the FSs are fairly stated

Answer 16

reasonable

Question 17

the effectiveness of an ideal control system depends on the ____ and _____ of the people using it

Answer 17

competency dependability

Question 18

what are the 2 testing objectives in testing the operating effectiveness of controls?

Answer 18

1. determine whether the controls are operating as designed 2. determine whether the person performing the control possesses the necessary authority and qualifications to perform the control effectively

Question 19

why do auditors need to gain an understanding of not only transaction related controls but controls over ending account balance and presentation and disclosure objectives?

Answer 19

because transaction related audit objectives typically have no effect on 2 balance related audit objectives and they are unlikely to have an effect on the 4 presentation and disclosure objectives

Question 20

management focus is on controls that address risks related to all relevant ______ for all significant _____ and _____ in the FSs ?

Answer 20

assertions accounts disclosures

Question 21

an act of two or more employees who conspire to steal assets or misstate records is called ______

Answer 21

collusion

Question 22

T/F Management does not have to conclude that the companys internal control over fiancial reporting is not effective if there is only one material weakness

Answer 22

F

Question 23

what are the 2 key concepts that underlie managments design and implemenation of internal control?

Answer 23

1. reasonable assurance 2. inherent limitations

Question 24

what is the internal control framework used by most U.S companies to evaluate the effectiveness of internal control?

Answer 24

COSO ( Committee of Sponsoring Organizations of the Treadyway Commission) Internal Control-Integrated Framework

Question 25

managements assessment of internal control over finanncial reporting consists of what 2 key aspects?

Answer 25

1. they must evaluate the design of internal control 2. they must test the operating effectiveness of those controls

Question 26

why should auditors not ignore controls affecting internal managment info such as budget and internal performance reports?

Answer 26

because these types of info are important sources used by management to run the business and therefore can be important sources of evidence to help the auditor decide whether the FSs are fairly presented

Question 27

Managements test results for the operating effectiveness of controls form the basis for what?

Answer 27

managements assertion at the end of the fiscal year about the controls ooperating effectivenss

Question 28

what are the 2 balance related audit objectives that are typically not effected by transaction related audit objectives

Answer 28

1. realizable value 2. rights and obligations

Question 29

T/F Internal controls are completely effective

Answer 29

F

Question 30

what is the auditors responsibility in regards to internal control? (2)

Answer 30

understanding and testing internal control over financial reporting

Question 31

internal controls are developed by managment after coonsidering what 2 aspects of the controls?

Answer 31

benefits and costs

Question 32

T/F auditors of all public companies are required by the SEC to annually issue an audit report on the operating effectiveness of internal controls

Answer 32

F larger public companies

Question 33

managements evaluation of the design of internal control includes evaluating how significant _____ are \_\_\_\_, \_\_\_\_, \_\_\_\_, \_\_\_\_, and _____ to identify points in the ____ of transactions where material misstatements due to error or fraud could occur

Answer 33

transactions initiated authorized recorded processed reported flow

Question 34

managment must also identify the _____ used to evaluate the effectiveness of internal control

Answer 34

framework

Question 35

reasonable assurance is a high level that allos for only a ___ likelihood that material misstatements will not be ____ or ____ on a ____ basis by internal control

Answer 35

low prevented detected timely