chapter 1: mcq Flashcards
The concept of reasonable assurance suggests that
a. the cost of an internal control should be less than the benefit it provides
b. a well-designed system of internal controls will detect all fraudulent activity
c. the objectives achieved by an internal control system vary depending on the data processing
method
d. the effectiveness of internal controls is a function of the industry environment
a. the cost of an internal control should be less than the benefit it provides
Which of the following is not a limitation of the internal control system?
a. errors are made due to employee fatigue
b. fraud occurs because of collusion between two employees
c. the industry is inherently risky
d. management instructs the bookkeeper to make fraudulent journal entries
c. the industry is inherently risky
The most cost-effective type of internal control is
a. preventive control
b. accounting control
c. detective control
d. corrective control
a. preventive control
Which of the following is a preventive control?
a. credit check before approving a sale on account
b. bank reconciliation
c. physical inventory count
d. comparing the accounts receivable subsidiary ledger to the control account
a. credit check before approving a sale on account
A well-designed purchase order is an example of a
a. preventive control
b. detective control
c. corrective control
d. none of the above
a. preventive control
A physical inventory count is an example of a
a. preventive control
b. detective control
c. corrective control
d. Feed-forward control
b. detective control
The bank reconciliation uncovered a transposition error in the books. This is an example of a
a. preventive control
b. detective control
c. corrective control
d. none of the above
b. detective control
Which of the following is not an element of the internal control environment?
a. management philosophy and operating style
b. organizational structure of the firm
c. well-designed documents and records
d. the functioning of the board of directors and the audit committee
c. well-designed documents and records
Which of the following suggests a weakness in the internal control environment?
a. the firm has an up-to-date organizational chart
b. monthly reports comparing actual performance to budget are distributed to managers
c. performance evaluations are prepared every three years
d. the audit committee meets quarterly with the external auditors
c. performance evaluations are prepared every three years
Which of the following indicates a strong internal control environment?
a. the internal audit group reports to the audit committee of the board of directors
b. there is no segregation of duties between organization functions
c. there are questions about the integrity of management
d. adverse business conditions exist in the industry
a. the internal audit group reports to the audit committee of the board of directors
According to COSO, an effective accounting system performs all of the following except
a. identifies and records all valid financial transactions
b. records financial transactions in the appropriate accounting period
c. separates the duties of data entry and report generation
d. records all financial transactions promptly
c. separates the duties of data entry and report generation
Which of the following is the best reason to separate duties in a manual system?
a. to avoid collusion between the programmer and the computer operator
b. to ensure that supervision is not required
c. to prevent the record keeper from authorizing transactions
d. to enable the firm to function more efficiently
c. to prevent the record keeper from authorizing transactions
Which of the following is not an internal control procedure?
a. authorization
b. management’s operating style
c. independent verification
d. accounting records
b. management’s operating style
The decision to extend credit beyond the normal credit limit is an example of
a. independent verification
b. authorization
c. segregation of functions
d. supervision
b. authorization
When duties cannot be segregated, the most important internal control procedure is
a. supervision
b. independent verification
c. access controls
d. accounting records
a. supervision
An accounting system that maintains an adequate audit trail is implementing which internal control procedure?
a. access controls
b. segregation of functions
c. independent verification
d. accounting records
d. accounting records