Chapter 10 Flashcards
Which of the following is responsible for establishing a private company’s internal control?
Management.
Which of the following is not one of the three primary objectives of effective internal control?
Assurance of elimination of business risk.
(Public) The Public Company Accounting Oversight Board states that reasonable assurance allows a:
remote likelihood that material misstatements will not be prevented or detected by internal control.
Two key concepts that underlie management’s design and implementation of internal control are:
inherent limitations and reasonable assurance.
Internal controls can never be considered as absolutely effective because:
their effectiveness is limited by the competency and dependability of employees.
A major control available in a small company, which might not be feasible in a big company, is:
the owner-manager’s personal interest and close relationship with personnel.
Public) Which of the following is responsible for establishing internal controls for a public company?
Management.
Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies?
Management
Financial statement auditors
Yes Yes
An act of two or more employees to steal assets or misstate records is frequently referred to as:
collusion.
When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be:
performing a walk-through.
SOX) Which section of the Sarbanes-Oxley Act requires management to issue an internal control report?
404
Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements?
A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
Internal control reports issued by public companies must identify the framework used to evaluate the effectiveness of internal control. Which of the following is the most common framework in the U.S.?
Internal Control - Integrated Framework - COSO
To obtain an understanding of an entity’s control environment, an auditor should concentrate on the substance of management’s policies and procedures rather than their form because:
management may establish appropriate policies and procedures but not act on them.
After considering a client’s internal controls, an auditor has concluded that it is well designed and is functioning as intended. Under these circumstances the auditor would most likely:
not increase the extent of predetermined substantive tests.
When a compensating control exists, the absence of a key control:
is no longer a concern because there is no longer a significant deficiency or material weakness.
When planning an audit, the auditor’s assessed level of control risk is:
an economic issue, trading off the costs of testing controls against the cost of testing balances.
External financial statement auditors must obtain evidence regarding what attributes of an internal audit (IA) department if the external auditors intend to rely on IA’s work?
Integrity
Objectivity
Competence
Hanlon Corp. maintains a large internal audit staff that reports directly to the chief financial officer. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably:
place limited reliance on the work performed by the internal audit staff.
To be effective, an internal audit department must be independent of:
operating departments.
the accounting department.
The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor’s study and evaluation of internal control because the:
work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor’s procedures.
An auditor should consider two key issues when obtaining an understanding of a client’s internal controls. These issues are:
the design and utilization of the controls.
Compared to a public company, the most important difference in a nonpublic company in assessing control risk is the ability to assess control risk at _______ for any or all control-related objectives.
high
The primary emphasis by auditors is on controls over:
classes of transactions.
The financial statements are not likely to correctly reflect GAAP if the:
controls affecting the reliability of financial reporting are inadequate.
When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the:
costs of internal control should not exceed the benefits expected to be derived from internal control.
The Sarbanes-Oxley Act requires:
all public companies to issue reports on internal controls.
How must significant deficiencies and material weaknesses be communicated to those charged with governance?
Written communication is required.
Significant deficiencies are matters that come to an auditor’s attention and should be communicated to an entity’s audit committee because they represent:
internal control deficiencies that could adversely affect a company’s ability to initiate, record, process, or report external financial statements reliably.
Which of the following statements about auditor documentation of the client’s internal controls is correct?
No one particular form of documentation is necessary.
Internal controls are not designed to provide reasonable assurance that:
all frauds will be eliminated.
(Public) When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is:
ineffective.
