Chapter 10 True/False

Question 1

If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably set a high assessment of control risk.

Answer 1

True

Question 2

As a client’s information system becomes more complex, it is likely that an auditor will decrease reliance on controls and increase substantive tests to support a control risk assessment.

Answer 2

False

Question 3

When a company designs and implements internal controls, cost of the controls is not a valid consideration.

Answer 3

False

Question 4

PCAOB Standard 2 requires auditors to perform walkthroughs to assist in understanding internal control.

Answer 4

True

Question 5

Adequate documents and records is a subcomponent of the control environment.

Answer 5

False

Question 6

If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably determine the client were unauditable.

Answer 6

True

Question 7

When internal controls are effective, then substantive audit tests are more reliable; thus, the extent of substantive tests should be reduced.

Answer 7

False

Question 8

Auditors of private companies may rely on prior periods’ tests of controls for a period not to exceed four years.

Answer 8

False

Question 9

In an audit of a non-public company, the less control risk there is, the smaller the amount of planned substantive evidence that is required.

Answer 9

True

Question 10

For proper internal control, there should be adequate separation of duties. However, the extent of separation of duties considered “adequate” depends heavily on the size of the organization.

Answer 10

True

Question 11

In an audit of a non-public company, the auditor’s assessment of control risk and the extent of tests of controls are inversely related

Answer 11

True

Question 12

Smaller companies usually have more extensive internal controls than larger companies which result in fewer frauds being committed at small companies.

Answer 12

False

Question 13

To issue an unqualified opinion on internal control over financial reporting, there must be no identified material weaknesses and no restrictions on the scope of the audit.

Answer 13

True

Question 14

The Sarbanes-Oxley Act of 2002 requires that public companies issue an internal control report.

Answer 14

True

Question 15

The most important component of internal control is risk assessment

Answer 15

False

Question 16

The primary emphasis by auditors when evaluating and testing internal control is on controls over classes of transactions rather than controls over account balances.

Answer 16

True

Question 17

When internal controls over a given financial statement account are assessed as highly effective, the auditor need not obtain audit evidence for that account beyond testing the controls.

Answer 17

False

Question 18

The chart of accounts is a control and is closely related to the controls related to adequate documents and records.

Answer 18

True

Question 19

Auditing standards prohibit reliance on the work of internal auditors due to the lack of independence of the internal auditors.

Answer 19

False

Question 20

If an auditor wishes to rely on the work of internal auditors (IA), the auditor must obtain satisfactory evidence related to the IA’s competence, integrity, and objectivity.

Answer 20

True

Question 21

Procedures used to obtain an understanding of internal control are normally performed on fewer transactions than procedures used to test controls.

Answer 21

True

Question 22

For most uses, flowcharts are superior to narratives as a method of communicating the characteristics of internal control.

Answer 22

True

Question 23

When documenting their understanding of a client’s internal controls, auditors are required to use narratives.

Answer 23

False