Chapter 11: Internal Control and COSO Framework

Question 1

Which of the following is notone of the three primary objectives of effective internal control?

A) reliability of financial reporting

B) efficiency and effectiveness of operations

C) compliance with laws and regulations

D) assurance of elimination of business risk

Answer 1

D) assurance of elimination of business risk

Question 2

With which of management’s assertions with respect to implementing internal controls is the auditor primarily concerned?

A) efficiency of operations

B) reliability of financial reporting

C) effectiveness of operations

D) compliance with applicable laws and regulations

Answer 2

B) reliability of financial reporting

Question 3

Internal controls

A) are implemented by and are the responsibility of the auditors.

B) consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals.

C) guarantee that the company complies with all laws and regulations.

D) only apply to SEC companies.

Answer 3

B) consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals.

Question 4

Internal controls are notdesigned to provide reasonable assurance that

A) all frauds will be detected.

B) transactions are executed in accordance with management’s authorization.

C) the company’s resources are used efficiently and effectively.

D) company personnel comply with applicable rules and regulations.

Answer 4

A) all frauds will be detected.

Question 5

Section 404 of the Sarbanes-Oxley Act requires that both private and public companies issue an internal control report.

TRUE OR FALSE

Answer 5

FALSE

Question 6

Management has a legal and professional responsibility to be sure that the financial statements are prepared in accordance with reporting requirements of applicable accounting frameworks.

TRUE OR FALSE

Answer 6

TRUE

Question 7

Who is responsible for establishing a private company’s internal control?

A) senior management

B) internal auditors

C) FASB

D) audit committee

Answer 7

A) senior management

Question 8

Two key concepts that underlie management’s design and implementation of internal control are

A) costs and materiality.

B) absolute assurance and costs.

C) inherent limitations and reasonable assurance.

D) collusion and materiality.

Answer 8

C) inherent limitations and reasonable assurance.

Question 9

The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on

A) the company’s board of directors.

B) the audit committee of the board of directors.

C) management.

D) the CFO and the independent auditors.

Answer 9

C) management.

Question 10

An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as

A) collusion.

B) a material weakness.

C) a control deficiency.

D) a significant deficiency.

Answer 10

A) collusion.

Question 11

6) 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) a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting

B) a statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting

C) a statement that management, the board of directors, and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting

D) a statement that the external auditors are solely responsible for establishing and maintaining an adequate system of internal control

Answer 11

A) a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting

Question 12

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

A) insufficient.

B) inadequate.

C) ineffective.

D) inefficient.

Answer 12

C) ineffective.

Question 13

The auditors primary purpose in auditing the client’s system of internal control over financial reporting is

A) to prevent fraudulent financial statements from being issued to the public.

B) to evaluate the effectiveness of the company’s internal controls over all relevant assertions in the financial statements.

C) to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements.

D) to efficiently conduct the Audit of Financial Statements.

Answer 13

B) to evaluate the effectiveness of the company’s internal controls over all relevant assertions in the financial statements.

Question 14

The internal control framework used by most U.S. companies is the ________ framework.

A) FASB

B) PCAOB

C) COSO

D) SEC

Answer 14

C) COSO

Question 15

In performing the audit of internal control over financial reporting, the auditor emphasizes internal control over classes of transactions because

A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.

B) the class of transaction is where most fraud schemes occur.

C) account balances are less important to the auditor then the changes in the account balances.

D) classes of transactions tests are the most efficient manner to compensate for inherent risk.

Answer 15

A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.

Question 16

Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the

A) adequacy of the computer system.

B) proper implementation by management.

C) ability of the internal audit staff to maintain it.

D) competency and dependability of the people using it.

Answer 16

D) competency and dependability of the people using it.

Question 17

When considering internal controls,

A) auditors can ignore controls affecting internal management information.

B) auditors are concerned with the client’s internal controls over the safeguarding of assets if they affect the financial statements.

C) management is responsible for understanding and testing internal control over financial reporting.

D) companies must use the COSO framework to establish internal controls.

Answer 17

B) auditors are concerned with the client’s internal controls over the safeguarding of assets if they affect the financial statements.

Question 18

Of the following statements about internal controls, which one is least likely to be correct?

A) No one person should be responsible for the custodial responsibility and the recording responsibility for an asset.

B) Transactions must be properly authorized before such transactions are processed.

C) Because of the cost-benefit relationship, a client may apply controls on a test basis.

D) Control procedures reasonably ensure that collusion among employees cannot occur.

Answer 18

D) Control procedures reasonably ensure that collusion among employees cannot occur.

Question 19

The Sarbanes-Oxley Act requires

A) all public companies to issue reports on internal controls.

B) all public companies to define adequate internal controls.

C) the auditor of public companies to design effective internal controls.

D) the auditor of public companies to withdraw from an engagement if internal controls are weak.

Answer 19

A) all public companies to issue reports on internal controls.

Question 20

Which of the following is an accurate statement regarding the auditor’s responsibility for understanding internal control?

A) Transaction-related audit objectives typically have no impact on the rights and obligations objectives.

B) Transaction-related audit objectives typically have a significant impact on the balance-related audit objective of realizable value.

C) Auditors generally emphasize internal control over account balances rather than classes of transactions.

D) Auditors and management are both equally concerned about controls that affect the efficiency and effectiveness of company operations.

Answer 20

A) Transaction-related audit objectives typically have no impact on the rights and obligations objectives.

Question 21

The primary emphasis by auditors is on controls over

A) classes of transactions.

B) account balances.

C) both A and B, because they are equally important.

D) both A and B, because they vary from client to client.

Answer 21

A) classes of transactions.

Question 22

An auditor should consider two key issues when obtaining an understanding of a client’s internal controls. These issues are

A) the effectiveness and efficiency of the controls.

B) the frequency and effectiveness of the controls.

C) the design and operating effectiveness of the controls.

D) the implementation and operating effectiveness of the controls.

Answer 22

C) the design and operating effectiveness of the controls.

Question 23

Reasonable assurance allows for

A) low likelihood that material misstatements will not be prevented or detected by internal controls.

B) no likelihood that material misstatements will not be prevented or detected by internal control.

C) moderate likelihood that material misstatements will not be prevented or detected by internal control.

D) high likelihood that material misstatements will not be prevented or detected by internal control.

Answer 23

A) low likelihood that material misstatements will not be prevented or detected by internal controls.

Question 24

Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes-Oxley Act?

A) The audits of internal control and the financial statements provide reasonable assurance as to misstatements.

B) The audit of internal control provides absolute assurance of misstatement.

C) The audit of financial statements provides absolute assurance of misstatement.

D) The audits of internal control and the financial statements provide absolute assurance as to misstatements.

Answer 24

A) The audits of internal control and the financial statements provide reasonable assurance as to misstatements.

Question 25

Under the Dodd-Frank federal financial reform legislation, all public companies are required to obtain an audit report on internal control over financial reporting.

TRUE OR FALSE

Answer 25

FALSE

Question 26

When a company designs and implements internal controls, cost of the controls is nota valid consideration.

TRUE OR FALSE

Answer 26

FALSE

Question 27

Which of the following activities would be least likely to strengthen a company’s internal control?

A) separating accounting from other financial operations

B) maintaining insurance for fire and theft

C) fixing responsibility for the performance of employee duties

D) carefully selecting and training employees

Answer 27

B) maintaining insurance for fire and theft

Question 28

Which of the following components of the control environment define the existing lines of responsibility and authority?

A) organizational structure

B) management philosophy and operating style

C) human resource policies and practices

D) management integrity and ethical values

Answer 28

A) organizational structure

Question 29

Which of the following statements is most correct with respect to separation of duties?

A) A person who has temporary or permanent custody of an asset should account for that asset.

B) Employees who authorize transactions should not have custody of related assets.

C) Employees who open cash receipts should record the amounts in the subsidiary ledgers.

D) Employees who authorize transactions should have recording responsibility for these transactions.

Answer 29

B) Employees who authorize transactions should not have custody of related assets.

Question 30

Authorizations can be either general or specific. Which of the following is notan example of a general authorization?

A) automatic reorder points for raw materials inventory

B) a sales manager’s authorization for a sales return

C) credit limits for various classes of customers

D) a sales price list for merchandise

Answer 30

B) a sales manager’s authorization for a sales return

Question 31

Which of the following is correct with respect to the design and use of business documents?

A) The documents should be in paper format.

B) Documents should be designed for a single purpose to avoid confusion in their use.

C) Documents should be designed to be understandable only by those who use them.

D) Documents should be prenumbered consecutively to facilitate control over missing documents.

Answer 31

D) Documents should be prenumbered consecutively to facilitate control over missing documents.

Question 32

Which of the following best describes the purpose of control activities?

A) the actions, policies and procedures that reflect the overall attitudes of management

B) the identification and analysis of risks relevant to the preparation of financial statements

C) the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity’s objectives

D) activities that deal with the ongoing assessment of the quality of internal control by management

Answer 32

C) the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity’s objectives

Question 33

Which of the following deals with ongoing or periodic assessment of the quality of internal control by management?

A) verifying activities

B) monitoring activities

C) oversight activities

D) management activities

Answer 33

B) monitoring activities

Question 34

Which of the following is a risk assessment principle?

A) accountability

B) use relevant, quality information to support the functioning of internal controls

C) consider the potential for fraud

D) develop general controls over technology

Answer 34

C) consider the potential for fraud

Question 35

Which of the following is notan underlying principle related to risk assessment?

A) The organization should have clear objectives in order to be able to identify and assess the risks relating to the objectives.

B) The auditors should determine how the company’s risks should be managed.

C) The organization should consider the potential for fraudulent behavior.

D) The organization should monitor changes that could impact internal controls.

Answer 35

B) The auditors should determine how the company’s risks should be managed.

Question 36

Which of the following is notone of the subcomponents of the control environment?

A) management’s philosophy and operating style

B) organizational structure

C) adequate separation of duties

D) commitment to competence

Answer 36

C) adequate separation of duties

Question 37

It is important for the CPA to consider the competence of the clients’ personnel because their competence has a direct impact upon the

A) cost/benefit relationship of the system of internal control.

B) achievement of the objectives of internal control.

C) comparison of recorded accountability with assets.

D) timing of the tests to be performed.

Answer 37

B) achievement of the objectives of internal control.

Question 38

Proper segregation of functional responsibilities calls for separation of

A) authorization, execution, and payment.

B) authorization, recording, and custody.

C) custody, execution, and reporting.

D) authorization, payment, and recording.

Answer 38

B) authorization, recording, and custody.

Question 39

Without an effective ________, the other components of the COSO framework are unlikely to result in effective internal control, regardless of their quality.

A) risk assessment policy

B) monitoring policy

C) control environment

D) system of control activities

Answer 39

C) control environment

Question 40

Which of the following is an accurate statement regarding control activities?

A) As the level of complexity of IT systems increases, the separation of duties often becomes blurred.

B) Segregation of duties would be violated if the same person authorizes the payment of a vendor’s invoice and also approves the disbursement of funds to pay the bill.

C) The most important type of protective measure for safeguarding assets and records is the us of physical precautions.

D) all of the above

Answer 40

D) all of the above

Question 41

If a company has an effective internal audit department,

A) the internal auditors can express an opinion on the fairness of the financial statements.

B) their work cannot be used by the external auditors per PCAOB Standard 5.

C) it can reduce external audit costs by providing direct assistance to the external auditors.

D) the internal auditors must be CPAs in order for the external auditors to rely on their work.

Answer 41

C) it can reduce external audit costs by providing direct assistance to the external auditors.

Question 42

To promote operational efficiency, the internal audit department would ideally report to

A) line management.

B) the PCAOB.

C) the Chief Accounting Officer.

D) the audit committee.

Answer 42

D) the audit committee.

Question 43

Hanlon Corp. maintains a large internal audit staff that reports directly to the accounting department. 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

A) eliminate tests of controls.

B) increase the depth of the study and evaluation of administrative controls.

C) avoid duplicating the work performed by the internal audit staff.

D) place limited reliance on the work performed by the internal audit staff.

Answer 43

D) place limited reliance on the work performed by the internal audit staff.

Question 44

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?

A) integrity

B) objectivity

C) competence

D) all of the above

Answer 44

D) all of the above

Question 45

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

A) management may establish appropriate policies and procedures but not act on them.

B) the board of directors may not be aware of management’s attitude toward the control environment.

C) the auditor may believe that the policies and procedures are inappropriate for that particular entity.

D) the policies and procedures may be so weak that no reliance is contemplated by the auditor.

Answer 45

A) management may establish appropriate policies and procedures but not act on them.

Question 46

The ________ is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.

A) general ledger

B) general journal

C) trial balance

D) chart of accounts

Answer 46

D) chart of accounts

Question 47

Control activities help assure that the necessary actions are taken to address risks to the achievement of the company’s objectives. List the five types of control activities.

Answer 47

1. adequate separation of duties
2. proper authorization of transactions and activities
3. adequate documents and records
4. physical control over assets and records
5. independent checks on performance

Question 48

Management’s identification and analysis of risk is an ongoing process and is a critical component of effective internal control. An important first step is for management to identify factors that may increase risk. Identify at least five factors, observable by management, which may lead to increased risk in a typical business organization.

Answer 48

• failure to meet prior objectives
• quality of personnel
• geographic dispersion of company operations
• significance and complexity of core business processes
• introduction of new information technologies
• entrance of new competitors
• economic downturns
• rapid technology changes

Question 49

Separation of duties is essential in preventing errors and intentional misstatements on the financial statements. List below the four general guidelines.

Answer 49

1. separation of custody of the assets from accounting
2. separation of the authorization of transactions from custody of related assets
3. separation of operational responsibility from record keeping responsibility
4. separation of IT duties from user departments

Question 50

List the four underlying principles of risk assessment per the COSO framework.

Answer 50

• have clear objectives in order to identify risks related to those objectives
• determine how risks should be managed
• consider the potential for fraud
• monitor changes

Question 51

Control activities are a subcomponent of the information and communication component of internal control.

TRUE OR FALSE

Answer 51

FALSE

Question 52

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

TRUE OR FALSE

Answer 52

FALSE

Question 53

The chart of accounts is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.

TRUE OR FALSE

Answer 53

TRUE

Question 54

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

TRUE OR FALSE

Answer 54

FALSE

Question 55

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.

TRUE OR FALSE

Answer 55

TRUE

Question 56

An example of a specific authorization is management setting a policy authorizing the ordering of inventory when less than a one-week supply is on hand.

TRUE OR FALSE

Answer 56

FALSE

Question 57

Personnel responsible for performing internal verification procedures must be independent of those originally responsible for preparing the data.

TRUE OR FALSE

Answer 57

TRUE

Question 58

Old and new systems operating simultaneously in all locations is a test approach known as

A) pilot testing.

B) horizontal testing.

C) integrative testing.

D) parallel testing.

Answer 58

D) parallel testing.

Question 59

Which of the following is a component of general controls?

A) processing controls

B) output controls

C) back-up and contingency planning

D) input controls

Answer 59

C) back-up and contingency planning

Question 60

Which of the following statements related to application controls is correct?

A) Application controls relate to various aspects of the IT function including software acquisition and the processing of transactions.

B) Application controls relate to various aspects of the IT function including physical security and the processing of transactions in various cycles.

C) Application controls relate to all aspects of the IT function.

D) Application controls relate to the processing of individual transactions.

Answer 60

D) Application controls relate to the processing of individual transactions.

Question 61

General controls include all of the following except

A) systems development.

B) online security.

C) processing controls.

D) hardware controls.

Answer 61

C) processing controls.

Question 62

Which of the following describes the process of implementing a new system in one part of the organization, while other locations continue to use the current system?

A) parallel testing

B) online testing

C) pilot testing

D) control testing

Answer 62

C) pilot testing

Question 63

A ________ is responsible for controlling the use of computer programs, transaction files and other computer records and documentation and releases them to the operators only when authorized.

A) software engineer

B) chief computer operator

C) librarian

D) data control operator

Answer 63

C) librarian

Question 64

Security controls should require that users enter a(n) ________ before being allowed access to software and other related data files.

A) echo check

B) parity check

C) self-diagnosis test

D) authorized password

Answer 64

D) authorized password

Question 65

Typical controls developed for manual systems which are still important in IT systems include

A) management’s authorization of transactions.

B) competent personnel.

C) adequate preparation of input source documents.

D) all of the above.

Answer 65

D) all of the above.

Question 66

Which of the following controls prevent and detect errors while transaction data are processed?

A) software

B) application

C) processing

D) transaction

Answer 66

C) processing

Question 67

When purchasing software or developing in-house software,

A) cost should be the only factor.

B) extensive testing of the software is generally not required.

C) a team of both IT and non-IT personnel should be involved in the decision process.

D) the librarian and the IT manager should be the only ones involved in the decision process.

Answer 67

C) a team of both IT and non-IT personnel should be involved in the decision process.

Question 68

Output controls need to be designed for which of the following data integrity objectives?

A) detecting errors after the processing is completed

B) preventing errors before the processing is completed

C) detecting errors in the general ledger adjustment process

D) preventing errors in separation of duties for IT personnel

Answer 68

A) detecting errors after the processing is completed

Question 69

A control that relates to all parts of the IT system is called a(n)

A) general control.

B) systems control.

C) universal control.

D) applications control.

Answer 69

A) general control.

Question 70

Controls that are designed for each software application and are intended to help a company satisfy the transaction-related audit objectives are

A) user controls.

B) general controls.

C) audit controls.

D) application controls.

Answer 70

D) application controls.

Question 71

Which of the following is notan example of an applications control?

A) Back-up of data is made to a remote site for data security.

B) There is a preprocessing authorization of the sales transactions.

C) There are reasonableness tests for the unit selling price of a sale.

D) After processing, all sales transactions are reviewed by the sales department.

Answer 71

A) Back-up of data is made to a remote site for data security.

Question 72

Which of the following is nota general control?

A) Computer performed validation tests of input accuracy.

B) Equipment failure causes error messages on monitor.

C) There is a separation of duties between programmer and operators.

D) There are adequate program run instructions for operating the computer.

Answer 72

A) Computer performed validation tests of input accuracy.

Question 73

Controls which are built in by the manufacturer to detect equipment failure are called

A) input controls.

B) data integrity controls.

C) hardware controls.

D) manufacturer’s controls.

Answer 73

C) hardware controls.

Question 74

Controls which are designed to assure that the information entered into the computer is authorized, complete, and accurate are called

A) input controls.

B) processing controls.

C) output controls.

D) general controls.

Answer 74

A) input controls.

Question 75

When dealing with the administration of the IT function and the segregation of IT duties

A) in large organizations, management should assign technology issues to outside consultants.

B) programmers should investigate all security breaches.

C) the board of directors should not get involved in IT decisions since it is a routine function handled by middle management.

D) in complex environments, management may establish IT steering committees.

Answer 75

D) in complex environments, management may establish IT steering committees.

Question 76

Which of the following tests determines that every field in a record has been completed?

A) validation

B) sequence

C) completeness

D) programming

Answer 76

C) completeness

Question 77

An example of a physical control is

A) a hash total.

B) a parallel test.

C) the matching of employee fingerprints to a database before access to the system is allowed.

D) the use of backup generators to prevent data loss during power outages.

Answer 77

C) the matching of employee fingerprints to a database before access to the system is allowed.

Question 78

Controls specific to IT include all of the following exceptfor

A) adequately designed input screens.

B) pull-down menu lists.

C) validation tests of input accuracy.

D) separation of duties.

Answer 78

D) separation of duties.

Question 79

An internal control deficiency occurs when computer personnel

A) participate in computer software acquisition decisions.

B) design flowcharts and narratives for computerized systems.

C) originate changes in customer master files.

D) provide physical security over program files.

Answer 79

C) originate changes in customer master files.

Question 80

Which of the following best explains the relationship between general controls and application controls?

A) Application controls are effective even if general controls are extremely weak.

B) Application controls are likely to be effective only when general controls are effective.

C) General controls have no impact on application controls.

D) None of the above

Answer 80

B) Application controls are likely to be effective only when general controls are effective.

Question 81

A(n) ________ total represents the summary total of codes from all records in a batch that do notrepresent a meaningful total.

A) record

B) hash

C) output

D) financial

Answer 81

B) hash

Question 82

In an IT system, automated equipment controls or hardware controls are designed to

A) correct errors in the computer programs.

B) monitor and detect errors in source documents.

C) detect and control errors arising from the use of equipment.

D) arrange data in a logical sequential manner for processing purposes.

Answer 82

C) detect and control errors arising from the use of equipment.

Question 83

If a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll IT application?

A) gross wages earned

B) employee numbers

C) total hours worked

D) total debit amounts and total credit amounts

Answer 83

B) employee numbers

Question 84

Which of the following is notan application control?

A) reprocessing authorization of sales transactions

B) reasonableness test for unit selling price of sale

C) post-processing review of sales transactions by the sales department

D) logging in to the company’s information systems via a password

Answer 84

D) logging in to the company’s information systems via a password

Question 85

Which of the following is not a general control?

A) separation of IT duties

B) systems development

C) processing controls

D) hardware controls

Answer 85

C) processing controls

Question 86

________ is the information technology and internal control processes an organization has in place to protect computers, networks, programs, and data from unauthorized access.

A) Encryption

B) A firewall

C) Cybersecurity

D) A processing control

Answer 86

C) Cybersecurity

Question 87

The most important output control is

A) distribution control, which assures that only authorized personnel receive the reports generated by the system.

B) review of data for reasonableness by someone who knows what the output should look like.

C) control totals, which are used to verify that the computer’s results are correct.

D) logic tests, which verify that no mistakes were made in processing.

Answer 87

B) review of data for reasonableness by someone who knows what the output should look like.

Question 88

Parallel testing is used when old and new systems are operated simultaneously in all locations.

TRUE OR FALSE

Answer 88

TRUE

Question 89

Programmers should only be allowed to work with test copies of programs and data.

TRUE OR FALSE

Answer 89

TRUE

Question 90

In IT systems, if general controls are effective, it increases the auditor’s ability to rely on application controls to reduce control risk.

TRUE OR FALSE

Answer 90

TRUE

Question 91

Parallel testing can be used in combination with pilot testing to test new systems.

TRUE OR FALSE

Answer 91

TRUE

Question 92

The effectiveness of automated controls depends solely on the competence of the personnel performing the controls.

TRUE OR FALSE

Answer 92

FALSE

Question 93

Backup and contingency plans should also identify alternative hardware that can be used to process company data.

TRUE OR FALSE

Answer 93

TRUE

Question 94

A large portion of errors in IT systems result from data entry errors.

TRUE OR FALSE

Answer 94

TRUE

Question 95

Output controls focus on preventing errors during processing.

TRUE OR FALSE

Answer 95

FALSE

Question 96

Processing controls are a category of application controls.

TRUE OR FALSE

Answer 96

TRUE

Question 97

Controls that relate to a specific use of the IT system, such as the processing of sales or cash receipts, are called application controls.

TRUE OR FALSE

Answer 97

TRUE

Question 98

IT controls are classified as either input controls or output controls.

TRUE OR FALSE

Answer 98

FALSE

Question 99

A database management system

A) allows clients to create databases that include information that can be shared across multiple applications.

B) stores data on different files for different purposes, but always knows where they are and how to retrieve them.

C) allows quick retrieval of data, but at a cost of inefficient use of file space.

D) allows quick retrieval of data, but it needs to update files continually.

Answer 99

A) allows clients to create databases that include information that can be shared across multiple applications.

Question 100

When auditing a client who uses a database management system, the auditor is principally aware of elevated risk due to the fact that

A) multiple users can access and update data files.

B) the accounting information is only in one place.

C) the database administrator may lack appropriate accounting knowledge.

D) multiple users could all access the data simultaneously causing a system shutdown.

Answer 100

A) multiple users can access and update data files.

Question 101

Firewalls are used to protect from

A) erroneous internal handling of data.

B) insufficient documentation of transactions.

C) illogical programming commands.

D) unauthorized external users.

Answer 101

D) unauthorized external users.

Question 102

Rather than maintain an internal IT center, many companies outsource their basic IT functions such as payroll to an

A) external general service provider.

B) independent computer service center.

C) internal control service provider.

D) internal auditor.

Answer 102

B) independent computer service center.

Question 103

When the auditor is obtaining an understanding of the independent computer service center’s internal controls, the auditor should

A) use the same criteria used to evaluate the client’s internal controls.

B) use different criteria because the service center resides outside the company.

C) use the same criteria used to evaluate the client’s internal controls but omit tests of transactions.

D) use different criteria for the service center by including substantive tests of balances.

Answer 103

A) use the same criteria used to evaluate the client’s internal controls.

Question 104

________ protect(s) the security of electronic communication when information is transmitted and when it is stored.

A) Firewalls

B) Digital signatures

C) Encryption

D) A database

Answer 104

C) Encryption

Question 105

A(n) ________ is a computer resource deployment and procurement model that enables an organization to obtain IT resources and applications from any location via an Internet connection.

A) application service provider

B) firewall

C) cloud computing environment

D) local area network

Answer 105

C) cloud computing environment

Question 106

Firewalls can protect company data and software programs.

TRUE OR FALSE

Answer 106

TRUE

Question 107

LANs link equipment within a single or small cluster of buildings and are used within a company.

TRUE OR FALSE

Answer 107

TRUE

Question 108

Companies using e-commerce systems to transact business electronically do notneed to be concerned about how their e-commerce partners manage IT systems risks.

TRUE OR FALSE

Answer 108

FALSE