CHAPTER 4

Question 1

Which of the following is not one 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

Which of the following are considered control environment elements?
a. detection risk and organizational structure
b. commitment to competence, detection risk, and organizational structure
c. commitment to competence and organizational structure
d. organizational structure

Answer 2

c. commitment to competence and organizational structure

Question 3

Which of the following statements concerning the relevance of various types of controls to a financial statement audit is correct?
A. All controls are ordinarily relevant to a financial statement audit
B. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant.
C. Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial statement audit, but other controls may also be relevant.
D. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.

Answer 3

C. Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial statement audit, but other controls may also be relevant.

Question 4

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 implementation of the controls.
D. The implementation and efficiency of the controls.

Answer 4

C. The design and implementation of the controls.

Question 5

Authorizations can be either general or specific. Which of the following is not an 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 transactions.
D. A sales price list for merchandise.

Answer 5

B. A sales manager’s authorization for a sales return

Question 6

An auditor should obtain sufficient knowledge of an entity’s information system, including the related business processes relevant to financial reporting, to understand the
a. Policies used to detect the concealment of fraud.
b. Process used to prepare significant accounting estimates.
C. Safeguards used to limit access to computer facilities.
D. Procedures used to assure proper authorization of transactions.

Answer 6

b. Process used to prepare significant accounting estimates.

Question 7

Which of the following controls most likely would provide reasonable assurance that all credit sales transactions of an entity are recorded?
a. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
b. The accounting department supervisor independently reconciles, on a monthly basis, the accounts receivable subsidiary ledger to the
accounts receivable control account.
c. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
D. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.

Answer 7

c. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Question 8

Physical control used to minimize incompatible functions at work refers
to
A. Segregation of Duties
B. Accounting Records
C. Supervision
D. Independent Verification

Answer 8

A. Segregation of Duties

Question 9

Physical control used to capture the economic essence of transactions and provide an audit trail of economic events refers to
A. Segregation of Duties
B. Accounting Records
C. Supervision
D. Access Control

Answer 9

B. Accounting Records

Question 10

Auditors assessing the integrity of the organization’s management and using investigative agencies to report on the backgrounds of key managers is one of the five components of the COSO framework.
A. Control environment
B. Risk assessment
C. Monitoring
D. Information and communication

Answer 10

A. Control environment

Question 11

The authorization of a transaction to ensure that all material transactions processed by the information system are valid and in accordance with management’s objectives is one of the five components of the COSO Framework.
A. Control environment
B. Control activities
C. Monitoring
D. Information and communication

Answer 11

B. Control activities

Question 12

The classes of transactions that are material to the financial
statements and how those transactions are initiated is one of the five components of the COSO framework.
A. Control environment
B. Risk assessment
C. Control activities
D. Information and communication

Answer 12

D. Information and communication

Question 13

A change in the organizational structure resulting in the reduction and/or reallocation of personnel such that business operations and transaction processing are affected is one of the five components of
the COSO Framework.
A. Control environment
B. Risk assessment
C. Monitoring
D. Information and communication

Answer 13

B. Risk assessment

Question 14

Physical control used to ensure that only authorized personnel have
access to the firm’s assets refers to
A. Segregation of Duties
B. Accounting Records
C. Access control
D. Independent Verification

Answer 14

C. Access control

Question 15

Every system of internal control has limitations on its effectiveness.
These include
A. The concept that the company should establish and maintain a
system of internal control.
B. The possibility of error—no system is perfect.
C. Circumvention—personnel may circumvent the system through
collusion.
D. B and C only

Answer 15

D. B and C only

Question 16

In the COSO enterprise risk management framework, organization’s overall tone relates most closely to:
A. Internal environment
B. Objective setting
C. Event Identification
D. Monitoring

Answer 16

A. Internal environment

Question 17

Miguel and Rafaela were developing a risk management plan for their company following the COSO framework. One of the company’s goals is to have sufficient cash available for operations; that goal had been difficult to achieve due to seasonal fluctuations in sales. To reduce that risk, Miguel and Rafaela recommended their company invest some cash in short-term securities that could be liquidated quickly and easily. Which element of the COSO framework is most related to their recommendation?
A. Internal environment
B. Monitoring
C. Control activities
D. Risk response

Answer 17

D. Risk response

Question 18

In a conversation about risk management, Miguel and Rafaela produced a ranked list of their company’s risk exposures. The ranked list is most closely related to which element of the COSO framework?
A. Information and communication
B. Risk assessment
C. Risk response
D. Monitoring

Answer 18

B. Risk assessment

Question 19

COSO has published integrated frameworks for both internal control and for enterprise risk management. Which of the following statements about the frameworks is most true?
A. The internal control framework is more useful than the enterprise
risk management framework.
B. The enterprise risk management framework is more useful than the
internal control framework.
C. Management attitudes are an element of both frameworks.
D. Both frameworks are required.

Answer 19

C. Management attitudes are an element of both frameworks.

Question 20

Which of the following best pairs an element of the COSO enterprise risk management framework with an example of that element?
A. Objective setting, determining which elements of the COSO framework to use
B. Event identification, identifying needed internal controls
C. Risk assessment, annual management retreats focused on the ERM plan
D. Risk response, diversifying risk by expanding internationally

Answer 20

D. Risk response, diversifying risk by expanding internationally

Question 21

One of the steps in the generalized model of business process management discussed in the text focuses on collecting process- related data. If Laurie and Milton are concerned about the risks Created by inefficiency in the company’s current fixed asset purchasing process, they could collect data related to:
I. the average length of time between an order for a fixed asset and its delivery,
II. the costs incurred in the fixed asset purchasing process.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 21

C. Both I and II