Chapter 6 [Salosagcol] Flashcards
The primary responsibility for establishing and maintaining an internal control rests with
a. external auditors
b. internal auditors
c. management and those charged with governance
d. controller or the treasurer
c
The fundamental purpose of an internal control is to
a. Safeguard the resources of the organization
b. Provide reasonable assurance that the objectives of the organization are achieved
c. Encourage compliance with organization objectives
d. Ensure the accuracy, reliability, and timeliness of information
b
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. Each of the above is a primary objective of effective internal control
d
Which of the following is not typically one of management’s concerns in designing effective internal control?
a. to generate profits from operations
b. to generate fairly stated financial statements
c. to comply with applicable laws and regulations
d. to design the most effective internal control possible no matter how much it will cost
d
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
d
Which of the following internal control objectives would be most relevant to the audit?
a. Operational objective
b. Compliance objective
c. Financial reporting objective
d. Administrative control objective
c
Which statement is correct concerning the relevance of various types of controls to a financial audit?
a. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.
b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.
c. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant.
d. All controls are ordinarily relevant to audit.
b
Which statement is correct concerning the relevance of various types of controls to a financial audit?
a. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.
b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit but other controls may also be relevant.
c. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant.
d. All controls are ordinarily relevant to an audit.
b
An act of two or more employees to steal assets or misstate records is frequently referred to as
a. Collusion
b. A material weakness
c. A control deficiency
d. Any of the above
a
An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the
a. Efficiency of management’s decision-making process
b. Appropriate prices the entity should charge for its products
c. Methods of assigning production tasks to employees
d. Entity’s ability to process and summarize financial data
d
In an audit of financial statements, an auditor’s primary consideration regarding an internal control activity is whether the control
a. Reflects management’s philosophy and operating style
b. Affects management’s financial statement assertions
c. Provides adequate safeguards over access to assets
d. Enhances management’s decision-making processes
b
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
c
Internal control can provide only reasonable assurance of achieving entity’s control objectives. One factor limiting the likelihood of achieving those objectives is that
a. The auditor’s primary responsibility is the detection of fraud
b. The board of directors is active and independent
c. The cost of internal control should not exceed its benefits
d. Management monitors internal control
c
Inherent limitations in an internal control must be considered in evaluating its effectiveness in preventing and detecting errors and fraud. Inherent limitations do not include
a. Misunderstanding of instructions, mistakes of judgment, personal carelessness, distraction, or fatigue.
b. Incompatible functions performed by the same person.
c. Collusion among employees.
d. Management override of certain policies or procedures
b
The following statements relate to internal controls, which is false?
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 control procedures on a test basis.
d. Control procedures reasonably ensure that collusion among employees cannot ocur.
d
Which of the following best describes an inherent limitation that should be recognized by an auditor when considering the potential effectiveness of an internal control structure?
a. Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.
b. The competence and integrity of client personnel provide an environment conductive to control and provides assurance that effective control will be achieved.
c. Procedures designed to assure the execution and recording of transactions in accordance with proper authorizations are effective against fraud perpetrated by management
d. The benefits expected to be derived from effective internal control usually do not exceed the cost of such control.
a
When considering the effectiveness of a system of internal accounting control, the auditor should recognize that inherent limitations do exist. Which of the following is an example of an inherent limitation in system of internal accounting control?
a. The effectiveness of procedures depends on the segregation of employee duties.
b. Procedures are designed to assure the execution and recording of transactions in accordance with management’s authorization.
c. In the performance of most control procedures, there are possibilities of errors arising from mistakes in judgment.
d. Procedures for handling large numbers of transactions are processed by electronic data processing equipment
c
An effective system of internal control
a. Cannot be circumvented by management
b. Can reduce the cost of an external audit
c. Can prevent collusion among employees
d. Eliminates risks and potential loss to the organization
b
The internal control cannot be design to provide reasonable assurance that
a. Transactions are executed in accordance with management’s authorization.
b. Fraud will be eliminated.
c. Access to assets is permitted only in accordance with management’s authorization.
d. The recorded accountability for assets is compared with the existing assets at reasonable intervals
b
Which of the following statements about internal control is correct?
a. Properly maintained internal control reasonably ensures that collusion among employees cannot occur.
b. The establishment and maintenance of internal control are important responsibilities of the internal auditor.
c. Exceptionally strong internal control is enough for the auditor to eliminate substantive tests on a significant account balance.
d. The cost-benefit relationship is a primary criterion that should be considered in designing internal control.
d
Which of the following is correct about internal control?
a. Accounting and internal control systems provide management with conclusive evidence that objectives are reached.
b. One of the inherent limitations of accounting and internal control systems is the possibility that the procedures may become inadequate due to changes in conditions, and compliance with procedures may deteriorate.
c. Most internal controls tend to be directed at non-routine transactions.
d. Management does not consider costs of the accounting and internal control systems.
b
Internal control, no matter how well designed and operated, can only provide an entity with reasonable assurance about achieving the entity’s objectives. The likelihood of achievement is affected by limitations inherent to internal control. These limitations do not include:
a. Collusion among employees
b. Inappropriate management override of internal control
c. Human failures
d. Incompatible functions
d
Internal controls can never be regarded a 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
d
Internal controls can never be considered as absolutely effective because
a. Their effectiveness is highly dependent on the competence and integrity of Company’s employees.
b. Controls always have inherent weaknesses that can be exploited.
c. Controls are designed to prevent and detect only material misstatements.
d. None of the above
a