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
Which of the following best describes the interrelated components of internal control?
a. Organizational structure, management, philosophy, and planning
b. Control environment, risk assessment, control activities, information and communication systems, and monitoring
c. Risk assessment, backup facilities, responsibility accounting, and natural laws
d. Internal audit and management’s philosophy and operating stye
b
Which of the following is not one of the components of an entity’s internal control?
a. Control risk
b. Control activities
c. Information and communication
d. The control environment
a
The overall attitude and awareness of an entity’s board of directors concerning the importance of the internal control usually is reflected in its
a. Computed-based controls
b. System of segregation of duties
c. Control environment
d. Safeguards over access to assets
c
When obtaining 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. The auditor may believe that the policies and procedures inappropriate for that particular entity.
b. The board of directors may not be aware of management’s attitude toward the control environment.
c. Management may establish appropriate policies and procedures but not act on them
d. The policies and procedures may be so ineffective that the auditor may assess control risk at a high level
c
Basic to proper control environment are the quality and integrity of personnel who must perform the prescribed procedures. Which is not a factor in providing for competent personnel?
a. Segregation of duties
b. Hiring practices
c. Training programs
d. Performance evaluations
a
In evaluating the design of the entity’s internal control environment, the auditor considers the certain subcomponents of control environment and how they have been incorporated into the entity’s processes. Subcomponents of control environment would not include
a. Integrity and ethical values
b. Commitment to competence
c. Organizational structure
d. Information and communications systems
d
It is important for the auditor to consider the competence of the audit client’s employees, because their competence bears directly and importantly upon the
a. Cost-benefit relationship 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
b
Which of the following components of an entity’s internal control structure includes the development of employee promotion and training policies?
a. Control activities
b. Control environment
c. Information and communication
d. Quality control system
b
Which of the following subcomponents 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 pracitces
d. Management integrity and ethical values
a
Which of the following is not one 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
c
Management philosophy and operating style most likely would have a significant influence on an entity’s control environment when
a. The internal auditor reports directly to management.
b. Management is dominated by one individual.
c. Accurate management job descriptions delineate specific duties.
d. The audit committee actively oversees the financial reporting process
b
A proper segregation of duties requires
a. An individual authorizing a transaction records it
b. An individual authorizing a transaction maintains a custody of the asset that resulted from the transaction
c. An individual maintaining custody of an asset be entitled to access the accounting records for the asset
d. An individual recording a transaction not compare accounting record of the asset with the asset itself
d
The single most effective control procedure established to avoid any person to be in a position to perpetrate and then conceal errors or fraud is
a. The separation of the functional responsibilities custodianship, record keeping, operations, and authorization.
b. Require each employee to take a vacation each year.
c. Establish an internal audit department.
d. Require the bonding of personnel in positions that necessitate handling of cash and other universally desirable valuables.
a
Which of the following statements is most correct with respect to separation of duties?
a. Employees should not have temporary and permanent custody of assets.
b. Employees who authorize transactions should not have custody of related assets.
c. It is permissible to allow an employee to open cash receipts and record those receipts.
d. Employees who authorize transactions should have recording responsibility for these transactions.
b
Which of the following would contribute most to the safeguarding of assets?
a. Access to computer facilities and records is limited to authorized personnel.
b. Training programs are conducted to develop competence of newly hired personnel
c. Control and subsidiary accounts are reconciled on a regularly scheduled basis
d. Blank stock of all purchase orders and sales invoices are prenumbered
a
Which of the following statements is correct with respect to separation of duties?
a. Employees should not have temporary and permanent custody of assets.
b. It is desirable to prevent employees who authorize transactions from having custody of related assets
c. It is permissible to allow an employee to open cash receipts and record those receipts
d. None of the above is correct
b
The most important type of protective measure for safeguarding assets and records is
a. Adequate separation of duties among personnel
b. Proper authorization of transactions
c. The use of physical precautions
d. Adequate documentation
c
Which of the following statements best describes the entity’s risk assessment process?
a. Entity’s process of identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks.
b. Entity’s assessment of audit risks affecting the financial statements.
c. Entity’s process of evaluating the risks of misstatements due to fraud.
d. Entity’s assessment of risks that internal control may fail to detect misstatements affecting the financial statements.
a
Which of the following deal with ongoing or periodic assessment of the quality of internal control by management?
a. Quality control activities
b. Monitoring activities
c. Oversight activities
d. Management activities
b
An entity’s ongoing monitoring activities often include
a. Periodic audits by the audit committee.
b. Reviewing the purchasing function.
c. The audit of the annual financial statements.
d. Control risk assessment in conjunction with quarterly reviews.
b
The policies and procedures that help ensure that management directives are carried out are referred to as the:
a. Control environment
b. Control activities
c. Monitoring of controls
d. Information system
b
Which of the following is not one of the specific control activities that are relevant to financial statement audit?
a. Performance reviews
b. Physical controls
c. Segregation of duties
d. Monitoring
d
Proper segregation of functional responsibilities in an effective structure of internal control calls for separation of the functions of
a. Authorization, execution, and payment
b. Authorization, recording, and custody
c. Custody, execution, and reporting
d. Authorization, payment, and recording
b
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
b
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 in order to achieve the entity’s objectives
d. Activities that deal with the ongoing assessment of the quality of internal control by management
c
A small entity may use less formal means to ensure that internal control objectives are achieved. For example, extensive accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed if
a. Management is closely involved in operations
b. The entity is involved in complex transactions
c. The entity is subject to legal or regulatory requirements also found in larger entities.
d. Financial reporting objectives have been established
a
Which of the following may represent the biggest challenge smaller public companies face in implementing effective internal control?
a. A lack of expertise
b. Reduced importance
c. Limited resources
d. Limited available guidance
c
A major control available in a small company, which might not be feasible in a large company, is
a. A wider segregation of duties
b. A voucher system
c. Fewer transactions to process
d. The owner-manager’s personal interest and close relationship with personnel.
d
Control risk should be assessed in terms of
a. Specific controls.
b. Types of potential fraud.
c. Financial statement assertions.
d. Control environment factors.
c
The auditor’s consideration of a company’s internal control is:
a. Required under the Philippine Accountancy Act.
b. Required by PSA.
c. Required by the Code of Ethics for Professional Accountants.
d. Recommended by the SEC.
b
The auditor’s 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.
b
Auditing standards require the auditor to obtain an understanding of the client’s internal control structure
a. For every audit.
b. For first time audits.
c. Sufficient to find any frauds which may exist.
d. Whenever it would be appropriate
a
When auditing a private company, the auditor should obtain an understanding of internal control sufficient to
a. Provide reasonable protection against client fraud and defalcations by client employees.
b. Assess control risk.
c. Provide a basis for suggestions to the client for improving the accounting system.
d. Provide a method for safeguarding assets, checking the accuracy and reliability of accounting data, promoting operational efficiency, and encouraging adherence to prescribed managerial policies.
b
Which of the following techniques is not useful for obtaining an understanding of internal controls?
a. Make inquiries of the client’s personnel.
b. Examine documents and records
c. Read industry trade magazines
d. Observe client activities and operations
c
Evaluating the design of the entity’s internal control would involve
a. Considering whether the control, individually or in combination with other controls, is capable of effectively preventing, or detecting and correcting, material misstatements.
b. Determining whether control exists and the entity is using it.
c. Determining whether the control is operating effectively.
d. Determining the consistency of application of internal control procedures.
a
Obtaining knowledge about whether the control is implemented can best be obtained by
a. Inquiry of client’s personnel
b. Reading procedures manual
c. Tracing transactions through the information system relevant to financial reporting.
d. Performing tests of control
c
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.
c
The auditor uses his understanding of accounting and internal control systems together with the inherent and control risks assessments to perform all of the following except
a. Identify the types of misstatements that could occur
b. Consider factors that affect the risk of material misstatements
c. Design appropriate audit procedures
d. Evaluate the effectiveness of the accounting and control systems.
d
When obtaining an understanding of the accounting and internal control systems to plan the audit, the auditor should obtain knowledge about the
a. Design of the accounting and internal control systems, Operation of accounting and internal control systems
b. Design of the accounting and internal control systems
c. None of the two
d. Operation of accounting and internal control systems
a
When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is
a. Tracing.
b. Vouching.
c. Performing a walk-through.
d. Testing controls.
c
Which of the following statements is incorrect about walk-through tests?
a. It involves tracing a few transactions through the accounting systems.
b. This procedure may form part of tests of control.
c. The nature and extent of walk-through tests performed by the auditor are such that they alone would provide sufficient appropriate audit evidence to support a low assessment of control risk.
d. This procedure is performed to determine whether the controls are being implemented.
c
The auditor’s understanding of the accounting and internal control systems significant to the audit is ordinarily obtained through previous experience with the entity. In addition, the auditor may perform the following procedures, except
a. Inquiries of appropriate management, supervisory and other personnel at various organizational levels within the entity, together with reference to documentation, job descriptions and flow charts
b. Inspection of documents and records produced by the accounting and internal control system
c. Observation of the entity’s activities and operations, including observation of the organization of computer operations, management personnel and the nature of transaction processing.
d. Reperformance of internal control procedures.
d
When obtaining understanding of the entity’s internal control, the auditor should obtain knowledge about the system’s
a. Design, Implementation, Operating Effectiveness
b. Design and Implementation
c. Operating Effectiveness
d. Implementation and Operating Effectiveness
b
Which of the following would an auditor least likely perform when obtaining understanding of the entity’s accounting and internal control systems?
a. Inquiries of appropriate personnel
b. Inspection of documents and record
c. Observation of the entity’s activities and operations
d. Performing analytical review procedures
d
After obtaining sufficient understanding of the entity’s accounting and internal control systems, the auditor should make a preliminary assessment of
a. Audit risk
b. Control risk
c. Inherent risk
d. Detection risk
b
Which of the following is not a medium that can normally be used by an auditor to record information concerning a client’s internal control policies and procedures?
a. Narrative memorandum
b. Flowchart
c. Procedures manual
d. Questionnaire
c
The auditor observes client employees while gaining an understanding of the internal control structure to
a. Prepare a flowchart
b. Update information contained in the organization and procedure manuals
c. Gain knowledge of the design and application of relevant policies, procedures, and records relating to the control structure
d. Determine the extent of compliance with quality control standards
c
Which of the following statements regarding auditor’s documentation of the client’s internal control structure is correct?
a. Documentation must include flow charts.
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary, and the extent of documentation may vary.
c
In gaining an understanding of the internal control structure, the auditor may trace several transactions through the control process. The primary purpose of this task is to
a. Replace substantive tests
b. Detect fraud
c. Determine the effectiveness of the control procedures
d. Determine whether the controls have been placed in operation
d
The conclusion reached as a result of assessing control risk is referred to as the:
a. Assurance provided by internal control structure.
b. Determined level of acceptable detection risk
c. Product of the understanding of internal control.
d. Assessed level of control risk
d
An auditor assesses control risk because it
a. Is relevant to the auditor’s understanding of the control environment
b. Provides assurance that the auditor’s materiality levels are appropriate
c. Indicates to the auditor where inherent risk may be the greatest
d. Affects the level of detection risk that the auditor may accept
d
When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increases the
a. Extent of tests of controls.
b. Level of detection risk.
c. Extent of tests of details.
d. Level of inherent risk.
c
An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risk of material misstatement primarily to
a. Determine whether procedures and records concerning the safeguarding of assets are reliable.
b. Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized.
c. Modify the initial assessments of inherent risk and preliminary judgments about materiality levels.
d. Determine the nature, timing and extent of substantive tests for financial statement assertions.
d
Which of the following statements concerning control risk is correct?
a. Assessing control risk and obtaining an understanding of an entity’s internal control structure may be performed concurrently
b. When control risk is at a high level, an auditor is required to document the basis for that assessment
c. Control risk may be assessed sufficiently low to eliminate substantive testing for significant transaction classes
d. When assessing control risk an auditor should not consider evidence obtained in prior audits about the operation of control procedures
a
Which of the following is a step in an auditor’s decision to assess control risk at less than high level?
a. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls
b. Perform tests of details of transactions and accounts balances to identify potential errors and fraud
c. Identify specific internal control policies and procedures that are likely to detect or prevent material misstatements
d. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing
c
If, after obtaining an initial understanding of a client’s internal control, the auditor wishes to further reduce the assessed level of control risk relating to plant asset transactions, the auditor should next
a. Make extensive substantive tests of plant asset balances.
b. Establish the physical existence of current year additions.
c. Complete the plant asset section of the internal accounting control questionnaire
d. Further test those internal control procedures relating to processing and recording plant asset transactions.
d
An auditor uses the knowledge provided by the understanding of internal control and the final assessed level of control risk primarily to determine the nature, timing, and extent of the
a. Attribute tests
b. Tests of controls
c. Compliance tests
d. Substantive tests
d
Control testing is performed in order to determine whether or not
a. The assessed level of control risk can be reduced
b. Necessary controls are absent
c. Incompatible functions exist
d. Material peso errors exist
a
Which of the following procedures most likely would provide an auditor with evidence about whether an entity’s internal control activities are suitably designed to prevent or detect material misstatements?
a. Reperforming the activities for a sample of transactions.
b. Performing analytical procedures using data aggregated at a high level.
c. Vouching a sample of transactions directly related to the activities.
d. Observing the entity’s personnel applying the activities.
d
Tests of controls do not include
a. Reperformance of internal control procedures
b. Inquiries about, and observation of, internal controls which leave no audit trail
c. Inspection of documentary support for transactions evidencing authorization
d. Analytical procedures involving comparison of operating expenses with budgeted amounts.
d
To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including
a. Inquiry
b. Analytical procedures
c. Calculation
d. Confirmation
a
When the auditor finds that there are missing controls in an area of the accounting system, the audit program in that area would be modified in such a way as to
a. Increase the amount of tests of controls
b. Increase the reliance on tests of controls
c. Cause the issuance of a qualified or adverse opinion
d. Eliminate the need for tests of controls
d
For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by
a. Reperformance and corroboration
b. Observation and inquiry
c. Inspection and vouching
d. Confirmation and recomputation
b
Audit evidence concerning proper segregation of duties normally is best obtained by:
a. Direct personal observation of the employee who applies control procedures.
b. Making inquiries of co-workers about the employee who applies control procedures.
c. Preparation of a flowchart of duties performed and available personnel.
d. Inspection of third-party documents containing the initials of who applied control procedures.
a
Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is most likely obtained in part by
a. Preparing flowcharts.
b. Performing substantive tests.
c. Analyzing tests of trends and ratios.
d. Inspection of documents.
d
An auditor generally tests the segregation of duties related to inventory by
a. Personal inquiry and observation.
b. Test counts and cutoff procedures.
c. Analytical procedures and invoice recomputation.
d. Document inspection and reconciliation.
a
Based on a study and evaluation completed at an interim date, the auditor concludes that no significant internal accounting control weaknesses exist. The records and procedures would most likely be tested again at year-end if
a. Compliance tests were not performed by the internal auditor during the remaining period
b. The internal accounting control system provides a basis for reliance in reducing the extent of substantive testing.
c. The auditor used non-statistical sampling during the interim period compliance testing
d. Inquiries and observations lead the auditor to believe that conditions have changed
d
Before relying on the system of internal control, the auditor obtains a reasonable degree of assurance that the internal control procedures are in use and operating as planned. The auditor obtains this assurance by performing
a. Substantive tests
b. Tests of controls
c. Transaction tests
d. Tests of trends and ratios
b
After obtaining an understanding of the internal control structure and assessing control risk, an auditor decided to perform tests of controls. The auditor most likely decided that
a. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests
b. Additional evidence to support further reduction in control risk is not available
c. An increase in the assessed level of control risk is justified for certain financial statement assertions
d. There were may internal control weaknesses that could allow errors to enter the accounting system
a
After studying and evaluating a client’s existing internal control, an auditor has concluded that the policies and procedures are well designed and functioning as intended. Under these circumstances, the auditor would most likely.
a. Perform further control tests to the extent outlined in the audit program.
b. Determine the control policies and procedures that should prevent or detect errors and fraud.
c. Set detection risk at a higher level than would be set under conditions of weak internal control.
d. Set detection risk at a lower level than would be set under conditions of weak internal control.
c
After considering a client’s internal control, an auditor has concluded that the system is well designed and is functioning as anticipated. Under these circumstances, the auditor would most likely
a. Cease to perform further substantive tests
b. Not increase the extent of planned substantive tests
c. Increase the extent of anticipated analytical procedures
d. Perform all tests of controls to the extent outlined in the pre-planned audit program
b
After considering internal control, an auditor might decide to
a. Increase the extent of tests of controls and substantive tests in areas where internal control is strong
b. Increase the extent of substantive tests in areas where internal control is weak
c. Reduce the extent of tests of controls in areas where internal control is strong
d. Reduce the extent of both substantive tests and tests of controls in areas where internal control is strong
b
The auditor would most likely assess control risk at a high level when
a. It would be efficient to perform test of control
b. The entity’s accounting and internal control systems are not reliable
c. The auditor wishes to rely on the entity’s accounting and internal control systems.
d. The auditor wants to restrict substantive tests.
b
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.
a
When obtaining audit evidence about the effective operation of internal controls, the auditor considers all of the following except
a. How they were applied
b. The consistency with which they were applied during the period
c. By whom they were applied
d. Why they were applied
d
When control risk is assessed at a high level, the auditor should document his
a. Understanding of internal control components, Conclusion that control risk is at a high level, Basis for concluding that control risk is at a high level
b. Understanding of internal control components, Conclusion that control risk is at a high level
c. Understanding of internal control components
d. Conclusion that control risk is at a high level
b
When control risk is assessed at less than high level, the auditor should document his
a. Understanding of Internal Control, Basis for the assessment
b. Understanding of Internal Control
c. None of the two
d. Basis for the assessment
a
The auditor will perform tests of controls when controls are initially assessed as
a. Low Level, Moderate Level, High Level
b. Low level, Moderate level
c. Moderate Level
d. High Level
b
Which of the following may not be required on a particular audit of a company?
a. Tests of controls.
b. Analytical procedures.
c. Substantive procedures.
d. Risk assessment procedures.
a
Control risk should be assessed in terms of
a. Specific controls.
b. Types of potential fraud.
c. Control environment factors.
d. Financial statement assertions.
d
After assessing control risk, an auditor desires to seek a further reduction in the assessed level of control risk. At this time, the auditor would consider whether
a. The entity’s controls have been implemented.
b. The entity’s controls pertain to any financial statement assertions.
c. It would be efficient to obtain an understanding of the entity’s information system
d. Additional audit evidence sufficient to support a further reduction in the assessed level of control risk is likely to be available.
d
Tests of controls are directed toward the control’s
a. Efficiency
b. Effectiveness
c. Efficiency and effectiveness
d Cost benefit ratio
b
Based on the requirement of PSA 330, how frequently must an auditor test operating effectiveness of controls that appear to functions as they have in past years and on which the auditor wishes to rely in the current year?
a. Monthly.
b. Each audit.
c. At least every second audit
d. At least every third audit.
d
Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is most likely obtained in part by
a. Preparing flowcharts.
b. Performing substantive tests.
c. Analyzing tests of threads and ratios.
d. Inspection of documents
d
An auditor generally tests the segregation of duties related to inventory by
a. Personal inquiry and observation.
b. Test counts and cutoff procedures.
c. Analytical procedures and invoice recomputation.
d. Document inspection and reconciliation.
a
Which of the following audit tests would be regarded as a test of controls?
a. Comparison of the inventory pricing to vendors’ invoices.
b. Tests of the signatures on canceled checks to board of directors authorizations
c. Tests of the additions to property, plant, and equipment by physical inspections
d. Review of the specific items making up the balance in a given general ledger account
b
The auditor may decide to perform some tests of control during an interim visit in advance of the period end. However, the auditor cannot rely on the results of such test without considering the need to obtain further audit evidence relating to the remainder of the period. Factors to be considered in deciding whether to perform tests of controls for the remaining period would not include
a. The results of the interim tests.
b. The length of remaining period.
c. Whether any changes have occurred in the accounting and internal control systems during the remaining period
d. The results of substantive tests
d
Most audits of a company are done annually by the same CPA firm. Except for initial engagements, the auditor begins the audit with a great deal of information about the internal controls developed in prior years. Because systems and controls usually do not change often
a. The auditor can skip the evaluation of this area on repeat engagements.
b. This information can be updated and carried forward to the current year’s audit.
c. It eases the burden on the auditor’s requirement to do a complete study of the controls this year.
d. It is sufficient for the auditor just to inquire of client whether the controls have been changed since last year.
b
Which of the following is correct when the auditor assesses control risk at a high level?
a. The auditor should document the basis for his assessment
b. The auditor should perform tests of controls
c. The auditor should document his conclusion that control risks is at a high level.
d. The auditor need not document his understanding of internal control
a
The auditor ordinarily assesses control risk at a high level for some or all assertions when
a. The entity’s internal control is effective, Evaluating the effectiveness of the control would not be efficient
b. The entity’s internal control is effective
c. None of the two
d. Evaluating the effectiveness of the control would not be efficient
d
The objective of tests of details of transactions performed as tests of controls is to
a. Monitor the design and use of entity documents such as prenumbered shipping form
b. Determine whether controls have been placed in operation.
c. Detect material misstatements in the account balances of the financial statements.
d. Evaluate whether controls operated effectively.
d
Tests of controls are designed to obtain evidence to support the auditor’s assessment of control risk
a. At a high level
b. At less than high level
c. At zero level
d. At the maximum level
b
Which of the following statements regarding tests of controls is correçt?
a. Control test deviations are significant only if they occur in significant patterns never before seen by the auditor
b. Tests of controls must be performed on each audit
c. Tests of controls must be performed if the auditor intends to rely on the client’s controls
d. All of the above are correct
c
After performing a study and evaluation of the client’s system of internal control, an auditor has concluded that the controls are well designed and functioning as anticipated. Under these circumstances the auditor would most likely
a. Cease to perform further substantive tests
b. Not increase the extent of predetermined substantive tests
c. Increase the extent of planned analytical review procedures
d. Perform all tests of controls to the extent outlined in the audit program.
b
Extended performance of tests of controls is most likely to occur when.
a. It is a first-year audit
b. The auditor is doing a “fraud audit”
c. Controls are effective and assessed control risk is low.
d. Controls are ineffective and assessed control risk is high.
c
An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls. Which of the following, would generally NOT be used?
a. Make inquiries of appropriate client personnel
b. Examine documents, records, and reports
c. Reperform client procedures
d. Inspect the design of documents
d
Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed?
a. Confirmations of receivables verifying account balances.
b. Letters of representations corroborating inventory pricing.
c. Attorneys’ responses to the auditor’s inquiries.
d. Client records documenting the use of computer programs.
d
Significant deficiencies in internal control of a public company must be reported in writing to which of the following?
a. The SEC
b. Members of management who are responsible for the related area of the company
c. Audit committee of the company’s board of directors
d. The PICPA
c
When a compensating control exists, the absence of a key control
a. Is no longer a concern because there is no longer a significant deficiency or material weakness.
b. Is still a major concern to the auditor.
c. Could cause a material loss, so it must be tested using substantive procedures.
d. Is magnified and must be removed from the sampling process and examined in its entirety.
a
In general, a material weakness in internal control may be defined as a condition in which material errors or irregularities may occur and not be detected within a timely period by
a. An independent auditor during tests of controls.
b. Management when reviewing interim financial statements and reconciling account balances.
c. Employees in the normal course of performing their assigned functions.
d. Outside consultants who issue a special-purpose report on internal control structure.
c
A consideration of internal control made during an audit is usually not sufficient to express an opinion on an entity’s controls because
a. Weaknesses in the system may go unnoticed during the audit engagement.
b. A consideration of internal control is not necessarily made during an audit engagement.
c. Only those controls on which an auditor intends to rely are reviewed, tested and evaluated.
d. Controls can change each year.
c
During the consideration of internal control in a financial statement audit, an auditor is not obligated to
a. Search for significant deficiencies in the operation of the internal control.
b. Understand the internal control and the information system.
c. Determine whether the control activities relevant to audit planning have been implemented.
d. Perform procedures to understand the design of internal control.
a
The management letter is used
a. To allow management to corroborate oral representations to the auditor
b. To confirm the terms of the audit engagement
c. To document the auditor’s consideration of internal controls
d. To make recommendations to the client based on observations made during the audit
d
