Final Exam

Question 1

Which is not a management objective for an effective internal control system?
a. effectiveness of operations
b. compliance with laws and regulations
c. mitigate employee collusion
d. reliability of financial reporting

Answer 1

c. mitigate employee collusion

Question 2

Which is not part of management’s IC reporting responsibilities?
a. identify the framework of IC evaluation
b. assessment of IC for financial reporting
c. establish adequate IC for financial reporting
d. state level of reasonable assurance

Answer 2

d. state level of reasonable assurance

Question 3

Auditors first focus on internal control over classes of transactions because the accuracy of accounting system outputs (account balances) depends heavily on the accuracy of inputs
a. true
b. false

Answer 3

a. true

Question 4

Which is not one of the 5 COSO components?
a. control environment
b. risk assessment
c. monitoring
d. IT management

Answer 4

d. IT management

Question 5

Reducing management override is a part of which aspect of the COSO control environment component?
a. board and audit committee participation
b. commitment to competence
c. organizational structure
d. integrity and ethical values

Answer 5

a. board and committee participation

Question 6

Manager purchasing limits are part of which COSO control activity?
a. adequate separation of duties
b. proper authorization of transactions
c. physical control of assets and records
d. independent check on performance

Answer 6

b. proper authorization of transactions

Question 7

Which is not an area of general controls for IT?
a. backup and recovery
b. review of sales transactions
c. passwords and other access
d. system change approvals

Answer 7

b. review of sales transactions

Question 8

Which is not a part of the written narrative description of a client’s IC?
a. document origin
b. transaction processing
c. records disposition
d. flowchart diagram

Answer 8

d. flowchart diagram

Question 9

Which is not part of the control risk matrix?
a. control frequency
b. identify control deficiencies
c. associate controls with audit objectives
d. associate deficiencies with audit objectives

Answer 9

a. control frequency

Question 10

Which activity would more likely be part of obtaining an understanding of controls rather than a substantive test of controls?
a. procedure observation with specific timing
b. document inspection sampling
c. transaction walkthrough
d. reperformance

Answer 10

c. transaction walkthrough

Question 11

Unchanged automated controls require minimal testing
a. true
b. false

Answer 11

a. true

Question 12

Which is not a procedure for tests of controls?
a. reperform client procedures
b. observe control-related activities
c. conduct analytical procedures
d. make inquiries

Answer 12

c. conduct analytical procedures

Question 13

If a client uses an external service provider for important systems such as payroll, the auditor can rely on a service control organization audit rather than perform an audit of that service provider themselves
a. true
b. false

Answer 13

a. true

Question 14

The control risk assessment is used in the financial statement audit to help determine:
a. acceptable audit risk
b. planned detection risk
c. inherent risk
d. engagement risk

Answer 14

b. planned detection risk

Question 15

Which audit procedure takes place first, before the other “four audit procedures”?
a. tests of controls
b. risk assessment
c. substantive and analytical procedures
d. tests of details of balances

Answer 15

b. risk assessment

Question 16

Which type of evidence can be collected for all four further audit procedures?
a. inquiries
b. reperformance
c. confirmation
d. physical examination

Answer 16

a. inquiries

Question 17

Which is the most cost-effective procedure:
a. risk assessment
b. test of controls
c. analytical procedures
d. tests of details of balances

Answer 17

c. analytical procedures

Question 18

Substantive tests of transactions are usually performed alongside:
a. risk assessment
b. test of controls
c. analytical procedures
d. tests of details of balances

Answer 18

b. test of controls

Question 19

If a client has strong controls, the auditor can rely on extensive testing of controls as an offset to smaller amount of testing transactions
a. true
b. false

Answer 19

a. true

Question 20

The transaction-related audit objective ‘occurrence’ is related to which balance-related audit objective as regard increases in balances?
a. existence
b. completeness
c. accuracy
d. reliable value

Answer 20

a. existence

Question 21

Which balance-related audit objective does not have a direct relationship to a transaction-related audit objective?
a. existence
b. completeness
c. accuracy
d. realizable value

Answer 21

d. realizable value

Question 22

During phase 4 of the audit process as the audit is being completed, the auditor focuses on which audit objective?
a. accuracy
b. realizable value
c. presentation
d. existence

Answer 22

c. presentation

Question 23

Which is NOT a type of contingent liability?
a. notes receivable discounts
b. capital leases
c. litigation
d. product warranties

Answer 23

b. capital leases

Question 24

Which is like a contingent liability but usually encountered as a less formal terms of trade?
a. purchase commitments
b. obligation guarantees
c. environmental liability
d. letter of credit

Answer 24

a. purchase commitments

Question 25

A subsequent event that has no direct effect on the FS and is evidence of new conditions that did not exist in the balance sheet does not need disclosure
a. true
b. false

Answer 25

b. false

Question 26

A dual-date audit report is an option for what type of subsequent event?
a. contains information that would assist in fair presentation
b. occurs after BS date but before audit report date
c. non-recognized subsequent event if significant
d. occurs after the audit report date but before audit report issuance

Answer 26

d. occurs after the audit report date but before audit report issuance

Question 27

Which is not one of the additional final review tasks for the audit report beyond the disclosure issues of contingent liabilities and subsequent events?
a. test for ongoing concern
b. inquiry of all attorneys used by company
c. obtain management representation letter
d. consider supplementary information

Answer 27

b. inquiry of all attorneys used by company

Question 28

Auditors are responsible to inform users of FS if there is a subsequent discovery of facts that indicate a MS or material weakness no matter if it was the auditor’s or client’s fault
a. true
b. false

Answer 28

a. true

Question 29

How is the ‘separation of operational responsibility from record keeping’ different from the ‘separation of the custody of assets from accounting’?

Answer 29

The separation of operational responsibility from record-keeping is to ensure unbiased information and is typically the responsibility of a separate department reporting to the controller, dealing with a whole department. The separation of custody of assets from accounting is to mitigate the risk that comes with only one person performing certain functions and deals with individual people.

Question 30

How does the auditor use information obtained from the control risk assessment and testing of controls to plan audit procedures?

Answer 30

The auditor obtains an understanding of the design and implementation of internal control to make a preliminary assessment of control risk as part of the auditor’s overall assessment. The auditor uses this preliminary assessment to plan the audit for each material class of transactions. However, in some instances the auditor may learn that the control deficiencies are so significant that the client’s financial statements may not be auditable.

Question 31

Tests of controls and substantive tests of transactions are usually performed at the same time. But the substantive tests of transactions rely on the results of the tests of controls. How do auditors resolve this inconsistency?

Answer 31

The audit procedures include both tests of controls as well as substantive tests of transactions, which vary depending on assessed control risk. When controls are effective and control risk is assessed as low, auditors put heavy emphasis on tests of controls. Some substantive tests of transactions will also be included. If control risk is assessed at maximum, only substantive tests of transactions will be used.

Question 32

Explain why the analysis of legal expense is an essential part of every audit.

Answer 32

Analyzing legal expenses for the period under audit and reviewing invoices and statements from legal counsel is a common audit procedure used to search for contingent liabilities (especially lawsuits and pending tax assessments).