M8-Risk Assessment:Part 2

Question 1

One of information technology’s potential benefits is the enhanced timeliness of information. (true or false)

Answer 1

true

Question 2

Observation and inspection may be used to evaluate the design of controls. Observation of entity personnel applying control activities is a procedure that would likely provide evidence about the design of the activities. (true or false)

Answer 2

true

Question 3

The control environment reflects the overall attitude, awareness and actions of those charged with governance (i.e., the board of directors, management, owners, and others) concerning the importance of control and its emphasis in the entity. (true or false)

Answer 3

true

Question 4

The control environment represents the collective effect of various factors on establishing, enhancing, or mitigating the effectiveness of specific policies and procedures. Such factors include management’s philosophy and operating style, the entity’s organizational structure, the participation of those charged with governance, methods of assigning authority and responsibility, and human resource policies and practices. (true or false)

Answer 4

true

Question 5

The auditor should obtain sufficient knowledge of the client’s information system relevant to financial reporting to understand the types of transactions processed, and how the transactions are initiated, recorded and summarized. Included in the information system relevant to financial reporting is the preparation of significant accounting estimates. (true or false)

Answer 5

true

Question 6

“Substance over form” concerns relate to controls that appear on the surface to exist but in reality are not operating effectively. When obtaining an understanding of a client’s internal controls, an auditor should concentrate on the substance of controls rather than the form because even when appropriate procedures are established, management may not enforce compliance. (true or false)

Answer 6

true

Question 7

The control environment element of an entity’s internal control relates to the tone of the organization, which includes human resource policies and practices. (true or false)

Answer 7

true

Question 8

The concept of reasonable assurance recognizes that the cost of an entity’s internal control should not exceed the benefits that are expected to be derived. The cost-benefit relationship is a primary criterion that should be considered in designing internal control. (true or false)

Answer 8

true

Question 9

Knowledge about the design and implementation of relevant internal controls should be used to identify types of misstatements that could occur. (true or false)

Answer 9

true

Question 10

Services performed by another organization are not considered to be part of the client’s information system if the services provided are limited to executing transactions that are specifically authorized by the client. (true or false)

Answer 10

true

Question 11

Manual controls would most likely be more suitable than automated controls for large, unusual, or nonrecurring transactions. (true or false)

Answer 11

true

Question 12

An inherent limitation of internal control exists when, although good controls are instituted, management can override those controls. When the CEO requests a check with no purchase order, this is an example of management override. (true or false)

Answer 12

true

Question 13

The suitability of the client’s lines of reporting is an important part of the organizational structure, which in turn is a key component of the control environment. Since the control environment has a pervasive effect on the auditor’s risk assessment, consideration of the suitability of the client’s lines of reporting is quite relevant in evaluating control risk. (true or false)

Answer 13

true

Question 14

The more complex the IT system, the more extensive the documentation (such as flowcharts, narratives, questionaires, decision tables, etc.). The less complex the IT system, more limited documentation, such as a memorandum, may be sufficient. (true or false)

Answer 14

true

Question 15

The best compensating control for the lack of segregation of duties in smaller organizations is to have more management oversight of incompatible functions. (true or false)

Answer 15

true

Question 16

Human error in decision making is an example of inherent limitation in an internal control system. Internal control, no matter how effective, has inherent limitations. Inherent limitations in internal control recognize the realities that human judgment in decision making can be faulty and that breakdowns in internal control can occur because of human error. These limitations in internal control prevent auditors from providing absolute assurance about an internal control system. (true or false)

Answer 16

true

Question 17

The classes of transactions in the issuer’s operations that are significant to the issuer’s financial statements are typically assessed when the auditor is obtaining an understanding of the information and communication component of internal control. (true or false)

Answer 17

true

Question 18

Even a well-designed internal control system has its limitations. One example of a limitation of internal control includes deliberate circumvention of controls by collusion of two or more people, such as when a purchasing employee and an outside vendor participate in a kickback scheme. Other limitations of internal controls include human error and management override of control. (true or false)

Answer 18

true

Question 19

The use of budgets and forecasts to identify variance improves managers ability to supervise company activities. Variances from budgets serve as signals to managers that a potential problem exists. (true or false)

Answer 19

true

Question 20

Control environment factors include:

Answer 20

1. Communication and enforcement of integrity and ethical values.
2. Commitment to competence
3. Participation of those charged with governance
4. Management’s philosophy and operating style
5. Organizational structure
6. Assignment of authority, responsibility, and accountability
7. Human resource policies and practices

Question 21

Monitoring is the process of assessing the quality of internal control performance over time and taking necessary corrective actions. Eliminating a control that is not operating effectively would not be an appropriate corrective action. (true or false)

Answer 21

true