Week 7 Flashcards
Assessing control risk at less than high involves all of the following except:
concluding that controls are ineffective.
Obtaining an understanding of the internal control and assessing control risk:
may be performed concurrently in an audit.
The conclusion reached as a result of assessing control risk is referred to as the:
assessed level of control risk.
An auditor assesses the level of control risk to:
determine the extent of substantive tests to be performed.
How does the extent of substantive tests required to constitute sufficient appropriate audit evidence vary with the auditor’s assessment of control risk?
Directly.
The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the:
risk that material misstatements exist in the financial report.
Assessing control risk at less than high would most likely involve:
Identifying specific internal controls relevant to specific assertions.
A primary purpose of internal controls is to:
meet objectives of maintaining sound documents and records and accurate financial reporting.
When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to:
assess the risk of material misstatement and plan the audit.
Which of the following would be least likely to suggest to an auditor that the client’s management may have overridden the internal control?
Differences are always disclosed on a computer exception report.
In assessing control risk, the auditor is basically concerned that the system provides reasonable assurance that:
misstatements have been prevented or detected.
T or F
for internal control: Control procedures reasonably ensure that collusion among employees cannot occur.
False
T or F
for internal control: The cost–benefit relationship is a primary criterion that should be considered in designing internal control.
True
What is one of the overriding principles of internal control?
Responsibility for the performance of each duty must be fixed.
Virginia Samuels, the purchasing officer of Handyman Wholesalers Pty Ltd (Handyman), has a relative who owns a retail hardware store. Virginia arranged for hardware to be delivered by manufacturers to the retail store on a COD basis, thereby enabling her relative to buy at ’wholesale prices in Handyman’s name. Virginia was probably able to accomplish this because of Handyman’s poor internal control for:
purchase orders.
A company policy should clearly indicate that defective merchandise returned by customers is to be delivered to the:
receiving clerk.
An effective internal control for the payroll function would generally include which of the following?
Total time spent on jobs should be compared with total time indicated on time-clock cards
An auditor reviews a client’s payroll procedures. The auditor would consider the internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:
distributing payroll cheques to employees.
Management’s attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity’s control environment when:
management is dominated by one individual.
The control environment component of internal controls includes all of the following except:
access to computer programs.
The risk assessment component of internal controls refers to:
the entity’s identification and analysis of risks relevant to achievement of its objectives.
Which of the following is not one of the five elements of internal control?
Corporate governance.
The internal control environment includes all of the following except:
tests of control.
A well-prepared flowchart should make it easier for the auditor to:
perform walk-throughs.
A flowchart is most frequently used by an auditor in connection with the:
review of the client’s internal accounting controls.
Emerald Ltd maintains a large, full-time internal audit staff that reports directly to the chief accountant. Audit reports prepared by the internal auditors indicate that the structure is functioning as it should be and that the accounting records are reliable. The external auditor will probably:
place limited reliance on the work performed by the internal audit staff.
To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the:
audit committee.
When an independent auditor decides that the work performed by internal auditors may have a bearing on the nature, timing and extent of contemplated audit procedures, the independent auditor should plan to evaluate the objectivity of the internal auditors. Relative to objectivity, the independent auditor should:
consider the organisation level to which internal auditors report the results of their work
In which of the following situations would an auditor most likely use a strategy of reliance on internal control?
No paper trail is generated, as the entity receives sales orders, bills customers and receives payment based only on information generated from IT.
One of the major problems with IT systems is that incompatible functions may be performed by the same individual. One compensating control for this is the use of:
a computer log.
If a control total were to be calculated on each of the following data items, which would best be identified as a hash total for a payroll IT application?
Department numbers.
If a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll IT application?
Employee’s identification number.
The completeness of IT-generated sales figures can be tested by comparing the number of items listed on the daily sales report with the number of items billed on the actual invoices. This process uses:
control totals.
Gift Stores Ltd has a fully integrated IT accounting system and is planning to issue credit cards to creditworthy customers. To strengthen the internal control by making it difficult for one to fraudulently create a customer account number, a check digit should be placed:
consistently in any position.
An input control is designed to ensure that:
data received for processing are properly authorised and converted to machine-readable form.
An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts:
provide a visual depiction of clients’ activities.
For a complex system, auditors are least likely to use which of the following when documenting their understanding of internal controls?
Narratives.
Walk-throughs usually involve all of the following audit procedures except:
re-performance.
Which of the following situations is not a reason to assess control risk as high?
The auditor has assessed detection risk as high.
In obtaining an understanding of the internal control policies and procedures that are relevant to audit planning, the auditor should perform procedures to provide sufficient knowledge of:
design of the relevant policies, procedures and records and whether they have been placed in operation.
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?
Procedures manual.
When the auditor has assessed the level of control risk at less than high, the auditor should document:
The understanding of the entity’s internal control elements obtained to plan the audit.
The conclusion and the basis for that conclusion.
The implications for the overall audit strategy.
Procedures directed towards obtaining evidence concerning the effectiveness of the design or operation of an internal control policy or procedure are referred to as:
tests of controls.
The auditor observes client employees in obtaining an understanding of the internal control in order to:
corroborate the information obtained during the initial phases of obtaining an understanding of the internal control.
The following are steps in the audit process: I. prepare flowchart. II. gather exhibits of all documents. III. interview personnel. The most logical sequence of steps is:
III, II, I.
The auditor’s understanding of the client’s internal control is documented to substantiate:
compliance with the auditing standards.
After the auditor has prepared a flowchart of the accounting system and control procedures surrounding sales, and assessed the design of the system, the auditor would perform tests of controls for all control procedures:
considered to be strengths that the auditor plans to use as a basis for an assessed level of control risk less than high.
Which of the following internal control features would an auditor be least likely to review?
Classification of sales and cost records by products.
When considering the internal control for inventory with respect to segregation of duties, an auditor would be least likely to:
inspect documents.
In the weekly computer run to prepare payroll cheques, a cheque was printed for an employee whose employment was terminated the previous week. Which of the following controls, if properly used, would have been most effective in preventing this error or ensuring its prompt detection?
A control total for hours worked, prepared from time-cards collected by the timekeeping department
and compared to the payroll sheets.
The auditor obtains evidence supporting the notion that proper segregation of duties exists by:
personally observing the employees who apply the control procedures.
Which of the following procedures is essential to determine whether effective internal control policies and procedures have been prescribed and are being followed?
Understanding the internal control and performing tests of controls.
