Audit Ch. 5

After obtaining an understanding of the entity's internal control and assessing control risk, an auditor of a non-public company decided not to perform additional tests of controls. The auditor most likely concluded that the:

a. internal control structure was properly designed and justifiably may be relied on.

b. assessed level of inherent risk exceeded the assessed level of control risk.

c. evidence obtainable through tests of controls would not support an increased level of control risk.

d. additional evidence to support a further reduction in control risk was not cost beneficial.

d. additional evidence to support a further reduction in control risk was not cost beneficial.

Proper separation of duties reduces the opportunities to allow persons to be in positions to both:

a. journalize entries and prepare financial statements.

b. perpetrate a fraud and then conceal it in the books.

c. establish internal controls and authorize transactions.

d. record cash receipts and cash disbursements.

b. perpetrate a fraud and then conceal it in the books.

An audit team's responsibility would not include:

a. documentation of understanding of a client's internal controls.

b. assessing the effectiveness of a client's internal controls.

c. communicating internal control deficiencies.

d. designing client's internal controls.

d. designing client's internal controls.

In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or activity is whether the policy or activity:

a. affects management's financial statement assertions.

b. provides adequate safeguards over access to assets.

c. enhances management's decision making processes.

d. reflects management's philosophy and operating style.

a. affects management's financial statement assertions.

Which of the following statements is correct regarding internal control?

a. Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.

b. A well-designed internal control environment ensures the achievement of an entity's control objectives.

c. A well-designed and operated internal control environment should detect collusion perpetrated by two people.

d. An inherent limitation to internal control is the fact that controls can be circumvented by management override.

d. An inherent limitation to internal control is the fact that controls can be circumvented by management override.

The most important foundational component of an entity’s internal control system is

a. Effectiveness and efficiency of operations.

b. The control environment.

c. Reliability of financial reporting.

d. Compliance with applicable laws and regulations.

d. All of the above.

The primary purpose for obtaining an understanding of internal control during the audit of a nonissuer is to

a. Provide a basis for making constructive suggestions in a management letter.

b. Determine the nature, timing, and extent of further audit tests to be performed.

c. Provide the rationale for the inherent risk assessment at the financial statement assertion level.

d. Provide information for a communication of internal control–related matters to management.

C. A written audit plan.

Effectiveness of audit procedures would be reduced by

a. Selecting larger sample sizes for audit.

b. Performing audit procedures at the fiscal year-end date as opposed to the interim period. c. Deciding to obtain external evidence instead of internal evidence.

d. Performing procedures during the interim period as opposed to at the fiscal year-end date.

d. Performing procedures during the interim period as opposed to at the fiscal year-end date.

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for

a. Inquiry of client personnel.

b. Observation of company operations.

c. Confirmation of balances.

d. Inspection of documentation.

c. Confirmation of balances.

Which of the following is a preventive control?

a. Reconciliation of a bank account.

b. Recalculation of a sample of payroll entries by internal auditors.

c. Separation of duties between the payroll and personnel departments.

d. Detailed fluctuation analysis completed by the CFO for revenue.

c. Separation of duties between the payroll and personnel departments.

In most audits of large entities, control risk assessment contributes to audit efficiency, which means that

a. The cost of substantive procedures will exceed the cost of control evaluation work.

b. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs.

c. The cost of control evaluation work will exceed the cost of substantive procedures.

d. Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls.

b. Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs.

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client?

a. A narrative memorandum describing the control system.

b. An internal control questionnaire.

c. A flowchart of the documents and procedures used by the company.

d. All of the above.

b. An internal control questionnaire.

If the auditors encounter a significant scope limitation in evaluating an issuer's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate?
A. Unqualified opinion or adverse opinion.
B. Qualified opinion or adverse opinion.
C. Unqualified opinion or disclaimer of opinion.
D. Disclaimer of opinion.

D. Disclaimer of opinion.

A transaction-level internal control activity is best described as

a. An action taken by auditors to obtain evidence.

b. An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company.

c. A method for recording, summarizing, and reporting financial information.

d. The functioning of the board of directors in support of its audit committee.

b. An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company.

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the

a. Authorization of transactions from the custody of related assets.

b. Operational responsibility from the record-keeping responsibility.

c. Human resources function from the controllership function.

d. Administrative controls from the internal accounting controls. (AICPA adapted)

C. Authorization of transactions from the custody of related assets.

If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the auditor must

a. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

b. Assess control risk at less than the maximum for all relevant assertions.

c. Perform only substantive procedures.

d. Provide additional examples of responses to assessed fraud risks relating to fraudulent financial reporting.

a. Obtain evidence that the controls selected for testing are designed effectively and operated effectively during the entire period of reliance.

If they decide to rely on internal controls, the audit team should assess control risk for relevant assertions by considering the evidence obtained from all sources, including

a. The auditor’s testing of internal controls from the prior year.

b. Misstatements detected during the financial statement audit.

c. Any control deficiencies identified during the audit.

d. All of the answers correct.

d. All of the answers correct.

When completing the audit of internal controls for an issuer, AS 2201 requires auditors to test:

A. Operating effectiveness only.
B. Design effectiveness only.
C. Both operating and design effectiveness.
D. Neither operating nor design effectiveness.

C. Both operating and design effectiveness.

The primary purpose for obtaining an understanding of internal control during the audit of a nonissuer is to:
A. provide a basis for making constructive suggestions in a management letter.
B. determine the nature, timing, and extent of further audit tests to be performed.
C. provide the rationale for the inherent risk assessment at the financial statement assertion level.
D. provide information for a communication of internal control-related matters to management.

B. determine the nature, timing, and extent of further audit tests to be performed.

Which of the following is a preventive control?
A. Recalculation of a sample of payroll entries by internal auditors.
B. Detailed fluctuation analysis completed by the CFO for revenue.
C. Reconciliation of a bank account.
D. Separation of duties between the payroll and personnel departments.

D. Separation of duties between the payroll and personnel departments.

Once the auditor detects a control deficiency, which of the following steps must he or she take first?
A. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion.
B. Modify the planned substantive procedures as a result of the deficiency.
C. Test the deficient control, assuming a maximum level of risk.
D. Perform tests of other controls related to the same assertion as the control deemed ineffective.

A. Evaluate the severity of the deficiency on the auditor's control risk assessment for that assertion.