[B] Module 6 - Considerations of Internal Control

C

1. An auditor considers internal control in order to

a. Determine whether assets are safeguarded

b. Suggest improvements in internal control.

c. Plan audit procedures

d. Express an opinion

C

2. The primary purpose of the auditor's consideration of internal control is to provide a basis for

a. Determining whether procedures and records that are concerned with the safeguarding of assets are reliable.

b. Constructive suggestions to clients concerning deficiencies in internal control

c. Determining the nature, timing, and extent of audit tests to be applied

d. Expressions of an opinion.

B

3. The primary objective of procedures to be performed in obtaining an understanding of internal control is to provide an auditor with

a. Evidential matter for use in reducing detection risk

b. Knowledge necessary to plan the audit

c. A basis for which to modify tests of controls

d. Information necessary to prepare flowcharts.

B

4. A reason to establish internal control is to

a. Have a basis of planning the audit.

b. Provide reasonable assurance that the objectives of the organization are achieved

c. Encourage compliance with organizational objectives.

d. Ensure the accuracy, reliability, and timeliness of information

A

5. What is the primary purpose of effective internal control organization?

a. Achievement of certain organizational gods.

b. Completion of a successful audit for the entity.

c. Shareholders' involvement in the company's success

d. Obtaining profitability and financial strength.

C

6. An effective internal control is not expected to provide. a reasonable assurance regarding the achievement of objectives concerning

a. Reliability of financial reporting.

b. Compliance to applicable laws and regulations.

c. Elimination of material misstatements.

d. Effectiveness and efficiency of operations.

B

7. Internal control is primarily establishedwithin a companyto accomplish which of the following objectives?

a. Prevent irregularities

b. Provide reasonable assurance that the company's objective be achieved

c. Catch all errors that may occur in the company

d. Aid in the effective auditing of the company

A

8. Which of the following is not an element-of an entity's internal control?

a. Control risk

b. Control activities

c. The information System

d. The control environment

C

9. One of the major components of an organization's internal control structure includes:

a. Audit control risk

b. The cost-benefit ratio

c. Risk assessment

d. Communication

B

10. 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. Legal environment of the firm, management philosophy, and organizational structure.

B

11. Which of the following is not typically one of management's concerns in designing an effective internal control structure?

a. Reliability of financial reporting.

b. Obtaining the best internal control system possible.

c. Compliance with applicable laws and regulations

d. Efficiency and effectiveness of operations.

C

12. The auditor's review of the client's internal control is documented in order to substantiate

a. Conformity of the accounting records, with Philippine Financial Reporting Standards.

b. Representation as to adherence to requirements of management.

c. Representation as to compliance with Philippine Standards on Auditing

d. The fairness of the financial statement presentation.

D

13. An auditor would most likely .be concerned with internal control policies and procedures that provide reasonable assurance about:

a. The efficiency of management's decision-making process

b. Appropriate prices thatthe entity should charge for its products.

c. Methods of assigning production tasks to employees

d. The entity's ability to process and summarize financial data.

C

14. When considering the effectiveness of internal control, the auditor should recognize that inherent limitations do exist. Which following is an example of inherent limitations in a client's internal control?

a. The effectiveness of procedures depends or the segregation of employee duties.

b. Procedures are designed to assure the execution and 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

15. Which of the following is least likely to be an evidence of effectiveness of controls?

a. Cancelation of supporting document.

b. The policy of documenting the usage of computer program

c. Confirmation of bank balances.

d. Signatures on authorization forms.

D

16. Which of the following is an inherent limitation of any client's internal control?

a. The benefits expected to be derived from effective internal control should not exceed the costs of such control.

b. The competence and integrity of client personnel provide an environment conducive to control and provide assurance that effective control will be achieved.

c. The procedures that are designed to assure the execution and recording of transactions in accordance with proper authorizations are effective against frauds perpetrated by management

d. The procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.

C

17. A system of internal control, regardless of how carefully designed and implemented, contains certain inherent limitations. Which of the following errors or irregularities is not caused by an inherent limitation?

a. The president and chief executive officer, with the assistance of the corporate controller, inflated earnings by recording fictitious sales at year-end.

b. A newly-installed electronic data processing system failed to provide for a comparison of sales order amount with prior customer balance and credit limit. This resulted in numerous sales to customers who had already exceeded their credit limits.

c. Numerous recording errors occurred because persons analyzing and recording transactions did not have the necessary accounting background.

d. A computer programmer and a computer operator conspired to divert funds from the company to an account controlled by dishonest employees.

A

18. Corporate directors, management, external auditors, and internal auditors all play important roles in creating a proper control environment. Top management is primarily responsible for

a. Establishing a proper environment and specifying overall internal control.

b. Reviewing the reliability and integrity of financial information and the means used to collect and report such information.

c. Ensuring that external and internal auditors adequately monitor the control environment.

d. Implementing and monitoring controls that are designed by the board of directors

B

19. The primary responsibility for establishing and maintaining internal controls rests with the

a. internal auditors

b. management

c. Securities and Exchange Commission

d. External auditors.

C

20. Which of the following is not a part of the control environment?

a. Management philosophy and operating style

b. Organizational structure

c. Information rind communication systems

d. Assignment of authority and responsibility

B

21. Internal control is a function of management, and effective control is based upon the concept of charge and discharge of responsibility and duty. Which of the following is an important feature of effective internal control?

a. Responsibility for accounting and financial duties should be assigned to one responsible officer.

b. Responsibility for the performance of each duty must be fixed

c. Responsibility for the accounting duties must be borne by the auditing committee of the company.

d. Responsibility for accounting activities and duties must be assigned only to employees who are bonded.

B

22. The control environment includes which of the following?

a. Control activities

b. Management philosophy and operating style

c. Assessing activity level risks

d. Application level controls

D

23. Which of the following is not a major emphasis in the design of effective internal accounting control?

a. Assets are properly protected

b. Duties are segregated.

c. Transactions are authorized

d. Processes are efficient.

D

24. A proper understanding of the client's internal control is an integral part of the audit planning process. The results of the understanding

a. Must be reported to the major stakeholders.

b. always require the auditor in testing the control policies and procedures.

c. are not reported to client management.

d. May be used as the basis for withdrawing from an audit engagement

C

25. The auditor who becomes aware of reportable conditions is required to communicate such a weakness to the

a. Audit committee and client's legal counsel

b. Board of directors and internal directors.

c. Senior management and board of directors

d. Internal auditors and senior management.

D

26. As part of understanding internal controls, an auditor is not required to

a. Consider factors that affect the risk of material misstatement

b. Ascertain whether internal control policies and procedures have been placed in operation

c. Identify the types of potential misstatements that may occur

d. Obtain knowledge about the operating effectiveness of internal control

B

27. The purpose of tests of controls is to provide reasonable assurance that the

a. Accounting treatment of transactions and balances is valid and proper

b. Control procedures are functioning as intended

c. Entity has complied with disclosure requirements of PFRS

d. Entity has complied with requirements of quality control.

A

28. Tests of controls are used to test whether controls are

a. Operating effectively

b. Placed in operation (implemented)

c. Properly accumulated into balance sheet totals

d. Properly documented by the client

A

29. After documenting internal control in an audit engagement, the auditor may perform tests on

a. Those controls that the auditor plans to rely on

b. Those controls in which deficiencies were identified.

c. Those controls that have a material effect on the financial statement balances

d. A random sample of the controls that were reviewed.

C

30. Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of an internal control procedure?

a. Inquiry of client personnel

b. Recomputation of an accountbalance

c. Observation of client personnel

d. Confirmation of balances or transactions with outside parties

D

31. After the study and evaluation of a client's internal control policies and procedures has been completed, an auditor might decide to

a. increase the extent of substantive testing in areas where the internalcontrol policies and procedures are strong

b. Reduce the extent of control testing in areas where the in control policies and procedures are strong.

c. Reduce the extent of both substantive and control testing in areas where the internal control policies and procedures are strong

d. Increase the extent of substantive testing in areas where internal controls are weak.

A

32. The Philippine Standards on Auditing require the auditor to obtain an understanding of the client's internal controls

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

33. 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

C

34. The auditor is studying internal control policies and procedures within the sales, shipping, and billing subset of the revenue cycle. Which of the following conditions suggests a need for additional testing of controls?

a. Internal control is found to be weak with regard to shipping and billing

b. Internal control over sales, billing; and shipping appears strong but 80% of sales revenue is attributable to three major customers

c. Internal control over billing and shipping is thought to be strong and the auditor considers additional testing of selected controls will result in a major reduction in substantive testing

d. Internal control over the recording of sales is found to be weak and the sales are evenly divided among a large number of customers

D

35. To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of the following except:

a. Make inquiries

b. Make observations

c. Inspect documents and records

d. Design substantive tests

C

36. It is most appropriate that tests of controls be applied to transactions and controls

a. At the balance sheet date

b. At each quarterly interim period.

c. For the entire period under audit

d. At the beginning of the fiscal period.

C

37. To obtain evidence about control risk, an auditor ordinarily selects tests from a variety of techniques, including

a. Analysis

b. Confirmation

c. Reperformance

d. Comparison

C

38. An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence; the auditor most likely will test the procedures by

a. confirmation and observation

b. analytical procedures and confirmation

c. observation and inquiry

d. inquiry and analytical procedures

C

39. 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

a. The audit committee is active in overseeing the entity's financial reporting policies.

b. external policies established by parties outside the entity affect its accounting practices

c. Management is dominated by one individual who is also a shareholder.

d. Internal auditors have direct access to the board of directors and entity management.

C

1. Of the following control environment characteristics, identify the one that contributes most to effective internal control.

a. The audit committee consists of the president, two vice-dents, and the corporate controller.

b. The company does not have a centralized human resource function

c. The company has an effective internal audit staffs that monitors controls on a continuous basis.

d. The company routinely transacts business with related parties.

A

2. Effective internal control

a. Reduces the need for management to review exception reports on a day-to- day basis.

b. Eliminates risk and potential loss to the organization.

c. Cannot be circumvented by management.

d. Is unaffected by changing circumstances arid conditions encountered by the organization.

B

3. Effective internal control requires organizational independence of different departments. Organizational, independence would be impaired in which of the following situations?

a. The internal auditors report to the audit committee of the board of directors

b. The controller reports to the vice president of production.

c. The payroll accounting department reports to the chief accountant

d. The cashier reports to the treasurer

D

4. Internal controls are designed to provide reasonable assurance that:

a. Control policies have not been circumvented through management's joint effort.

b. The internal auditing department's guidance and oversight of management's performance is accomplished economically and efficiently.

c. Management is planning, organizing, and directing processes are properly evaluated.

d. Material errors or fraud would be prevented or detected and corrected within a timely period by employees in the course of performing their assigned duties.

C

5. Which of the following is not an assurance to be provided by an effective internal control system?

a. Management is responsible for knowledge and authorization of transactions.

b. Transactions are recorded to maintain account accountability for assets

c. Access to assets is limited to members of management

d. Transactions are recorded to permit the preparation of reliable financial statements.

B

6. An entity's internal control consists of policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved. Only some of these objectives, policies and procedures are relevant to a financial statement audit. Which of the following would most likely be considered in an audit of financial statements?

a. Timely reporting and review of quality control

b. Maintenance of control over unused checks.

c. Marketing analysis of sales generated by advertising projects

d. Maintenance of statistical production analyses.

B

7. When an organization has strong internal control, management can expect various benefits. The benefit least likely to occur is

a. a reduced cost of an external audit

b. an elimination of employee fraud

c. the availability of reliable data for decision-making purposes and protection of important documents and records.

d. an assurance of compliance to applicable laws and regulations

D

8. Which of the following statements about internal control is correct?

a. Effectively designed 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.

C

9. Internal control can only provide reasonable and not an absolute e of achieving entity's control objectives. One of the factors 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 activeand independent.

c. The cost of internal control should not exceed its benefits.

d. Management monitors internal control.

D

10. A proper segregation of duties requires that an individual who is:

a. Authorizing a transaction records it.

b. Authorizing a transaction maintains custody of the asset that results from the transaction

c. Maintaining a custody of an asset be entitled to have access to the accounting records for the asset

d. Recording a transaction not compares the accounting record of the asset with the asset itself.

A

11. External factors can either strengthen or weaken an entity's internal control. Which of the following conditions supports strong internal control?

a. Strict monitoring by the Bureau of Internal Revenue.

b. The existence of related parties and related-party transactions.

c. Pressure imposed by the financial community to improve earnings

d. An economic downturn.

B

12. Proper segregation of functional responsibilities in an effective system control calls for separation of the functions of:

a. Authorization, execution and payment

b. Authorization, recording and custody

c. Custody, executionand reporting.

d. Authorization, payment, and recording.

A

13. For good internal control, which of the following functions should not be the responsibility of the treasurer's department?

a. Data processing.

b. Handling of cash

c. Custody of securities.

d. Establishing credit policies.

C

14. In general, a material internal control weakness may be defined as a condition in which material errors or fraud would ordinarily not be detected within a timely period by

a. an auditor during the normal study and evaluation of the system of internal control

b. a controller when reconciling accounts in the general ledger

c. Employees in the normal course of performing their assigned functions.

d. The chief financial officer when reviewing interim financial statements.

D

15. In general, material irregularities perpetrated by which of the following are most difficult to detect?

a. Internal auditor

b. Computer operator

c. Cashier

d. Controller

B

16. Controls that enhance the reliability of the financial statements may be classified as prevention controls and detection controls. Which the following is primarily a detection control?

a. Separation of duties between recording cash receipts and cash custody.

b. Bank accounts are reconciled monthly by persons who are independent of cash recording and cash custody.

c. The human resource department authorizes the hiring of only those persons for accounting positions that meet the written job requirements specified by the corporate controller.

d. An accounting manual, accompanied by a detailed chart of accounts, carefully and clearly describes each type of transaction affecting the entity.

A

17. One aspect of internal control requires companies to maintain adequate documentation and records. Which of the following statements is not correct with respect to an entity's maintenance of documents and records?

a. Documents should be pre-numbered only if the client has no other means to maintain records of which documents have been used

b. Documents should be sufficiently simple to ensure that they are clearly understood.

c. Documents should be prepared at the time a transaction occurs or as soon thereafter as possible.

d. Documents should be pre-numbered consecutively to facilitate control over missing documents

D

18. Which of the following factors are included in an entity's control environment?

Audit Committee | Internal Audit Function | Management Style

a. YES YES NO

b. YES NO YES

c. NO YES YES

d. YES YES YES

C

19. Emir is responsible for the custody of finished goods in the warehouse. If his company wishes to maintain strong internal control, which of the following responsibilities are incompatible with his primary job?

a. He is also responsible for the company's fixed asset control ledger.

b. He is also responsible for receiving of goods into the warehouse.

c. He is responsible for the accounting records for all receipts and shipments of goods from the warehouse.

d. He is responsible for issuing goods for shipment.

B

20. As part of a periodic planning exercise, a company discovers that an Eastern European political dispute may interfere with supply sources. This is an example of:

a. Control environment

b. Risk assessment

c. Control activities

d. Monitoring

B

21. Infernal control procedures are not designed to provide reasonable assurance that

a. Transaction are executed in accordance with management's authorization

b. Irregularities 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

22. Transaction authorization within on organization may be either specific or general. An example of specific transaction authorization is the

a. Setting of automatic reorder points.

b. Approval of a construction budget for a new warehouse

c. Establishment of a customer's credit limits

d. Establishment of sales prices.

D

23. Which of the following statements best describes a weakness often associated with computers?

a. Computer equipment is more subject to a systems error than manual processing which is subject to human error

b. Computer equipment processes and records similar transactions in a similar manner.

c. Control activities for detecting invalid and unusual transactions are less effective than manual control activities

d. Functions that would normally be separated in a manual system are combined in a computer system.

A

24. The financial statements are not likely to correctly reflect Philippine Financial Reporting Standards if

a. The controls affecting the reliability of financial reporting are inadequate.

b. The company's controls do not promote efficiency

c. The company's control do not promote effectiveness

d. All them are true.

D

25. The basic concept of internal control which recognizes that the cost of internal control should not exceed the benefits expected to be derived is known as:

a. Management by exception

b. Management responsibility

c. Limited assurance

d. Reasonable assurance

C

26. Internal control should provide reasonable (but not necessarily absolute) assurance which means that:

a. Internal control is a management's, not auditor's responsibility

b. An attestation engagement about management's internal control assertion may not necessarily detect all reportable conditions

c. The cost of control activities should not exceed the benefits

d. There is always a risk that reportable conditions may result in material misstatements

C

27. When considering internal control, an auditor must be aware of the concept of reasonable assurance which recognizes that

a. The employment of competent personnel provides assurance that the objectives of internal control will be achieved

b. The establishment of and maintenance of a system of internal control is an important responsibility of the management and not of the auditor

c. The cost of internal control should not exceed the benefits expected to be derived from internal control

d. The segregation of incompatible functions is necessary to obtain assurance that the internal control is effective.

B

28. To qualify as an "outside director" in an audit committee, one must

a. Not own any stock in client company.

b. Not be a part of management.

c. Not receive any remuneration or expense reimbursement.

d. Work for CPA firm.

A

29. Adequate separation of duties. within an EDP department would ensure that

a. the programmer does not have an access to computer operation

b. the librarian has no physical control over the computer programs

c. the computer operator does not have access to computer run instructions.

d. the data control group hove as little independence as possible.

D

30. Which of the following duties would indicate a weakness in the internal control system?

a. The accounting function is under the controller

b. The custodianship of cash is the responsibility of the treasurer's function.

c. The internal auditor reports to the board of directors.

d. The custodianship of buildings and equipment is the responsibility of the controller's function.

D

31. Control risk is a measure of the auditor's expectation that the internal control structure

a. Will prevent material misstatements from occurring.

b. Will detect and correct material misstatements.

c. Will either prevent material misstatements or detect and correct them

d. Will neither prevent material misstatements nor detect and correct them.

D

32. Of the following statements about an internal control system, which one is not valid?

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 thecost benefit relationship, a client may apply control procedures on a test basis.

d. Control procedures reasonably ensure that collusion among employees cannot occur.

C

33. An entity should consider the cost of a control in relation to the risk. Which of the following controls best reflects this philosophy for a large peso investment in heavy machine tools?

a. Conducting a weekly physical inventory

b. Placing security guards at every entrance 24 hours a day.

c. Imprinting a controlled identification number on each tool.

d. Having all dispositions approved by the vice president of sales

B

34. In an audit of financial statements, an auditor's primary consideration regarding internal control is whether it

a. incorporates management's philosophy and operating style.

b. affects management's financial statement assertions.

c. provides adequate safeguards over access to assets.

d. supports management's decision-making processes.

C

35. The procedures to test effectiveness of control policies and procedures in support of a reduced assessed control risk are called

a. tests of transactions.

b. analytical tests.

c. tests of controls.

d. a walk-through.

C

36. The actual operation of an internal control system may be most objectively evaluated by

a. Completing a questionnaire and flowchart related to the accounting system in the year under audit.

b. A review of the previous year's audit work papers to update the report of the internal control evaluation.

c. A selection of items processed by the system and determination of the presence or absence of errors and compliance deviations.

d. Substantive tests of accounts balances based on the auditor's assessment of internal control strength.

A

37. The auditor places, primary emphasis on controls over

I. Classes of transactions

II. Account balances

a. I only.

b. II only.

c. both I and II, because they are equally weighted.

d. both I and II, because they vary from client to client

A

38. The three key concepts that underlie the study of an internal control structure and the assessment of control risk would not include a criterion that

a. the control risk may range from zero to 100%.

b. Management, not the auditor, must establish and maintain the entity's controls.

c. the internal control structure provides reasonable, but not absolute, assurance that the financial statements are fairly sated.

d. the internal control structure can never be regarded as completely effective.

B

39. Even with the most effectively designed internal control structure, the auditor must obtain audit evidence, beyond testing the controls, for every

a. Financial statement account.

b. Material financial statement account.

c. Financial statement account that will be relied upon by third parties.

d. Transaction.

A

40. The primary purpose of performing controls is to provide reasonable assurance that:

a. The internal control is effective.

b. The accounting system isdocumented accurately.

c. Transactions are recorded at the amounts executed.

d. All control activities leave visible evidence,

C

41. 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.

A

42. An auditor's report on internal control of a publicly held company would ordinarily be of least use to

a. shareholders.

b. directors.

c. officers.

d. regulatory agencies.

A

43. The accountant's report that expresses an opinion on an entity's internal controls should state that the

a. establishment and maintenance of internal control is the responsibility of management.

b. objectives of the client's internal controls are being met.

c. consideration of the internal controls is conducted in accordance with generally accepted auditing standards.

d. inherent limitations of the client's internal controls are examined.

B

44. Reportable conditions are matters that come to an auditor's attention and that should be communicated to an entity's audit committee because they represent

a. material irregularities or illegal acts perpetrated by management.

b. significant deficiencies in the design or operation of internal control.

c. flagrant violations of the entity's documented conflict-of-interest policies.

d. intentional attempts by client personnel to limit the scope of the auditor's work.

D

45. The accountant's report that expresses an opinion on an entity's internal controls would not include a

a. description of the scope of the engagement.

b. specific date that the report covers rather than a period of time.

c. brief explanation of the broad objectives and inherent limitations of internal control.

d. statement that the entity's internal controls are consistent with that of the prior year after giving effect to subsequent changes.

A

46. A CPA's consideration of internal control in an audit

a. is generally more limited than that made in connection with an engagement to express an opinion on internal control.

b. is generally more extensive than that made in connection with an engagement to express an opinion on internal control

c. will generally be identical to that made in connection with an engagement to express an opinion on internal control.

d. will generally result in the CPA expressing an opinion on the internal control.

A

47. The understanding of internal control that relates to a financial statement assertion should be used to do all of the following except:

a. Determine inherent risk for that assertion.

b. identify types of potential misstatements for that assertion.

c. Consider factors that affect the risk of material misstatement for that assertion and assess control risk.

d. Design substantive tests that correspond with the assessment of control risk.

C

48. The sequence of steps in gathering evidence as the basis of the auditor's opinion is:

a. Substantive tests, documentation of control structure, and tests of controls.

b. Documentation of control structure, substantive tests, and tests of controls

c. Documentation of control structure, tests of controls, and substantive tests.

d. Tests of controls, documentation of control structure, and substantive tests

C

49. Which of the following procedures is essential in determining whether necessary control activities are prescribed and are being followed?

a. Development of questionnaires and checklists

b. Evaluation of the entity's procedures for risk assessment

c. Documentation of and testing controls.

d. Observing employees and making inquiries

C

50. Which of the following is the logical order of performing the following auditing procedures?

a. Tests of internal control procedures.

b. Preparation of a flowchart depicting the client's internal control system.

c. Substantive tests.

a. A B C

b. A C B

c. B A C

d. B C A

A

51.A A secondary purpose of the auditor's consideration of internal control is to provide a(n)

a. basis for constructive suggestions about improvements in internal control structure.

b. basis for assessing control risk

c. assurance that the records and documents have been maintained in accordance with existing company policies and procedures.

d. basis for the determination of the resultant extent of the tests to which auditing procedures are to be restricted

C

52. Which of the following statements with respect to the independent auditor's evaluation of internal control is correct?

a. The auditor should decrease control testing when weaknesses in cashreceipts are mitigated by strong controls in cash disbursement procedures.

b. The auditor should increase control testing when weaknesses in billing procedures are mitigated by strong controls in collection procedures.

c. The auditor generally should not evaluate the overall effectiveness of internal control, but should separately evaluate each of the transaction cycles.

d. The auditor should evaluate all internal control weaknesses before determining the, control procedures that should prevent or detect errors or irregularities.

B

53. The auditor concludes that a public company has significant deficiencies in its internal controls over financial reporting. Which of the following is not a proper response to this finding?

a. Report the deficiencies to management and the audit committee.

b. Report the deficiencies to the shareholders.

c. Expand the planned testing of account balances to consider the types of errors that might occur because of the deficiency.

d. Any of the responses

B

54. The development of constructive suggestions to clients for improvements in internal accounting control is

a. a requirement of the auditor's study and evaluation of internal accounting control.

b. a desirable by-product of an audit engagement.

c. only addressed by the auditor during a special engagement.

d. as important as establishing a basis for reliance on internal accounting control system.

D

55. Which of the following statements concerning the independent auditor's required communication of material weaknesses in internal control is correct?

a. Weaknesses reported at interim dates must be repeated in the final communication

b. If the auditor is not aware of any material weaknesses during the examination, that fact must be communicated

c. Weaknesses that had been reported in prior years' communications and have not been corrected need not be repeated in thecurrent year's communication.

d. Although written communication is preferable; the auditor may communicate the findings orally.

D

56. After obtaining a sufficient understanding of internal control, the auditor assesses

a. The need to apply PSAs

b. detection risk to determine the acceptable level of inherent risk

c. Detection risk and inherent risk to determine the acceptable level control risk.

d. Control risk to determine the acceptable level of detection risk.

B

57. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that

a. Tests of controls may fail to identify controls relevant to assertions.

b. Material misstatements may exist in the financial statements.

c. Specified controls requiring segregation of duties may circumvented by collusion.

d. Entity policies may be circumvented by senior management

B

58. It is important for the auditor to consider the competence of the audit 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

59. in gaining an understanding of internal control the auditor may trace several transactions through the control process, including how the interface with any service organizations whose services are part of the information system. The primary purpose of this task is to

a. replace substantive tests.

b. Determine whether the controls have been placed in operation.

c. determine the effectiveness of the control procedures.

d. Detect fraud.

B

60. When obtaining an understanding of an entity's internal control, the auditor should concentrate on the substance of controls rather than on their form because

a. The controls may be operating effectively but may not be documented.

b. Management may establish appropriate controls but not act on them.

c. the controls may be so inappropriate that no reliance is contemplated by the auditor:

d. Management may implement controls with costs in excess of benefits.

D

61. In obtaining an understanding at an entity's internal control in a financial statement audit, an auditor is not required to

a. determine whether the controls have been placed in operation

b. perform procedures to understand the design of controls.

c. document the understanding of the entity's internal control components.

d. search for significant deficiencies in the operation of internal control