BOBADILLA - MODULE 6 (INTERNAL CONTROL)

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

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.

c

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

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

b

What is the primary purpose of effective internal control organization?

a. Achievement of certain organizational goals.

b. Completion of a successful audit for the entity.

c. Shareholders' involvement in the company‘s success

d. Obtaining profitability and financial strength.

a

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.

c

Internal control is primarily established within a company to 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

b

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

a

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

c

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

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.

b

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.

c

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 that the 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.

d

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

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.

c

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.

d

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.

c

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

a

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.

b

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

a. Management philosophy and operating style

b. Organizational structure

c. Information risk communication systems

d. Assignment of authority and responsibility

c

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

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

b

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

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

d

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.

c

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

d

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.

b

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

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.

a

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

c

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 internal control

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.

d

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

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

a

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

c

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

d

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

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

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

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

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.

c

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.

a

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

b

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.

d

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.

c

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

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

b

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.

d

Internal control can only provide reasonable and not an absolute assurance 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 active and independent.

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

d. Management monitors internal control.

c

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.

d

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.

a

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.

b

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.

a

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.

c

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

d

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.

b

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

a

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

d

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.

c

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

Internal 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

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.

b

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.

d

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.

a

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

d

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

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.

c

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.

b

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.

a

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

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

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

c

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.

b

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

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.

c

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

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.

a

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.

b

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

a

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.

c

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

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.

a

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.

b

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.

d

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

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.

a

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

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

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. ABC

b. A C B

c. B A C

d. BCA

c

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

a

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.

c

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

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.

b

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

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.

d

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

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

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

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.

b

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

d

Which of the following tasks should be performed prior to the final audit?

a. Determining the fairness of property, plant, and equipment

b. Confirming accounts receivable.

c. Understanding internal control.

d. Collecting and evaluating evidence supporting the fairness of inventory

values.

c