AT.08 Considering Internal Controls Drill

Which of the following would an auditor least likely perform when obtaining understanding of the entity’s internal control?

Choices:

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Re-performance of internal control

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Inquiries of appropriate personnel

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Inspection of documents and record

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Observation of the entity’s activities and operations

Re-performance of internal control

In a consideration of the internal control, the completion of a questionnaire is most closely associated with which of the following?

Choices:

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Separation of duties.

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Documentation.

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Flowchart accuracy.

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Tests of controls.

Documentation.

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?

Choices:

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Disclosing lack of segregation of duties to the external auditors during the annual review.

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Replacing personnel every three or four years.

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Requiring accountants to pass a yearly background check.

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Allowing for greater management oversight of incompatible activities.

Allowing for greater management oversight of incompatible activities.

Which of the following would be least likely to be included in an auditor’s tests of controls?

Choices:

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Inspection.

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Observation.

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Inquiry.

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Confirmation.

Confirmation.

When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?

Choices:

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Test the operating effectiveness of such controls in the current audit.

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Document that reliance and proceed with the original audit strategy.

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Inquire of management as to the effectiveness of the controls.

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Report the reliance in the report on internal control.

Test the operating effectiveness of such controls in the current audit.

In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to

Choices:

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Document the auditor's understanding of the entity's internal control.

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Search for significant deficiencies in the operation of internal control.

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Perform tests of controls to evaluate the effectiveness of the entity's internal control.

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Determine whether controls are suitably designed to prevent or detect material misstatements.

Document the auditor's understanding of the entity's internal control.

he essence of an effectively controlled organization (i.e., control environment) lies in the:

Choices:

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effectiveness of its independent auditor.

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effectiveness of its internal auditor.

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attitude of its employees.

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attitude of its management.

attitude of its management.

In an auditor's consideration of internal control, the completion of a questionnaire is most closely associated with which of the following?

Choices:

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Separation of duties.

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Understanding the system.

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Flowchart accuracy.

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Tests of controls.

Understanding the system.

Internal control procedures are not designed to provide reasonable assurance that

Choices:

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Transactions are executed in accordance with management's authorization.

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Irregularities (frauds) will be eliminated.

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Access to assets is permitted only in accordance with management's authorization.

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The recorded accountability for assets is compared with the existing assets at reasonable intervals.

Irregularities (frauds) will be eliminated.

What is management’s primary purpose of effective internal control in an organization?

Choices:

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Obtaining high-quality data for making good business decisions providing reasonable assurance that the entity’s objectives are achieved.

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Completion of a successful audit for the entity.

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Shareholder involvement in the company’s success.

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Obtaining profitability and financial strength

Obtaining high-quality data for making good business decisions providing reasonable assurance that the entity’s objectives are achieved.

The auditor observes client employees during the review of the client's system of internal control in order to

Choices:

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Prepare a flowchart.

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Update information contained in the organization and procedure manuals.

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Assist in obtaining an understanding of the client's internal control policies and procedures.

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Determine the extent of compliance with quality control standards.

Assist in obtaining an understanding of the client's internal control policies and procedures.

Why will the external auditor typically interview the internal audit department as it relates to its risk-based approach?

Choices:

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To appropriately change internal controls.

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To comment on the deficiency of internal audit control.

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To understand and assess management risk processes.

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To perform effective analytical procedures.

To understand and assess management risk processes.

Which of the following statements about internal control is correct?

Choices:

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Properly maintained internal controls reasonably assure that collusion among employees cannot occur.

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Establishing and maintaining internal control is the internal auditor's responsibility.

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Exceptionally strong control allows the auditor to eliminate substantive tests of details.

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The cost benefit relationship should be considered in designing internal controls.

The cost benefit relationship should be considered in designing internal controls.

A procedure that involves tracing a transaction from its origination through the company's information systems until it is reflected in the company's financial report is referred to as a(n)

Choices:

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Analytical analysis.

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Substantive procedure.

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Test of a control.

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Walk-through.

Walk-through.

A proper segregation of duties requires

Choices:

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An individual maintaining custody of an asset be entitled to access the accounting records for the asset.

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An individual authorizing a transaction records it

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An individual recording a transaction not compare the accounting record of the asset with the asset itself

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An individual authorizing a transaction maintain a custody of the asset that resulted from a transaction

An individual recording a transaction not compare the accounting record of the asset with the asset itself

When an auditor discovered that certain control activities were ineffective, the auditor most likely would increase the

Choices:

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Level of detection risk.

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Extent of tests of details.

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Level of inherent risk.

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Extent of tests of controls.

Extent of tests of details.

Internal controls can never be considered as absolutely effective because:

Choices:

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their effectiveness is limited by the competency and dependability of employees.

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not all organizations have internal audit departments.

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controls are designed to prevent and detect only material misstatements.

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internal controls prevent separation of duties.

their effectiveness is limited by the competency and dependability of employees.

Which of the following is a detective control designed to detect the occurrence of a misstatement?

Choices:

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Access controls.

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Edit controls.

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Reconciliations.

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All of the above are detective controls.

Reconciliations.

When auditing a company, the auditor should obtain an understanding of internal control sufficient to:

Choices:

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provide reasonable protection against client fraud and defalcations by client employees.

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assess control risk.

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provide a basis for suggestions to the client for improving the accounting system.

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provide a method for safeguarding assets, checking the accuracy and reliability of accounting data, promoting operational efficiency, and encouraging adherence to prescribed managerial policies.

assess control risk.

An effective system of internal control

Choices:

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Eliminates risks and potential loss to the organization

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Can prevent collusion among employees

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Can reduce the cost of an external audit

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Cannot be circumvented by management

Can reduce the cost of an external audit

A component of COSO’s internal control system concerns the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization’s objective. This component is called

Choices:

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control activities.

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information and communication.

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monitoring.

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control environment.

information and communication.

The control environment includes all of the following except

Choices:

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management philosophy and operating style.

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methods of assigning authority and responsibility.

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personnel policies and practices.

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control activities.

control activities.

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control?

Choices:

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Incompatible duties.

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Management override.

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Mistakes in judgment.

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Collusion

Incompatible duties.

Which of the following is a step in an auditor’s decision to assess the risk of material misstatement at a low level by relying on controls?

Choices:

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Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls.

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Perform tests of details of transactions and account balances to identify potential errors and irregularities.

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Identify specific controls that are likely to detect or prevent material misstatements.

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Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

Identify specific controls that are likely to detect or prevent material misstatements.

Which of the following best describes the inherent limitations that should be recognized by an auditor when considering the potential effectiveness of internal control?

Choices:

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Procedures that depend on segregation of duties can be circumvented by collusion.

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Competent and honest client personnel provide an environment conducive to accounting control and provide absolute assurance that effective control will be achieved.

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Procedures designed to assure the execution and recording of transactions in accordance with proper authorizations are effective against irregularities perpetrated by management.

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The benefits expected to be derived from effective internal accounting control usually do not exceed the costs of such control.

Procedures that depend on segregation of duties can be circumvented by collusion.

When an auditor discovered that certain control activities were ineffective, the auditor most likely would increase the

Choices:

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Level of detection risk.

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Extent of tests of details.

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Level of inherent risk.

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Extent of tests of controls.

Extent of tests of details.

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been

Choices:

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Authorized.

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Implemented.

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Tested.

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Monitored.

Implemented.

When evaluating a client's system of internal control to determine whether the necessary procedures are prescribed and have been implemented satisfactorily, an auditor must

Choices:

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Develop questionnaires and checklists.

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Obtain an understanding of internal control.

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Perform tests of internal control procedures.

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Evaluate administrative policies.

Obtain an understanding of internal control.