Chapter 07 - Internal Control

Chapter 07 Internal Control
True / False Questions

1. Internal control is concerned with the reliability of financial information. True False

2. The Foreign Corrupt Practices Act prohibits bribes to foreign corporate officials to obtain business. True False

3. Incompatible duties exist when an employee is in a position to perpetrate and conceal errors or fraud. True False

4. Internal auditors should preferably report to the chief accounting officer of the company. True False

5. Well-designed internal control will prevent all fraud by top management. True False

6. CPA firms may use written narratives to describe internal control in their audit working papers. True False

7. The auditors' communication of internal control significant deficiencies should be addressed only to senior management of the company. True False

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Chapter 07 - Internal Control

8. If the auditors' assessment of the design of internal control reveals that it cannot be relied upon, the auditors are not required to prepare any documentation of internal control for their working papers. True False

9. The relatively low number of types of transactions incurred by small firms makes the segregation of duties impossible. True False

10. In a financial statement audit, CPAs are required to assess the operating effectiveness of most significant accounting oriented controls. True False

Multiple Choice Questions

11. Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? A. Management's failure to renegotiate unfavorable long-term purchase commitments. B. Recurring operating losses that may indicate going concern problems. C. Evidence of a lack of objectivity by those responsible for accounting decisions. D. Management's current plans to reduce its ownership equity in the entity.

12. In assessing the objectivity of a client's internal auditors, the CPA would be most likely to consider internal auditor's: A. Education levels. B. Experience. C. Organizational status within the company. D. Training and supervisory skills.

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Chapter 07 - Internal Control

13. In a financial statement audit performed following AICPA Professional Standards, how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely upon in the current year? A. Monthly. B. Each audit. C. At least every second audit. D. At least every third audit.

14. After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform tests of controls. The auditor most likely decided that: A. Additional evidence to support a reduction in the assessed level of control risk is not available. B. An increase in the assessed level of control risk is justified for certain financial statement assertions. C. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures. D. There were many internal control deficiencies that would allow misstatements to enter the accounting system.

15. Which of the following is least likely to be evidence of operating effectiveness of controls? A. Cancelled supporting documents. B. Confirmations of accounts receivable. C. Records documenting usage of computer programs. D. Signatures on authorization forms.

16. Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? A. Checklist. B. Flowchart. C. Questionnaire. D. Confirmation.

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Maximum. Tests of signatures on purchase orders. Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity. Tests of controls do not ordinarily address: A. The cost effectiveness of the way a control was applied. C. Change from performing substantive procedures at year-end to an interim date. 21. Zero. 19. By whom a control was applied. Low. D. 20. D. How a control was applied. The consistency with which a control was applied. C.Chapter 07 . 7-4 . Which of the following must the auditor communicate to the audit committee? A. Neither significant deficiencies nor material weaknesses. Tests of the additions to property by physical inspection. B. Use larger sample sizes for substantive procedures. but the CPA has elected not to perform any tests of controls.Internal Control 17. B. The planned assessed level of control risk is at what level? A. A client's internal control appears strong. B. B. Recalculation of payroll deductions. Use the maximum number of dual purpose tests. Which of the following would be least likely to be regarded as a test of a control? A. Moderate. C. D. Comparisons of the signatures on cancelled checks to the authorized check signer list. C. B. Only significant deficiencies. C. 18. D. Significant deficiencies and material weaknesses. D. Which is most likely when the assessed level of control risk increases? A. Only material weaknesses.

C. The effectiveness of controls is not generally tested by: A. The auditors must understand monitoring and all preliminary accounting controls. B. 7-5 . 23. D. Which of the following statements is correct concerning the understanding of internal control needed by auditors? A. B. including: A. Segregation of duties. Performing tests of controls for all material controls.Internal Control 22. Whether it has been implemented (placed in operation). D. Inspection of documents and reports. C. Performance of analytical procedures. C. Its ability to provide reasonable assurance. and all control activities. 24. Which of the following is not considered one of the five major components of internal control? A. not the accounting system. The auditors must understand the control environment. Inquiries of appropriate client personnel. risk assessment. Observation of the application of accounting policies and procedures. The auditors must understand the information system.Chapter 07 . C. Its operating effectiveness. B. Control activities. On financial statement audits. it is required that the auditors obtain an understanding of internal control. Risk assessment. B. The auditors must have a sufficient understanding to assess the risks of material misstatement. Monitoring. D. D. 25.

Differs from a material weakness in that it involves internal control over operations rather than internal control over financial reporting. 7-6 . Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality. Committee of Sponsoring Organizations. Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)? A. A significant deficiency: A. D. 29. Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting. It is recognized in the Statements on Auditing Standards. C. B. Which of the following is most likely to be considered a risk assessment procedure relating to internal control? A. but also over the effectiveness and efficiency of operations and compliance with laws and regulations: A. It emphasizes the effectiveness and efficiency of operations over the reliability of financial reporting. D. B. Take test counts of the year-end inventory. It suggests that it is important to view internal control as an end product as contrasted to a process or means to obtain an end. This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting.Internal Control 26. 27. Perform a test of a control relating to payroll. Financial Accounting Standards Board. Is less severe than a material weakness. B. C. Its applicability is largely limited to internal auditing applications. Foreign Corrupt Practices Corporation. D. 28. B. Confirm accounts receivable. Trace a transaction through the information system relevant to financial reporting. C. Cohen Commission. D. C.Chapter 07 .

Commitment to competence. Risk assessment. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit. Organizational structure. B. 33. C. Controls over safeguarding assets and liabilities are of primary importance. C. An auditor may ordinarily ignore the consideration of controls when a substantive audit approach is used. 31.Chapter 07 . Rapid growth of the organization. the effectiveness and efficiency of operations. All controls are ordinarily relevant to an audit. Incorporation of ethical business practice standards. Salaried sales personnel. Which of the following is not a component of the control environment? A.Internal Control 30. D. B. Effectiveness of prevention of fraudulent occurrences. D. but other controls may also be relevant. Implementation of a new information system. 32. Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies? A. Which statement is correct concerning the relevance of various types of controls to a financial statement audit? A. and: A. Corporate restructuring. B. C. The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of financial reporting. Compliance with applicable laws and regulations. Safeguarding of entity equity. D. 7-7 . B. C. D. while controls over the reliability of financial reporting may also be relevant. Integrity and ethical values.

Chapter 07 - Internal Control

34. The Sarbanes-Oxley Act of 2002 requires that the audit committee: A. Annually reassess control risk using information from the CPA firm. B. Be directly responsible for the appointment, compensation and oversight of the work of the CPA firm. C. Require that the company's CPA firm rotate the partner in charge of the audit. D. Review the level of management compensation.

35. When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will: A. Be less than the preliminary assessed level of control risk. B. Equal the preliminary assessed level of control risk. C. Equal the actual control risk. D. Be less than the actual control risk.

36. Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan? A. The auditors have determined that controls have been implemented (placed in operation) but, in accordance with the audit plan, have performed no tests of controls. B. Certain controls do not leave a trail of documentary evidence. C. Deviation rates were greater than zero and approached anticipated levels. D. The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

37. The provisions of the Foreign Corrupt Practices Act apply to: A. All U.S. corporations. B. All U.S. corporations that engage in foreign operations. C. All corporations that must file under the Securities Exchange Act of 1934. D. All U.S. partnerships and corporations.

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Chapter 07 - Internal Control

38. If the auditors do not perform tests of controls for certain assertions: A. They have performed a substandard audit. B. They are not required to communicate significant deficiencies relating to those accounts to management and the board of directors. C. They must issue a qualified opinion. D. They must assess control risk at the maximum level for those assertions.

39. During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to: A. Assess inherent risk. B. Design further audit procedures. C. Assess compliance with the Foreign Corrupt Practices Act. D. Provide a reasonable basis for an opinion on compliance with applicable laws.

40. Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits? A. An understanding of the control environment, information and communication, risk assessment and monitoring is necessary; an understanding of control activities is only necessary for areas in which the auditor is performing tests of controls. B. The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit. C. When tests of controls have been performed, control risk must be assessed at a level less than the maximum. D. An understanding of the control environment is necessary, but no understanding of the other components is necessary unless control risk is to be assessed at a level less than the maximum.

41. Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the design of the relevant controls and to determine whether they have been implemented (placed in operation)? A. Previous experience with the entity. B. Inquiries of appropriate management personnel. C. Performance of substantive procedures. D. Inspection of document and records.

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Chapter 07 - Internal Control

42. A control deficiency that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting is referred to as a(n): A. Control deficiency. B. Inherent limitation. C. Reportable deficiency. D. Significant deficiency.

43. For effective internal control, which of the following functions should not be assigned to the company's accounting department? A. Reconciling accounting records with existing assets. B. Recording financial transactions. C. Signing payroll checks. D. Preparing financial reports.

44. Which of the following is not a responsibility that should be assigned to a company's internal audit department? A. Evaluating internal control. B. Approving disbursements. C. Reporting on the effectiveness of operating segments. D. Investigating potential merger candidates.

45. Which of the following is true about the auditors' consideration of internal control in a financial statement audit? A. The auditors must assess control risk at a level lower than the maximum. B. The auditors must prepare a flowchart description of internal control for their working papers. C. The auditors must obtain an understanding of the steps in processing major types of transactions. D. The auditors must perform tests of controls.

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Chapter 07 . Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system. B. B. Board of directors. 47. Questionnaires highlight weaknesses in the system. B. B. C. Inquiries of client personnel. Observation of the performance of certain accounting procedures. D. Inspecting documents and reports. The organizational structure. Which of the following is least likely to be considered a risk assessment procedure relating to internal control? A. Management philosophy and operating style. D. Observation of the counting of inventory. The information system. Which of the following is an advantage of describing internal control through the use of a standardized questionnaire? A. D. 49. Analytical procedures.Internal Control 46. Which of the following is least likely to be considered a risk assessment procedure? A. Questionnaires are more flexible than other methods of describing internal control. Which of the following is not a factor that is considered a part of the client's overall control environment? A. Questionnaires provide a clearer and more specific portrayal of a client's system than other methods of describing internal control. Inspection of documents. Counting marketable securities at year-end. C. D. C. Observing the application of specific controls. 48. 7-11 . C.

except: A. C. All material weaknesses in internal control should be reported to the audit committee. B. C. 7-12 . Which of the following would be least likely to be considered a benefit of effective internal control? A.Internal Control 50. All such matters must be communicated to the audit committee and regulatory agencies. 53. Risk assessment. 52. An objective of a walk-through is to: A. After documenting the client's prescribed internal control. D. The major components of internal control include all of the following. Restricting access to assets. Internal auditing. The control environment. Replace tests of controls. C. Which of the following is correct with respect to control deficiencies discovered during an audit? A. B.Chapter 07 . Eliminating all employee fraud. D. Detecting ineffectiveness. D. B. Verify that the controls have been implemented (placed in operation). the auditors will often perform a walk-through of each transaction cycle. Evaluate the major strengths and weaknesses in the client's internal control. Auditors must communicate and recommend corrections relating to all material weaknesses in internal control to management. Identify weaknesses to be communicated to management in the management letter. 51. B. All control deficiencies are also significant deficiencies. Ensuring authorization of transactions. C. Control activities. D.

B. Cease to perform further substantive procedures. D. After considering the client's internal control the auditors have concluded that it is well designed and is functioning as anticipated.Chapter 07 . 7-13 . 57. D. Increase the extent of anticipated analytical procedures. Under these circumstances the auditors would most likely: A. C. C. 55. C. Reduces the company's need to obtain expensive business interruption insurance. Flowcharts verification. They are employees whose work must be reviewed during substantive testing. C. Substantive procedures. Their work impacts upon the cost/benefit tradeoff in evaluating inherent limitations. B. Allows the company to substitute the fidelity bonds for various parts of internal control. Decision tables. Protects employees who made unintentional errors from possible monetary damages resulting from such errors. Their degree of independence may be inferred by the nature of their work.Internal Control 54. Reduce substantive procedures in areas where the internal control was found to be effective. D. B. Minimizes the possibility of employing persons with dubious records in positions of trust. The use of fidelity bonds protects a company from embezzlement loses and also: A. B. In the consideration of internal control. 56. Perform all tests of controls to the extent outlined in the preplanned audit program. D. Tests of controls. the operating effectiveness of controls is tested by: A. The independent auditors might consider the procedures performed by the internal auditors because: A. They are employees whose work might affect the independent auditors' work.

More than remote. Significant deficiency. Control deficiency. B. 7-14 . Smaller than inconsequential. Corporate stockholders. Tolerable. D. Internal auditors. 60. Reasonable possibility. Audit committee. Client's legal counsel. to prevent or detect material misstatements on a timely basis is referred to as a: A. an internal auditor most likely should report to the: A. Corporate controller. C. The auditors who become aware of an internal control significant deficiency are required to communicate this to the: A. D. Material. A situation in which the design or operation of a control does not allow management or employees. Compensation committee. Audit committee. To provide for the greatest degree of independence in performing internal auditing functions. B. 59. Probable. in the normal course of performing their assigned functions. A material weakness involves an amount that could result in a misstatement that is: A. D. B. 62. 61. C. C. At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness? A. Reportable condition. C. Larger than inconsequential. Sufficient. D.Chapter 07 . Financial vice-president. B. Material weakness.Internal Control 58. C. D. B.

66. Transactions are executed in accordance with management's authorization. B. The program flowcharting symbol representing a decision is a: A. Controls are not designed to provide assurance that: A. 7-15 . Access to assets is permitted only in accordance with management's authorization. 64. Circle. Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of misstatement requires special audit consideration? A. The rate of technological change is moderate in the industry. 67. B. Equally. Fraud will be eliminated. The scope of substantive procedures as compared to the scope of tests of controls generally vary: A. Triangle. Well-designed internal control that is functioning effectively is most likely to detect a fraud arising from: A.Chapter 07 . Directly. C. D. Inversely. The potential for fraud seems high. B. B. C. The recorded accountability for assets is compared with the existing assets at reasonable intervals. C. 65. Management fraud. Complex calculations are involved. D. B. D. In a parallel manner. Informal deviations from the official organization chart. C. D. D. Various subjective methods of application of a key accounting policy exist. The fraudulent action of several employees. Rectangle. Diamond. C.Internal Control 63. The fraudulent action of an individual employee.

Operational efficiency has been achieved in accordance with management plans. rather than to exercise professional skepticism. Tests confirming receivables. the auditor is basically concerned that it provides reasonable assurance that: A. C. plant. D. B. they should consider the internal auditors': A. Evidence supporting a further reduction in the assessed level of control risk. Controls have not been circumvented by collusion. 7-16 . D. 70. D. C. Tests of the specific items making up the balance in a given general ledger account. and equipment by physical inspection. Misstatements have been prevented or detected. Independence and review skills. B. In assessing the competence of a client's internal auditor. C. C. Which of the following audit tests would be regarded as a test of a control? A. Efficiency and experience. B. Results of ratio analysis that may identify unusual transactions and events. C. In the consideration of internal control. Incorporate additional elements of unpredictability in the selection of audit procedures. Internal auditor's compliance with professional internal auditing standards. Emphasize the need to remain neutral. Tests of the additions to property. 69.Internal Control 68. Increase the scope of auditor procedures. Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level? A. If the independent auditors decide that the work performed by the internal auditors may have a bearing on their own procedures. Client's policies that limit the internal auditor's access to management salary data. Tests of the signatures on canceled checks to board of director's authorizations. B. Management can not override the system. Training and supervisory skills. 71. D. Competence and objectivity.Chapter 07 . B. 72. Assign more experienced staff. an independent auditor most likely would consider the: A. D.

Adopt new accounting pronouncements and authorize the recording of transactions. B. C. Analytical procedures as set forth in an industry audit guide. Record and conceal fraudulent transactions in the normal course of assigned tasks. D. Tests of controls designed specifically for the client. The complexity of the information processing system. 7-17 . C. Transactions are recorded as necessary to permit the preparation of the financial statements in conformity with generally accepted accounting principles. B. C. 74. Controls are operating effectively. Substantive procedures specified by a standardized audit program. Which of the following is intended to detect deviations from prescribed controls? A. Journalize cash receipts and disbursements and prepare the financial statements. D. C. 75. The ineffectiveness of the board of directors. D. The lack of management incentives to improve the control environment.Internal Control 73. B. Which of the following factors would most likely be considered an inherent limitation to an entity's internal control? A. 76. Monitor internal controls and evaluate whether the controls are operating as intended. Human judgment in the decision making process. B. Computerized analytical procedures tailored for the configuration of the computer equipment in use.Chapter 07 . An auditor's purpose for performing tests of controls is to provide reasonable assurance that: A. Transactions are executed in accordance with management's authorization and access to assets is limited by a segregation of functions. D. The risk that the auditor may unknowingly fail to modify the opinion on the financial statements is minimized. Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both: A.

79. All companies. Because of the cost/benefit relationship. SEC registrants. B. D. Transactions must be properly authorized before such transactions are processed. C. Only those companies included in the Fortune 500. B. Internal control over asset safeguarding. B. Inspection. Suitable criteria. All nonpublic companies. which one is not valid? A. 80. D. D. Compliance with laws. 81. Which of the following would be least likely to be included in an auditor's tests of controls? A. Controls seem weak and must be properly documented. Tests of controls are most likely to be performed when: A. C. D. B. Analytical procedures. D. The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States: A. Internal control over financial reporting. Inadequate substantive procedures exist to restrict audit risk to an acceptable level. C. An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and: A.Chapter 07 . C. C. Control activities reasonably insure that collusion among employees cannot occur. a client may apply control procedures on a test basis. 78. The auditor wishes to assess control risk at the maximum. Observation. No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. Of the following statements about internal control.Internal Control 77. 7-18 . Inquiry. B. The client's control environment appears weak.

" D. 83. auditors evaluate control: A. The prior quarter. Option A B. The "as of date.Internal Control 82. When performing an audit of internal control under PCAOB requirements. The end of each quarter.Chapter 07 . 5 includes an opinion on internal control for: A. Option D 7-19 . A report on internal control performed in accordance with PCAOB Standard No. Option C D. B. C. Option B C. The entire year.

Chapter 07 . Option C D. Option A B. Option A B. Option C D. Option D 7-20 . Option B C. one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): A. one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): A. When performing an internal control audit under PCAOB requirements. Option B C.Internal Control 84. When performing an internal control audit under PCAOB standards. Option D 85.

For A through F place a X in the box (for Situation 1 or Situation 2) which is most accurate with the statement below.Internal Control Essay Questions 86.Chapter 07 . In both situations assume inherent risk is at a high level. if for any question you believe that the situation are the same relating to that question place an X in each of the two boxes. 7-21 .

c. The operating effectiveness of controls. Auditors are required to consider a client's internal control. reliance should be placed on the work of the internal auditors. List three of those limitations. When considering a client's internal control. c. 89. For each of the following characteristics indicate the auditors' responsibility under generally accepted auditing standards and the procedures used to meet that responsibility. b. if any. a. b. 7-22 . b. Even the best internal control has certain limitations. Independent auditors should consider the work of internal auditors in their assessment of control risk. The design of internal control. a. What is the difference between the primary objective of the independent auditors and that of internal auditors? Explain. the auditors focus on its various characteristics. Controls have been implemented (placed in operation). Are internal auditors independent of management? Explain. Describe the two purposes of the auditors' consideration of a client's internal control.Chapter 07 . 88. a.Internal Control 87. Discuss the factors that should be considered by the independent auditors in deciding how much.

risk assessment. Incompatible duties exist when an employee is in a position to perpetrate and conceal errors or fraud. The Foreign Corrupt Practices Act prohibits bribes to foreign corporate officials to obtain business. the accounting information system.Internal Control Chapter 07 Internal Control Answer Key True / False Questions 1. Internal control is concerned with the reliability of financial information. and monitoring of controls.Chapter 07 . control activities. Topic: Internal Control 2. Topic: Control Activities 7-23 . Topic: Internal Control 3. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: 07-01 Define what is meant by internal control. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-01 Define what is meant by internal control.

and Internal Control 7-24 . Environment. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. the accounting information system.Chapter 07 . Topic: Limitations of Internal Controls 6. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. risk assessment. Topic: Audit Procedures 5. Well-designed internal control will prevent all fraud by top management. Topic: Understand Client.Internal Control 4. TRUE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Remember Difficulty: Easy Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control. CPA firms may use written narratives to describe internal control in their audit working papers. and monitoring of controls. Internal auditors should preferably report to the chief accounting officer of the company. control activities.

the auditors are not required to prepare any documentation of internal control for their working papers. The auditors' communication of internal control significant deficiencies should be addressed only to senior management of the company. Topic: Audit Procedures 8. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. The relatively low number of types of transactions incurred by small firms makes the segregation of duties impossible.Chapter 07 .Internal Control 7. Topic: Internal Control—Small Company 7-25 . FALSE AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 07-08 Describe the nature of the audits performed under Section 404(b) of the Sarbanes-Oxley Act of 2002. FALSE AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 07-07 Describe the auditors' responsibility for communicating controlrelated matters. Topic: Audit Procedures 9. If the auditors' assessment of the design of internal control reveals that it cannot be relied upon.

Topic: Understand Client. In a financial statement audit. and Internal Control Multiple Choice Questions 11. FALSE AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control. Management's failure to renegotiate unfavorable long-term purchase commitments. CPAs are required to assess the operating effectiveness of most significant accounting oriented controls. Environment. C. Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? A. Source: AICPA Topic: Audit Procedures 7-26 .Internal Control 10.Chapter 07 . Evidence of a lack of objectivity by those responsible for accounting decisions. AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 07-07 Describe the auditors' responsibility for communicating controlrelated matters. Management's current plans to reduce its ownership equity in the entity. B. D. Recurring operating losses that may indicate going concern problems.

Chapter 07 . B. how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely upon in the current year? A. Experience. In assessing the objectivity of a client's internal auditors. Organizational status within the company. Topic: Audit Procedures 7-27 . the CPA would be most likely to consider internal auditor's: A. D. Topic: Audit Procedures 13.Internal Control 12. At least every third audit. Each audit. Education levels. Monthly. C. C. In a financial statement audit performed following AICPA Professional Standards. Training and supervisory skills. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. B. D. At least every second audit.

Signatures on authorization forms. Source: AICPA Topic: Audit Procedures 15. An increase in the assessed level of control risk is justified for certain financial statement assertions. Confirmations of accounts receivable. It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures. Cancelled supporting documents. Additional evidence to support a reduction in the assessed level of control risk is not available. D. The auditor most likely decided that: A. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control.Chapter 07 . C. B. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 07-06 Describe the major types of tests of controls. There were many internal control deficiencies that would allow misstatements to enter the accounting system. Topic: Understand Client. and Internal Control 7-28 . Which of the following is least likely to be evidence of operating effectiveness of controls? A. Environment. D. After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk. C. B. an auditor decided to perform tests of controls. Records documenting usage of computer programs.Internal Control 14.

Tests of controls do not ordinarily address: A. D.Chapter 07 . B. C. Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity. Confirmation. Topic: Audit Procedures 18. D. Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? A. Change from performing substantive procedures at year-end to an interim date. The cost effectiveness of the way a control was applied. C. B. and Internal Control 17. Flowchart. B. By whom a control was applied. How a control was applied. D. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 07-06 Describe the major types of tests of controls. Topic: Audit Procedures 7-29 . Which is most likely when the assessed level of control risk increases? A. Checklist.Internal Control 16. Questionnaire. Use the maximum number of dual purpose tests. Use larger sample sizes for substantive procedures. Environment. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. C. Topic: Understand Client. The consistency with which a control was applied. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Remember Difficulty: Easy Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control.

B. Tests of the additions to property by physical inspection. Tests of signatures on purchase orders. B. Topic: Audit Procedures 20. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 07-06 Describe the major types of tests of controls. Which of the following would be least likely to be regarded as a test of a control? A. C. C. A client's internal control appears strong. Neither significant deficiencies nor material weaknesses. Topic: Audit Procedures 7-30 . Significant deficiencies and material weaknesses. Comparisons of the signatures on cancelled checks to the authorized check signer list. The planned assessed level of control risk is at what level? A. Zero. Low. C. Only significant deficiencies. D.Chapter 07 .Internal Control 19. D. D. Recalculation of payroll deductions. AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 07-07 Describe the auditors' responsibility for communicating controlrelated matters. Moderate. but the CPA has elected not to perform any tests of controls. Only material weaknesses. Topic: Audit Procedures 21. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 07-06 Describe the major types of tests of controls. Which of the following must the auditor communicate to the audit committee? A. B. Maximum.

and Internal Control 7-31 . Control activities. D. risk assessment. B. Segregation of duties. the accounting information system. B. Risk assessment. The auditors must understand the control environment. risk assessment. Which of the following statements is correct concerning the understanding of internal control needed by auditors? A.Internal Control 22. C. control activities. and all control activities. Which of the following is not considered one of the five major components of internal control? A. Topic: Understand Client. The auditors must understand the information system. not the accounting system. Environment.Chapter 07 . AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Describe the auditors' consideration of internal control. The auditors must have a sufficient understanding to assess the risks of material misstatement. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. Topic: Control Activities 23. The auditors must understand monitoring and all preliminary accounting controls. D. C. Monitoring. and monitoring of controls.

Environment. including: A.Chapter 07 . Performance of analytical procedures. On financial statement audits. C. Topic: Audit Procedures 25. Its ability to provide reasonable assurance. D. Whether it has been implemented (placed in operation). AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. Observation of the application of accounting policies and procedures. D. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Describe the auditors' consideration of internal control. Performing tests of controls for all material controls. Topic: Understand Client. Inspection of documents and reports. Inquiries of appropriate client personnel. and Internal Control 7-32 .Internal Control 24. B. Its operating effectiveness. C. The effectiveness of controls is not generally tested by: A. it is required that the auditors obtain an understanding of internal control. B.

Foreign Corrupt Practices Corporation. Committee of Sponsoring Organizations. Environment. Topic: Internal Control 7-33 . Cohen Commission. Financial Accounting Standards Board.Internal Control 26. Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality. B. C. C. Topic: Understand Client. Differs from a material weakness in that it involves internal control over operations rather than internal control over financial reporting. A significant deficiency: A.Chapter 07 . AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control. but also over the effectiveness and efficiency of operations and compliance with laws and regulations: A. Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting. and Internal Control 27. B. D. This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-01 Define what is meant by internal control. D. Is less severe than a material weakness.

B. Its applicability is largely limited to internal auditing applications. Topic: Understand Client. C. Perform a test of a control relating to payroll. D. and Internal Control 29. It suggests that it is important to view internal control as an end product as contrasted to a process or means to obtain an end. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Apply Difficulty: Hard Learning Objective: 07-03 Describe the auditors' consideration of internal control. D. It is recognized in the Statements on Auditing Standards. Confirm accounts receivable. Take test counts of the year-end inventory. Environment. Which of the following is most likely to be considered a risk assessment procedure relating to internal control? A.Internal Control 28. C. It emphasizes the effectiveness and efficiency of operations over the reliability of financial reporting.Chapter 07 . Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)? A. B. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Apply Difficulty: Hard Learning Objective: 07-01 Define what is meant by internal control. Trace a transaction through the information system relevant to financial reporting. Topic: Internal Control 7-34 .

Effectiveness of prevention of fraudulent occurrences. B. Topic: Internal Control 7-35 . C. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Apply Difficulty: Hard Learning Objective: 07-01 Define what is meant by internal control. Which statement is correct concerning the relevance of various types of controls to a financial statement audit? A. An auditor may ordinarily ignore the consideration of controls when a substantive audit approach is used. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit. B.Internal Control 30. Controls over safeguarding assets and liabilities are of primary importance. and: A. The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of financial reporting.Chapter 07 . Topic: Internal Control 31. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-01 Define what is meant by internal control. the effectiveness and efficiency of operations. Safeguarding of entity equity. Incorporation of ethical business practice standards. but other controls may also be relevant. D. C. Compliance with applicable laws and regulations. while controls over the reliability of financial reporting may also be relevant. D. All controls are ordinarily relevant to an audit.

Internal Control 32. the accounting information system. Integrity and ethical values. B. Be directly responsible for the appointment. Environment. control activities. Implementation of a new information system. Rapid growth of the organization. C. Topic: Understand Client. B. and Internal Control 34.Chapter 07 . control activities. Review the level of management compensation. compensation and oversight of the work of the CPA firm. Annually reassess control risk using information from the CPA firm. Organizational structure. Commitment to competence. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Describe the auditors' consideration of internal control. C. Topic: Control Environment 33. Salaried sales personnel. Topic: Control Environment 7-36 . AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. the accounting information system. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. B. Risk assessment. The Sarbanes-Oxley Act of 2002 requires that the audit committee: A. Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies? A. Which of the following is not a component of the control environment? A. risk assessment. D. Corporate restructuring. D. C. and monitoring of controls. D. risk assessment. Require that the company's CPA firm rotate the partner in charge of the audit. and monitoring of controls.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 07-06 Describe the major types of tests of controls. Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan? A. although no material misstatements were identified. Equal the actual control risk. Be less than the preliminary assessed level of control risk. C. it is most likely that the assessed level of control risk will: A. Topic: Audit Procedures 36. Certain controls do not leave a trail of documentary evidence. The operating effectiveness of certain controls was found to be less than expected. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 07-06 Describe the major types of tests of controls. D. Equal the preliminary assessed level of control risk.Internal Control 35. C.Chapter 07 . When tests of controls reveal that controls are operating as anticipated. Topic: Audit Procedures 7-37 . in accordance with the audit plan. have performed no tests of controls. Deviation rates were greater than zero and approached anticipated levels. The auditors have determined that controls have been implemented (placed in operation) but. B. Be less than the actual control risk. D. B.

C. partnerships and corporations.Chapter 07 . AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-01 Define what is meant by internal control. They must assess control risk at the maximum level for those assertions. D. All U. If the auditors do not perform tests of controls for certain assertions: A. the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to: A. B. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Describe the auditors' consideration of internal control. All U. They are not required to communicate significant deficiencies relating to those accounts to management and the board of directors. corporations that engage in foreign operations. Design further audit procedures. Topic: Financial Statement Audits—The Role of Internal Control 7-38 . Topic: Understand Client. They must issue a qualified opinion.S. Assess inherent risk. All U. corporations.Internal Control 37. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control. C. They have performed a substandard audit. Provide a reasonable basis for an opinion on compliance with applicable laws. D. The provisions of the Foreign Corrupt Practices Act apply to: A.S. C. Assess compliance with the Foreign Corrupt Practices Act. During financial statement audits. B. All corporations that must file under the Securities Exchange Act of 1934. Topic: Internal Control 38. and Internal Control 39.S. D. B. Environment.

and Internal Control 41. C. Previous experience with the entity. Environment. When tests of controls have been performed. Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the design of the relevant controls and to determine whether they have been implemented (placed in operation)? A. D. Environment.Internal Control 40. An understanding of the control environment is necessary. control risk must be assessed at a level less than the maximum. but no understanding of the other components is necessary unless control risk is to be assessed at a level less than the maximum. Inquiries of appropriate management personnel. An understanding of the control environment. Performance of substantive procedures. Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits? A. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Describe the auditors' consideration of internal control. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control. D. Topic: Understand Client. information and communication.Chapter 07 . risk assessment and monitoring is necessary. B. C. Inspection of document and records. Topic: Understand Client. The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit. an understanding of control activities is only necessary for areas in which the auditor is performing tests of controls. and Internal Control 7-39 . B.

Signing payroll checks. A control deficiency that is less severe than a material weakness. B. Reconciling accounting records with existing assets. D. AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 07-07 Describe the auditors' responsibility for communicating controlrelated matters. Reportable deficiency. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. For effective internal control. risk assessment. B. Recording financial transactions.Chapter 07 . but important enough to merit attention by those responsible for oversight of the company's financial reporting is referred to as a(n): A. the accounting information system. C. which of the following functions should not be assigned to the company's accounting department? A. control activities. Inherent limitation. Topic: Control Environment 7-40 . Control deficiency. Significant deficiency. D. and monitoring of controls. Preparing financial reports.Internal Control 42. Topic: Audit Procedures 43. C.

risk assessment. D. The auditors must obtain an understanding of the steps in processing major types of transactions. The auditors must assess control risk at a level lower than the maximum.Chapter 07 . Investigating potential merger candidates. and Internal Control 7-41 . Topic: Understand Client. and monitoring of controls. Which of the following is not a responsibility that should be assigned to a company's internal audit department? A.Internal Control 44. Topic: Monitoring of Controls 45. the accounting information system. Evaluating internal control. B. Reporting on the effectiveness of operating segments. The auditors must prepare a flowchart description of internal control for their working papers. B. Approving disbursements. D. The auditors must perform tests of controls. Which of the following is true about the auditors' consideration of internal control in a financial statement audit? A. control activities. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Apply Difficulty: Hard Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. C. C. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 07-03 Describe the auditors' consideration of internal control. Environment.

D. and Internal Control 7-42 . C. and Internal Control 47. Observing the application of specific controls. Which of the following is an advantage of describing internal control through the use of a standardized questionnaire? A. B.Chapter 07 . Which of the following is least likely to be considered a risk assessment procedure relating to internal control? A. Inspecting documents and reports. Questionnaires are more flexible than other methods of describing internal control. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Apply Difficulty: Hard Learning Objective: 07-03 Describe the auditors' consideration of internal control. Topic: Understand Client. B. Environment. D. Questionnaires provide a clearer and more specific portrayal of a client's system than other methods of describing internal control. C. Questionnaires highlight weaknesses in the system. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control. Environment. Counting marketable securities at year-end. Inquiries of client personnel. Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system. Topic: Understand Client.Internal Control 46.

Which of the following would be least likely to be considered a benefit of effective internal control? A.Internal Control 48. Inspection of documents.Chapter 07 . Management philosophy and operating style. C. Topic: Understand Client. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Apply Difficulty: Hard Learning Objective: 07-03 Describe the auditors' consideration of internal control. D. Topic: Internal Control 7-43 . The information system. the accounting information system. B. Detecting ineffectiveness. risk assessment. D. Which of the following is least likely to be considered a risk assessment procedure? A. and monitoring of controls. control activities. Ensuring authorization of transactions. and Internal Control 49. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-01 Define what is meant by internal control. Eliminating all employee fraud. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. Topic: Control Environment 50. B. B. C. Board of directors. D. Environment. Analytical procedures. The organizational structure. Which of the following is not a factor that is considered a part of the client's overall control environment? A. C. Restricting access to assets. Observation of the performance of certain accounting procedures. Observation of the counting of inventory.

Internal auditing. C. Which of the following is correct with respect to control deficiencies discovered during an audit? A. Environment. Control activities. All control deficiencies are also significant deficiencies. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-01 Define what is meant by internal control. Auditors must communicate and recommend corrections relating to all material weaknesses in internal control to management. except: A. After documenting the client's prescribed internal control. AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Apply Difficulty: Hard Learning Objective: 07-07 Describe the auditors' responsibility for communicating controlrelated matters. D. B. All material weaknesses in internal control should be reported to the audit committee. D. The major components of internal control include all of the following. The control environment.Internal Control 51.Chapter 07 . and Internal Control 52. C. Topic: Audit Procedures 7-44 . Topic: Understand Client. C. Verify that the controls have been implemented (placed in operation). All such matters must be communicated to the audit committee and regulatory agencies. An objective of a walk-through is to: A. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control. Identify weaknesses to be communicated to management in the management letter. the auditors will often perform a walk-through of each transaction cycle. B. B. Replace tests of controls. Evaluate the major strengths and weaknesses in the client's internal control. Topic: Internal Control 53. Risk assessment. D.

Cease to perform further substantive procedures. Allows the company to substitute the fidelity bonds for various parts of internal control. C. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. D. and monitoring of controls. risk assessment. The use of fidelity bonds protects a company from embezzlement loses and also: A. Reduces the company's need to obtain expensive business interruption insurance. Perform all tests of controls to the extent outlined in the preplanned audit program. Minimizes the possibility of employing persons with dubious records in positions of trust. D. Reduce substantive procedures in areas where the internal control was found to be effective. B. Increase the extent of anticipated analytical procedures. Under these circumstances the auditors would most likely: A.Internal Control 54. control activities. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Remember Difficulty: Easy Learning Objective: 07-06 Describe the major types of tests of controls. the accounting information system. B. Source: AICPA Topic: Audit Procedures 55. C. Protects employees who made unintentional errors from possible monetary damages resulting from such errors. After considering the client's internal control the auditors have concluded that it is well designed and is functioning as anticipated. Source: AICPA Topic: Control Environment 7-45 .Chapter 07 .

C. Their work impacts upon the cost/benefit tradeoff in evaluating inherent limitations.Internal Control 56. Tests of controls. The independent auditors might consider the procedures performed by the internal auditors because: A. Source: AICPA Topic: Audit Procedures 57. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Remember Difficulty: Easy Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control. Substantive procedures.Chapter 07 . Their degree of independence may be inferred by the nature of their work. D. D. C. Source: AICPA Topic: Understand Client. Environment. Decision tables. B. They are employees whose work might affect the independent auditors' work. the operating effectiveness of controls is tested by: A. and Internal Control 7-46 . B. They are employees whose work must be reviewed during substantive testing. Flowcharts verification. In the consideration of internal control.

Topic: Audit Procedures 60. Compensation committee. Material. A material weakness involves an amount that could result in a misstatement that is: A. Tolerable. Probable.Internal Control 58. The auditors who become aware of an internal control significant deficiency are required to communicate this to the: A. B. B. More than remote. D. D. Audit committee. AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 07-07 Describe the auditors' responsibility for communicating controlrelated matters. Client's legal counsel. C. Reasonable possibility. Smaller than inconsequential. At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness? A. B. Sufficient. Topic: Audit Procedures 7-47 . C. Internal auditors. D. C. Larger than inconsequential. AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 07-07 Describe the auditors' responsibility for communicating controlrelated matters.Chapter 07 . Source: AICPA Topic: Audit Procedures 59. AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 07-07 Describe the auditors' responsibility for communicating controlrelated matters.

A situation in which the design or operation of a control does not allow management or employees. Audit committee. Source: AICPA Topic: Control Environment 7-48 . Reportable condition. in the normal course of performing their assigned functions. and monitoring of controls. C.Internal Control 61. Control deficiency. an internal auditor most likely should report to the: A. B. D. B. Significant deficiency.Chapter 07 . Corporate controller. To provide for the greatest degree of independence in performing internal auditing functions. Corporate stockholders. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. Topic: Audit Procedures 62. to prevent or detect material misstatements on a timely basis is referred to as a: A. Material weakness. risk assessment. C. control activities. AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 07-07 Describe the auditors' responsibility for communicating controlrelated matters. Financial vice-president. the accounting information system. D.

Triangle. B. Management fraud.Internal Control 63. Informal deviations from the official organization chart. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control. risk assessment. B. control activities. D. D. C. Environment. the accounting information system. Rectangle. The program flowcharting symbol representing a decision is a: A.Chapter 07 . The fraudulent action of several employees. Diamond. Source: AICPA Topic: Control Environment 64. The fraudulent action of an individual employee. and Internal Control 7-49 . and monitoring of controls. Circle. Source: AICPA Topic: Understand Client. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. C. Well-designed internal control that is functioning effectively is most likely to detect a fraud arising from: A.

Source: AICPA Topic: Audit Procedures 7-50 .Internal Control 65. risk assessment. the accounting information system. C. and monitoring of controls. Controls are not designed to provide assurance that: A. Source: AICPA Topic: Limitations of Internal Controls 66. Directly. Fraud will be eliminated. Access to assets is permitted only in accordance with management's authorization. The recorded accountability for assets is compared with the existing assets at reasonable intervals. B. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. Transactions are executed in accordance with management's authorization.Chapter 07 . AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. D. B. Equally. Inversely. control activities. The scope of substantive procedures as compared to the scope of tests of controls generally vary: A. C. D. In a parallel manner.

Internal Control 67. and Internal Control 68. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. D. Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of misstatement requires special audit consideration? A. Tests of the specific items making up the balance in a given general ledger account. they should consider the internal auditors': A. C. Which of the following audit tests would be regarded as a test of a control? A. Efficiency and experience. Training and supervisory skills. D. B. and equipment by physical inspection. Topic: Understand Client. Complex calculations are involved. C. plant. If the independent auditors decide that the work performed by the internal auditors may have a bearing on their own procedures. Tests of the signatures on canceled checks to board of director's authorizations. Tests of the additions to property. Source: AICPA Topic: Audit Procedures 69. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Remember Difficulty: Easy Learning Objective: 07-03 Describe the auditors' consideration of internal control. Source: AICPA Topic: Audit Procedures 7-51 . B. The potential for fraud seems high. Tests confirming receivables. D. C. Various subjective methods of application of a key accounting policy exist. Environment. B. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. Competence and objectivity. The rate of technological change is moderate in the industry. Independence and review skills.Chapter 07 .

Management can not override the system.Chapter 07 . In the consideration of internal control. rather than to exercise professional skepticism. Controls have not been circumvented by collusion. Topic: Assess Risks of Misstatement 7-52 . Emphasize the need to remain neutral. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-01 Define what is meant by internal control. Incorporate additional elements of unpredictability in the selection of audit procedures. D. Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level? A. Source: AICPA Topic: Internal Control 71. Misstatements have been prevented or detected. AACSB: Analytic AICPA BB: Industry AICPA FN: Risk Analysis Bloom's: Remember Difficulty: Easy Learning Objective: 07-05 Explain how internal control relates to a financial statement audit. C. B. C. B. D.Internal Control 70. the auditor is basically concerned that it provides reasonable assurance that: A. Operational efficiency has been achieved in accordance with management plans. Assign more experienced staff. Increase the scope of auditor procedures.

control activities. risk assessment. C. the accounting information system. Which of the following factors would most likely be considered an inherent limitation to an entity's internal control? A. B. The ineffectiveness of the board of directors.Chapter 07 . C. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. D. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. In assessing the competence of a client's internal auditor. The complexity of the information processing system. Source: AICPA Topic: Audit Procedures 73. Evidence supporting a further reduction in the assessed level of control risk. Internal auditor's compliance with professional internal auditing standards. Client's policies that limit the internal auditor's access to management salary data. Source: AICPA Topic: Limitations of Internal Controls 7-53 . D. an independent auditor most likely would consider the: A. Human judgment in the decision making process. The lack of management incentives to improve the control environment. and monitoring of controls. Results of ratio analysis that may identify unusual transactions and events.Internal Control 72. B.

Internal Control 74. Computerized analytical procedures tailored for the configuration of the computer equipment in use. D. Analytical procedures as set forth in an industry audit guide.Chapter 07 . Substantive procedures specified by a standardized audit program. C. B. D. C. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both: A. Tests of controls designed specifically for the client. Adopt new accounting pronouncements and authorize the recording of transactions. Journalize cash receipts and disbursements and prepare the financial statements. risk assessment. the accounting information system. and monitoring of controls. control activities. Source: AICPA Topic: Control Activities 75. B. Which of the following is intended to detect deviations from prescribed controls? A. Source: AICPA Topic: Audit Procedures 7-54 . AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. Monitor internal controls and evaluate whether the controls are operating as intended. Record and conceal fraudulent transactions in the normal course of assigned tasks.

C. D. B. Source: AICPA Topic: Audit Procedures 77. and monitoring of controls. Controls are operating effectively. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. Transactions must be properly authorized before such transactions are processed. the accounting information system. The risk that the auditor may unknowingly fail to modify the opinion on the financial statements is minimized. which one is not valid? A. No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. Source: AICPA Topic: Limitations of Internal Controls 7-55 . D. Transactions are recorded as necessary to permit the preparation of the financial statements in conformity with generally accepted accounting principles. Transactions are executed in accordance with management's authorization and access to assets is limited by a segregation of functions. An auditor's purpose for performing tests of controls is to provide reasonable assurance that: A. risk assessment. Of the following statements about internal control. B. a client may apply control procedures on a test basis. Because of the cost/benefit relationship. Control activities reasonably insure that collusion among employees cannot occur. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making Bloom's: Remember Difficulty: Easy Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. C. control activities.Chapter 07 .Internal Control 76.

Topic: Audit Procedures 79. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 07-06 Describe the major types of tests of controls. D. C. B. Source: AICPA Topic: Audit Procedures 80. C.Internal Control 78. The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States: A. All companies. Topic: Internal Control—Public Companies and Their Auditors 7-56 . D. Tests of controls are most likely to be performed when: A. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-06 Describe the major types of tests of controls. Analytical procedures. Inadequate substantive procedures exist to restrict audit risk to an acceptable level. The auditor wishes to assess control risk at the maximum. Which of the following would be least likely to be included in an auditor's tests of controls? A. The client's control environment appears weak. Only those companies included in the Fortune 500. AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 07-08 Describe the nature of the audits performed under Section 404(b) of the Sarbanes-Oxley Act of 2002. All nonpublic companies. Inquiry. SEC registrants. D. Observation. C. Inspection. B.Chapter 07 . B. Controls seem weak and must be properly documented.

The end of each quarter. Suitable criteria. A report on internal control performed in accordance with PCAOB Standard No. AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 07-08 Describe the nature of the audits performed under Section 404(b) of the Sarbanes-Oxley Act of 2002. Internal control over financial reporting. AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Apply Difficulty: Hard Learning Objective: 07-08 Describe the nature of the audits performed under Section 404(b) of the Sarbanes-Oxley Act of 2002. Compliance with laws. The entire year. D. An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and: A. C. B." D. 5 includes an opinion on internal control for: A. B. C.Internal Control 81. Topic: Internal Control—Public Companies and Their Auditors 7-57 . The prior quarter. Internal control over asset safeguarding. Topic: Internal Control—Public Companies and Their Auditors 82.Chapter 07 . The "as of date.

Option D AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Apply Difficulty: Hard Learning Objective: 07-08 Describe the nature of the audits performed under Section 404(b) of the Sarbanes-Oxley Act of 2002. one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): A. Option B C. Option D AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 07-08 Describe the nature of the audits performed under Section 404(b) of the Sarbanes-Oxley Act of 2002.Internal Control 83. Option B C. When performing an audit of internal control under PCAOB requirements.Chapter 07 . Topic: Internal Control—Public Companies and Their Auditors 84. When performing an internal control audit under PCAOB requirements. Topic: Internal Control—Public Companies and Their Auditors 7-58 . Option C D. Option A B. Option C D. auditors evaluate control: A. Option A B.

one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): A. Option B C. When performing an internal control audit under PCAOB standards. Option C D.Internal Control 85. Option D AACSB: Communication AICPA BB: Industry AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 07-08 Describe the nature of the audits performed under Section 404(b) of the Sarbanes-Oxley Act of 2002.Chapter 07 . Topic: Internal Control—Public Companies and Their Auditors 7-59 . Option A B.

In both situations assume inherent risk is at a high level.Chapter 07 . For A through F place a X in the box (for Situation 1 or Situation 2) which is most accurate with the statement below. 7-60 . if for any question you believe that the situation are the same relating to that question place an X in each of the two boxes.Internal Control Essay Questions 86.

Internal Control AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 07-06 Describe the major types of tests of controls. Topic: Audit Procedures 7-61 .Chapter 07 .

Discuss the factors that should be considered by the independent auditors in deciding how much. internal auditors may achieve independence from departments they evaluate by reporting to a senior officer or the board of directors. Topic: Audit Procedures 7-62 . if any. b. c. a. What is the difference between the primary objective of the independent auditors and that of internal auditors? Explain. In deciding the degree of reliance to be placed on the work of the internal auditors. No. The independent auditors' objective is to express an opinion on the client's financial statements. b.Chapter 07 . a. the independent auditors should consider the competence and objectivity of the internal auditors. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Apply Difficulty: Hard Learning Objective: 07-06 Describe the major types of tests of controls. c.Internal Control 87. reliance should be placed on the work of the internal auditors. However. Are internal auditors independent of management? Explain. Independent auditors should consider the work of internal auditors in their assessment of control risk. and evaluate their work. The internal auditors' primary objective is to aid management in achieving the most efficient and effective administration of the business.

Auditors are required to consider a client's internal control.Internal Control 88. timing and extent of further audit procedures. • Misunderstanding of instructions. b. Learning Objective: 07-03 Describe the auditors' consideration of internal control. and monitoring of controls. the accounting information system. The auditors' consideration of their clients' internal control is integral to both (1) to assess the risks of material misstatement in the financial statements and (2) to design the nature. List three of those limitations. The limitations of internal control include (only three required): • Carelessness. • Cost considerations often limit the effectiveness of the design of the structure. Even the best internal control has certain limitations. b. control activities. Topic: Financial Statement Audits—The Role of Internal Control Topic: Limitations of Internal Controls 7-63 .Chapter 07 . a. risk assessment. Describe the two purposes of the auditors' consideration of a client's internal control. a. AACSB: Analytic AICPA BB: Industry AICPA FN: Decision Making AICPA FN: Risk Analysis Bloom's: Understand Difficulty: Medium Learning Objective: 07-02 Distinguish among the major components of a client's internal control: the control environment. • Top management may override the system • Collusion among employees may circumvent controls dependent upon segregation of duties.

Walk-through tests may also be used. and job descriptions. The operating effectiveness of controls.Chapter 07 . When considering a client's internal control. b. a. c. The design of internal control. The auditors have a responsibility to determine the operating effectiveness of controls that provide the basis for the auditors' assessment of control risk at levels below the maximum. For each of the following characteristics indicate the auditors' responsibility under generally accepted auditing standards and the procedures used to meet that responsibility. and reperformance to test the operating effectiveness of controls. inquiry. and Internal Control 7-64 . a. c. The auditors may determine whether the controls have been implemented (placed in operation) by observation. and by interviewing client personnel. b. inspection. organization charts. Controls have been implemented (placed in operation). Environment. Topic: Understand Client. the auditors focus on its various characteristics. inspection. and inquiry. The auditors have a responsibility to obtain an understanding of internal control that is sufficient to plan the audit. An understanding of the design of the structure is obtained by inspecting control manuals. AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 07-04 Discuss the techniques used by auditors to obtain an understanding of internal control. The auditors have a responsibility to determine whether significant internal control policies and procedures are implemented (placed in operation) in every audit.Internal Control 89. The auditors use observation.

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