Chapter 11

1. The primary purpose for obtaining an understanding of an audit client's internal control structure is
to:
a. provide a basis for making constructive suggestions in a management letter.

b. determine the nature, timing, and extent of tests to be performed in the audit

c. obtain sufficient competent evidential matter to afford a reasonable basis for an Opinion on the
financial statements under examination.

d. provide information for a communication of internal control structure-related matters to

management.

2. Which of the following can an auditor observe as a general control procedure used by companies?

a. Segregation of functional responsibilities.

b. Management philosophy and operating cycle.

c. Open lines of communication to the audit committee of the board of directors.

d. External influences such as bank examiner audits.

3. A client's control procedure is:

a. an action taken by auditors to obtain evidence.

b. an action taken by client personnel for the purpose of preventing, detecting, and correcting errors
and irregularities in transactions.

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

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

4. The control objective designed to reduce the probability that fictitious transactions get recorded in the
accounts is:

a. completeness c. proper period

b. authorization d. validity

5. The control objective designed to reduce the probability that a credit sale transaction will get debited to
cash instead of accounts receivable is:

a. validity c. accuracy

b. Classification d. completeness

6. In most audits of large companies, internal control risk assessment contributes to audit efficiency, which
means:

a. the cost of year-end audit work will exceed the cost of control evaluation work.

b. auditors will be able to reduce the cost of year-end audit work by an amount more than the control
evaluation costs.

c. the cost of control evaluation work will exceed the cost of year-end audit work.

d. auditors will be able to reduce the cost of year-end audit work by an amount less than the control
evaluation costs.
7. Which of the following is a device designed to help the audit team obtain evidence. about the control
environment and about the accounting and control procedures of an audit client?

a. A narrative memorandum describing the control system.

b. An internal control questionnaire

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

d. A well- indexed file of working papers.

8. During consideration of the internal control system in a financial statement audit, an auditor is not
obligated to

a. search for significant deficiencies in the operation of the internal control system.

b. understand the internal control environment and the accounting system.

c. determine whether the control procedures relevant to the audit planning have been placed in
operation perform

d. procedures in order to understand the design of the internal control policies.

9. The primary objective of procedures performed to obtain an understanding of the internal control system
is to provide an auditor with

a. evidential matter to use in reducing detection risk;

b. knowledge necessary to plan the audit.

c. a basis from which to modify tests of controls.

d. information necessary to prepare flowchart.

10. Which of the following is not a reason an auditor should obtain an understanding of the elements of an
entity's internal control system in planning an audit?

a. To identify types of potential misstatements that can occur.

b. To design substantive tests

c. To consider the operating effectiveness of the internal controls.

d. To consider factors that affect the risk of material misstatements.

8. When control risk is assessed-at the maximum level for all financial statement assertions, an auditor
should document the auditor's

Understanding of Conclusion that Basis for concluding

the entity's internal control risk is at the that control risk is at
control elements maximum level the maximum level

a. Yes No No

b. Yes Yes No

c. No Yes Yes

d. Yes Yes Yes

12. After obtaining an understanding of an entity's internal control system, an auditor may assess control
risk at the maximum level for some assertions because the auditor

a. believes the internal control policies and procedures are unlikely to be effective.

b. determines that the pertinent internal control system elements are not well documented.

c. performs tests of controls to restrict detection risk to an acceptable

d. identities internal control policies and procedures that are likely to prevent material misstatements.

13. After obtaining an understanding of an entity's internal control system and assessing control risk, an
auditor next may

a. perform tests of controls to verify management's assertions that are embodied In the financial
statements.

b. consider whether evidential matter is available to support a further reduction in the assessed level
of control risk.

c. apply analytical procedures as substantive tests to validate the assessed level of control risk.

d. evaluate whether the internal control system policies and procedures detected, material
misstatements in the financial statements.

14. The objective of tests of details of transactions performed as tests of controls is to

a. detect material misstatements in the account balances of the financial statements.

b. evaluate whether an internal control system policy or procedure operated effectively.

c. determine the nature, timing, and extent of substantive tests for financial statement assertions.

d. reduce control risk, m; and detection risk to an acceptably low level.

15. An auditor uses the knowledge provided by the understanding of the internal control system and the
assessed level of control risk primarily to

a. determine whether procedures and records concerning the safeguarding of assets are reliable.

b. ascertain-whetner the opportunities to allow any person to both perpetrate and conceal irregularities
are minimized.

c. modify the initial assessments of inherent risk and preliminary judgments about materiality levels.

d. determine the nature, timing, and extent of substantive tests for financial statement assertions.

16. In a study and evaluation of the control system policies and procedures, the completion of a
questionnaire is most closely associated with which of the following?

a. Tests of controls

b. Substantive tests

c. Obtaining an initial understanding of the system.

d. Review of the system design.

17. A weakness in internal control over recording retirements of equipment may cause an auditor to
 a. trace additions to the "other assets" account to search of equipment that is still on hand but no
longer being used s

b. select certain items of equipment from the accounting records and locate them In the plant .

c. inspect certain items of equipment in the plant and trace those items to the accounting records.

d. review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment
during the year.

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

a. material irregularities or illegal acts perpetrated by high-level management.

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

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

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

19. Miles Retailing, Inc., maintains a staff of three full-time internal auditors who report directly to the
controller. In planning to use the internal auditors to provide assistance in performing the audit, the
independent auditor most likely will

a. place limited reliance on the work performed by the internal auditors.

b. decrease the extent of the tests of controls needed to support the assessed level of detection risk.

c. increase the extent of the procedures needed to reduce control risk to an acceptable level.

d. avoid using the work performed by the internal auditors.

20. In developing a preliminary audit strategy, an auditor should consider

a. whether the allowance for sampling risk exceeds the achieved upper precision limit.

b. findings from substantive tests performed at interim dates.

c. whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not
disclosed in the financial statements.

d. the planned assessed level of control risk.