Study and Evaluation of Internal Control 

1. What is the primary purpose of effective internal control in an

organization? The achievement of certain organizational goals. 
Completion of a successful audit for a entity. 
Shareholders’ involvement in the company’s success. 
Obtaining profitability and financial strength. 
2. This is the process designed and effected by those charged with governance, 
management and other personnel ot provide reasonable assurance about the 
achievement of the entity’s objectives on financial reporting, operations and
compliance. Risk assessment 
Strategies 
Internal control 
Operational plans 
3. The auditor uses the understanding of internal control to 
Identify types of material misstatements 
Consider factors that might affect the risk of material misstatements. 
Design the nature, timing and extent of further audit procedures (i.e. tests of
controls and  substantive tests) 
All of these. 
4. Which of the following is not one of the three primary objectives of effective
internal  control? 
Reliability of financial reporting 
Efficiency and effectiveness of operations 
Compliance with laws and regulations 
Each of the above is a primary objective of effective internal control. 
5. Which of the following is not typically one of management’s concerns in
designing  effective internal control? 
To generate profits from operations. 
To generate fairly stated financial statements. 
To comply with applicable laws and regulations 
To design the most effective internal control possible no matter how much it
will cost. 6. Internal controls are not designed to provide reasonable assurance
that Irregularities will be eliminated. 
Transactions are executed in accordance with management’s authorization.
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. 
7. An act of two or more employees to steal assets or misstate records is frequently
referred  to as 
Collusion
A material weakness 
A control deficiency 
Any of the above 
8. Two key concepts that underlie management’s design and implementation of
internal  control are 
 Costs and materiality 
Absolute assurance and costs 
Inherent limitations and reasonable assurance 
Collusion and materiality 
9. Internal control can provide only reasonable assurance of achieving entity’s
control  objectives. One factor limiting the likelihood of achieving those
objectives is that The auditor’s primary responsibility is the detection of fraud. 
The board of directors is active and independent. 
The cost of internal control should not exceed its benefits. 
Management monitors internal control. 
10.An entity’s risk management process includes how management 
Identifies risk. 
Decides upon actions to manage these risks. 
Assess significance and likelihood of occurrence of these
identified risks. All of these. 
11.Proper segregation of functional responsibilities in an effective system of internal
control  calls for separation of the functions of 
Authorization, execution and payment. 
Authorization, recording and custody. 
Custody, execution and reporting. 
Authorization, payment and recording. 
12.Inherent limitations in an internal control must be considered in evaluating its 
effectiveness in preventing and detecting errors and fraud. Inherent limitations
do not  include 
Misunderstanding of instructions, mistakes of judgment, personal
carelessness,  distraction or fatigue. 
Incompatible functions performed by the same person. 
Collusion among employees. 
Management override of certain policies or procedures. 
13.The internal control cannot be designed to provide reasonable
assurance that Transactions are executed in accordance with
management’s authorization. Fraud will be eliminated. 
Access to assets is permitted only in accordance with management’s
authorization. The recorded accountability for assets compared with the
existing assets at reasonable  intervals. 
14.Which of the following is not one of the components of an entity’s internal
control? Control risk 
Control activities 
The control environment 
Information and communication. 
15.The overall attitude and awareness of an entity’s board of directors
concerning the  importance of the internal control usually is reflected in its 
Computer-based controls 
System of segregation of duties.
Control environment 
Safeguards over access to assets 
16.Basic to a proper control environment are the quality and integrity of personnel who
must  perform the prescribed procedures. Which is not a factor to providing for
competent  personnel? 
Segregation of duties. 
Hiring practices. 
Training programs. 
Performance evaluations. 
17.An entity’s ongoing monitoring activities often include 
Periodic audits by the audit committee. 
Reviewing the purchasing function. 
The audit of the annual financial statements. 
Control risk assessment in conjunction with quarterly reviews. 
18.It is important for the auditor to consider the competence of the audit client’s
employees,  because their competence bears directly and importantly upon the 
Timing of the test to be performed. 
Cost-benefit relationship of internal control. 
Achievement of the objectives of internal control. 
Comparison of recorded accountability with assets. 
19.When obtaining an understanding of the accounting and internal control system
the  auditor may trace a few transactions through the accounting system. This
technique is Reperformance test 
Walkthrough test 
Test of transactions  
Validity test 
20.A proper segregation of duties requires 
An individual authorizing a transaction records it 
An individual authorizing a transaction maintains custody of the asset that
resulted from  the transaction 
An individual maintaining custody of an asset be entitled to access the
accounting  records of the asset. 
An individual recording a transaction not compare the accounting record of the
asset with  the asset itself.