The primary responsibility for establishing

and maintaining an internal control rests

with

a) The external auditors

b) The Internal auditors
c) Management and those charged with
governance
d) The Controller or the treasurer
The fundamental purpose of an internal
control is to
a) Safeguard the resources of the organization
b) Provide reasonable assurance that the
objective of the organization are achieved
c) Encourage compliance with organization
objective.
d) Encourage the accuracy, reliability, and
timeless of information.
Which of the following internal control objective would
be most relevant to the audit?

a) Operational objective
b) Compliance objective
c) Financial reporting Objective
d) Administrative control objective
An auditor would most likely be connected with
internal control policies and procedures that provide
reasonable assurance about the

a) Efficiency of management’s decision-making

process
b) Appropriate prices the entity should charge for its
products
c) Methods of assigning production tasks to
employees
d) Entity’s ability to process and summarize financial
data
In an audit of financial statements, an auditor’s
primary consideration regarding an internal control
activity is whether the control
a) Reflects management’s philosophy and operating
style
b) Affects management’s financial statement
assertions
c) Provides adequate safeguards over access to
assets
d) Enhances management’s decision-making
processes
Internal control can provide only reasonable
assurance of achieving entity’s control objectives.
One factor limiting the likelihood of achieving those
objectives is that

a) The auditor’s primary responsibility is the

direction of fraud
b) The board of directors is active and independent
c) The cost of internal control should not exceed its
benefits
d) Management monitors internal control
Inherent limitations is an internal control must be
considered in evaluating its effectiveness in preventing
and detecting errors and fraud. Inherent limitations do
not include
a) Misunderstanding of instructions, mistakes of
judgment, personal carelessness, distraction, or
fatigue.
b) Incompatible functions performed by the same
person.
c) Collusion among employees.
d) Management override of certain policies or
procedures.
Which of the following best describes an inherent limitation
that should be recognized by an auditor when considering the
potential effectiveness of an internal control structure?

a) Procedures whose effectiveness depends on segregation of

duties can be circumvented by collusion.
b) The competence and integrity of client personnel provide
an environment conducive to control and provides
assurance that effective control will be achieved.
c) Procedures designed to assure the execution and recording
of transactions in accordance with proper authorizations
are effective against fraud perpetrated by management
d) The benefits expected to be derived from effective internal
control usually do not exceed the cost of such control.
When considering the effectiveness of a system of internal
accounting control, the auditor should recognize that
inherent limitations do exist. Which of the following is an
example of an inherent limitation in a system of internal
accounting control?
a) The effectiveness of procedures depends on the
segregation of employee duties.
b) Procedures are designed to assure the execution and
recording of transaction in accordance with
management’s authorization.
c) In the performance of most control procedures, there are
possibilities off errors arising from mistakes in judgment
d) Procedures for handling large numbers of transactions
are processed by electronic data processing equipment
An effective system of internal control

a) Cannot be circumvented by management

b) Can reduce the cost of an external audit
c) Can prevent collusion among employees
d) Eliminates risks and potential loss to the
organization
The internal control cannot be designed to provide
reasonable assurance that

a) Transactions are executed in accordance with

management’s authorization.
b) Fraud will be eliminated.
c) Access to assets is permitted only in accordance
with management’s authorization.
d) The recorded accountability for assets is
compared with the existing assets at reasonable
intervals
Which of the following statement about internal control is
correct?
a) Properly maintained internal control reasonably
ensures that collusion among employees cannot occur
b) The establishment and maintenance of internal control
are important responsibilities of the internal auditor
c) Exceptional strong internal control is enough for the
auditor to eliminate substantive tests on a significant
account balance
d) The cost-benefit relationship is a primary criterion that
shoul be considered in designing internal control
Which of the following components of an
entity’s internal control structure includes the
development of employee promotion and
training policies?

a) Control activities
b) Control environment
c) Information and communication
d) Quality control system
A proper segregation of duties requires

a) An individual authorizing a transaction records it

b) An individual authorizing a transaction maintain
a custody of the asset that resulted from the
transaction
c) An individual maintaining custody of an asset be
entitled to access the accounting records for the
asset
d) An individual recording a transaction not
compare the accounting record of the asset with
the asset itself
The single most effective control procedure
established to avoid allowing any person to be in a
position to perpetrate and then conceal errors or
fraud is
a) The separation of the functional responsibilities
custodianship, record keeping, operations, and
authorization.
b) Require each employee to take a vacation each
year.
c) Established an internal auditing department.
d) Require the bonding of personnel in positions
that necessitate handling of cash and other
universally desirable valuables.
Which of the following would contribute most to the
safeguarding of assets?

a) Access to computer facilities and records is

limited to authorized personnel.
b) Training programs are conducted to develop
competence of newly hired personnel.
c) Control and subsidiary accounts are reconciled
on a regularly scheduled basis
d) Blank stock of all purchase orders and sales
invoices are pre-numbered
Which of the following statements best describes the
entity’s risk assessment process?
Entity’s process of identifying business risks relevant
to financial reporting objective and deciding about
actions to address those risks.
Entity’s assessment of audit risks affecting the
financial statements.
Entity’s process of evaluating the risks of
misstatements due to fraud.
Entity’s assessment of risks that internal control may
fail to detect misstatements affecting the financial
statements.
The policies and procedures that help ensure
that management directives are carried out
are referred to as the:
a) Control environment
b) Control activities
c) Monitoring of controls
d) Information system
Which of the following is not one of the
specific control procedures that are relevant
to financial statement audit?

a) Performance reviews
b) Physical controls
c) Segregation of duties
d) Monitoring
Proper segregation of functional
responsibilities in an effective structure of
internal control calls for separation of the
functions of

a) Authorization, execution, and payment

b) Authorization, recording, and custody
c) Custody, execution, and reporting
d) Authorization, payment, and recording
A small entity may use less formal means to ensure
that internal control objectives are achieved. For
example, extensive accounting procedures,
sophisticated accounting records, or formal controls
are least likely to be needed if
a) Management is closely involved in operations
b) The entity is involved in complex transactions
c) The entity is subject to legal or regulatory
requirements also found in larger entities.
d) Financial reporting objectives have been
established
Auditing standards require the auditor to obtain an
understanding of the client’s internal control
structure
a) For every audit.
b) For first time audits.
c) Sufficient to find any frauds which may exist.
d) Whenever it would be appropriate
Evaluating the design of the entity’s internal control
would involve
a) Considering whether the control, individually or in
combination with other controls, is capable of
effectively preventing, or detecting and correcting,
material misstatements.
b) Determining whether control exists and the entity is
using it.
c) Determining whether the control is operating
effectively.
d) Determining the consistency of application of
internal control procedures.
Obtaining knowledge about whether the
control is implemented can best be obtained
by
a) Inquiry of client’s personnel.
b) Reading procedures manual
c) Tracing transactions through the
information system relevant to financial
reporting.
d) Performing tests of control.
The auditor uses his understanding of accounting
and internal control systems together with the
inherent and control risks assessment to perform all
of the following expect
a) Identify the types of misstatements that could
occur
b) Consider factors that affect the risk of material
misstatements
c) Design appropriate audit procedures
d) Evaluate the effectiveness of the accounting and
control systems.
The procedure of tracing a few transactions through
the accounting system to determine whether
internal controls have been placed in operations is
called
a) Test of control
b) Substantive test
c) Control documentation
d) Walk-through test
Which of the following statements is incorrect about
walk-through tests?
a) It involves tracing a few transactions through the
accounting systems.
b) This procedure may be treated as part of tests of
control.
c) The nature and extent of walk-through tests
performed by the auditor are such that they alone
would provide sufficient appropriate audit evidence
to support a control risk assessment which is lee than
high.
d) This procedure is performed to determine whether
the controls are implemented by the client.
Which of the following statements is incorrect about audit
planning documentation?
a) The audit plan and related program should no longer be
changed once the audit is started
b) Although the precise form and content of the audit plan may
vary, it should be sufficiently detailed to guide the
development of an audit program.
c) The audit program should set out the nature, timing and
extent of planned audit procedures required to implement
the overall audit plan.
d) In preparing an audit program, the auditor should consider
the specific assessments of inherent and control risks and
the required level of assurance to be provided by substantive
tests.
Which of the following matters would least likely
appear in the audit program?
a) Specific procedures that will be performed.
b) Specific audit objectives
c) Estimated time that will be spent in performing
certain procedures.
d) Documentation of the accounting and internal
control systems being reviewed.