Auditing Final 3

Front 1

Which of the following parties is responsible for establishing an entity’s internal controls?

Back 1

Management.

Front 2

Which of the following is not one of the three primary objectives of effective internal control?

Back 2

Each of the above is a primary objective of effective internal control.

Front 3

The PCAOB states that reasonable assurance allows for

Back 3

a remote likelihood that material misstatements will not be prevented or detected by internal control.

Front 4

Internal controls can never be considered as absolutely effective because

Back 4

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

Front 5

A major control available in a small company, which might not be feasible in a large company, is

Back 5

the owner-manager’s personal interest and close relationship with personnel.

Front 6

An act of two or more employees to steal assets or misstate records is frequently referred to as

Back 6

collusion.

Front 7

When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, this is referred to as

Back 7

a walk-through.

Front 8

Which section of the Sarbanes-Oxley Act requires management to issue an internal control report?

Back 8

404

Front 9

Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements?

Back 9

A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.

Front 10

When management is evaluating the design of internal control, management evaluates whether the control can do all but which of the following?

Back 10

Correct material misstatements.

Front 11

Internal control reports issued by public companies must identify the framework used to evaluate the effectiveness of internal control. Which of the following is the most common framework in the U.S.?

Back 11

Internal Control - Integrated Framework – COSO

Front 12

Auditor’s tests of operating effectiveness of internal controls might include which of the following types of procedures?

Back 12

All of the above

Front 13

With which one of management’s concerns with respect to implementing internal controls is the auditor primarily concerned?

Back 13

Reliability of financial reporting.

Front 14

Which of the following activities would be least likely to strengthen a company’s internal control?

Back 14

Maintaining insurance for fire and theft.

Front 15

Management must disclose material weaknesses in internal control

Back 15

even if just one weakness is found.

Front 16

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

Back 16

to assess control risk.

Front 17

Which of the following audit tests would be regarded as a test of a control?

Back 17

Tests of the signatures on canceled checks to management’s authorizations.

Front 18

During which part of an audit examination is the preparation of flowcharts most appropriate?

Back 18

When reviewing the system of internal control.

Front 19

The ______ consists of the actions, policies, and procedures that reflect the overall attitudes of top management.

Back 19

control environment.

Front 20

An auditor’s primary emphasis is internal controls over

Back 20

classes of transactions

Front 21

The auditor’s study of a nonpublic client’s internal control is

Back 21

required by GAAS.

Front 22

Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the

Back 22

competency and dependability of the people using it.

Front 23

Even with the most effectively designed internal control, the auditor must obtain audit evidence, beyond testing the controls, for every

Back 23

material financial statement account.

Front 24

To express an opinion on internal controls, an auditor obtains an understanding of and performs tests of controls related to all but which of the following?

Back 24

Account balances.

Front 25

The essence of an effectively controlled organization lies in the

Back 25

attitude of its management.

Front 26

To issue a report on internal control over financial reporting for a public company, an auditor must

Back 26

evaluate management’s assessment process and independently assess the design and operating effectiveness of internal control.

Front 27

Which of the stock exchanges require listed companies to have an audit committee composed entirely of independent directors?

Back 27

AMEX, NASDAQ, and NYSE

Front 28

Which of the following factors may increase risks to an organization?

Back 28

All of the above.

Front 29

Which of the following statements is correct with respect to separation of duties?

Back 29

It is desirable to prevent employees who authorize transactions from having custody of related assets.

Front 30

Authorizations can be either general or specific. Which of the following is not an example of a general authorization?

Back 30

A sales manager’s authorization for a sales return.

Front 31

The most important type of protective measure for safeguarding assets and records is

Back 31

the use of physical precautions.

Front 32

Which of the following statements is correct with respect to the design and use of business documents?

Back 32

None of the above statements is correct.

Front 33

The SEC prohibits U.S. stock exchanges from listing securities if a company’s audit committee is

Back 33

All of the above are correct.

Front 34

All of the following are substantive tests except

Back 34

tests of controls.

Front 35

Most audits of a company are done annually by the same CPA firm. Except for initial engagements, the auditor begins the audit with a great deal of information about the internal controls developed in prior years. Because systems and controls usually do not change often,

Back 35

this information can be updated and carried forward to the current year’s audit.

Front 36

Narratives, flowcharts, and internal control questionnaires are three common methods of

Back 36

documenting the auditor’s understanding of internal controls.

Front 37

Which of the following is not an element of a proper narrative of an accounting system and related controls?

Back 37

There should be an indication of all controls affecting the applicable process.

Front 38

Which of the following statements about the internal control questionnaire is not correct?

Back 38

A questionnaire is usually applicable to a wide variety of companies, especially smaller ones.

Front 39

Specific assessments must be made to arrive at the preliminary assessment of control risk. Which of the following is not one of these assessments?

Back 39

Is management committed to internal control?

Front 40

Which of the following is not one of the levels of an absence of internal controls?

Back 40

Internal control weakness.

Front 41

Which of the following is the correct definition of “control deficiency?”

Back 41

A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis.

Front 42

The purpose of an entity’s accounting information and communication system is to ______.

Back 42

initiate transactions and record and process transactions (a and b only).

Front 43

A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation of functions and that leave no transaction trail is

Back 43

observation.

Front 44

Internal controls normally include procedures designed to provide reasonable assurance that

Back 44

transactions are executed in accordance with management’s general or specific authorization.

Front 45

Which of the following is not a common step used to identify internal control deficiencies?

Back 45

Each of the above is a common step used to identify internal control deficiencies.

Front 46

Which of the following is not a component of an entity’s internal control?

Back 46

Control risk.

Front 47

Before making the final assessment of internal control at the end of an integrated audit, the auditor must

Back 47

test controls and perform substantive tests of details (a and b).

Front 48

Significant deficiencies and material weaknesses in internal control of a public company must be reported to which of the following?

Back 48

Audit committee of the company’s board of director.

Front 49

Of the following statements about internal controls, which one is not valid?

Back 49

Control procedures reasonably ensure that collusion among employees cannot occur.

Front 50

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

Back 50

Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.

Front 51

Which of the following is not one of the subcomponents of the control environment?

Back 51

Adequate separation of duties.

Front 52

It is important for the CPA to consider the competence of the audit clients’ employees because their competence bears directly and importantly upon the

Back 52

achievement of the objectives of internal control.

Front 53

Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by

Back 53

direct participation by the owner of the business in the record-keeping activities of the business.

Front 54

Evidential matter concerning proper segregation of duties ordinarily is best obtained by

Back 54

direct personal observation of the employee who applies control procedures.

Front 55

Proper segregation of functional responsibilities calls for separation of the functions of

Back 55

authorization, recording, and custody.

Front 56

When considering the objectivity of internal auditors, an independent auditor should

Back 56

determine the organizational level to which the internal auditors report.

Front 57

Internal controls are not designed to provide reasonable assurance that

Back 57

all frauds will be eliminated.

Front 58

Which of the following statements regarding auditor documentation of the client’s internal controls is correct?

Back 58

No one particular form of documentation is necessary.

Front 59

Significant deficiencies are matters that come to an auditor’s attention, which should be communicated to an entity’s audit committee because they represent

Back 59

internal control deficiencies that could adversely affect a company’s ability to initiate, record, process, or report external financial statements reliably.

Front 60

Which of the following statements, if any, is correct?

Back 60

The NASDAQ market requires listed companies to have audit committees that have only independent directors.

Front 61

Which of the following is not typically one of management’s concerns in designing effective internal controls?

Back 61

Obtaining the best internal control possible.

Front 62

The Sarbanes-Oxley Act requires

Back 62

all public companies to issue an internal control report.

Front 63

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the

Back 63

costs of internal control should not exceed the benefits expected to be derived from internal control.

Front 64

To comply with the second standard of fieldwork, the auditor need not be concerned with all five areas of internal control that apply to management. The auditor’s primary concerns are with the internal control’s ability to

Back 64

ensure reliability of financial reporting for external purposes.

Front 65

The financial statements are not likely to correctly reflect generally accepted accounting principles if

Back 65

the controls affecting the reliability of financial reporting are inadequate.

Front 66

The primary emphasis by auditors is on controls over

Back 66

classes of transactions.

Front 67

The most important difference in a nonpublic company in assessing control risk is the ability to assess control risk at _______ for any or all control-related objectives.

Back 67

high

Front 68

Having an audit committee composed of outside directors is a requirement of

Back 68

all companies that are listed on the NYSE, AMEX, and NASDAQ.

Front 69

An auditor should consider two key issues when obtaining an understanding of a client’s internal controls. These issues are

Back 69

the design and utilization of the controls.

Front 70

The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor’s study and evaluation of internal accounting control because

Back 70

the work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor’s procedures.

Front 71

Taylor Sales Corp. maintains a large full-time internal audit staff that reports directly to the chief accountant. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. The independent auditor will probably

Back 71

place limited reliance on the work performed by the internal audit staff.

Front 72

When planning an audit, the auditor’s assessed level of control risk is

Back 72

an economic issue, trading off the costs of testing controls against the cost of testing balances.

Front 73

When a compensating control exists, the absence of a key control

Back 73

is no longer a concern because there is no longer a significant deficiency or material weakness.

Front 74

An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

Back 74

Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.

Front 75

When obtaining an understanding of an entity’s control environment, an auditor should concentrate on the substance of management’s policies and procedures rather than their form because

Back 75

management may establish appropriate policies and procedures but not act on them.