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75 Cards in this Set

  • Front
  • Back
Which of the following parties is responsible for establishing an entity’s internal controls?
Management.
Which of the following is not one of the three primary objectives of effective internal control?
Each of the above is a primary objective of effective internal control.
The PCAOB states that reasonable assurance allows for
a remote likelihood that material misstatements will not be prevented or detected by internal control.
Internal controls can never be considered as absolutely effective because
their effectiveness is limited by the competency and dependability of employees.
A major control available in a small company, which might not be feasible in a large company, is
the owner-manager’s personal interest and close relationship with personnel.
An act of two or more employees to steal assets or misstate records is frequently referred to as
collusion.
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
a walk-through.
Which section of the Sarbanes-Oxley Act requires management to issue an internal control report?
404
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?
A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
When management is evaluating the design of internal control, management evaluates whether the control can do all but which of the following?
Correct material misstatements.
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.?
Internal Control - Integrated Framework – COSO
Auditor’s tests of operating effectiveness of internal controls might include which of the following types of procedures?
All of the above
With which one of management’s concerns with respect to implementing internal controls is the auditor primarily concerned?
Reliability of financial reporting.
Which of the following activities would be least likely to strengthen a company’s internal control?
Maintaining insurance for fire and theft.
Management must disclose material weaknesses in internal control
even if just one weakness is found.
When auditing a nonpublic company, the auditor should obtain an understanding of internal control sufficient
to assess control risk.
Which of the following audit tests would be regarded as a test of a control?
Tests of the signatures on canceled checks to management’s authorizations.
During which part of an audit examination is the preparation of flowcharts most appropriate?
When reviewing the system of internal control.
The ______ consists of the actions, policies, and procedures that reflect the overall attitudes of top management.
control environment.
An auditor’s primary emphasis is internal controls over
classes of transactions
The auditor’s study of a nonpublic client’s internal control is
required by GAAS.
Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the
competency and dependability of the people using it.
Even with the most effectively designed internal control, the auditor must obtain audit evidence, beyond testing the controls, for every
material financial statement account.
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?
Account balances.
The essence of an effectively controlled organization lies in the
attitude of its management.
To issue a report on internal control over financial reporting for a public company, an auditor must
evaluate management’s assessment process and independently assess the design and operating effectiveness of internal control.
Which of the stock exchanges require listed companies to have an audit committee composed entirely of independent directors?
AMEX, NASDAQ, and NYSE
Which of the following factors may increase risks to an organization?
All of the above.
Which of the following statements is correct with respect to separation of duties?
It is desirable to prevent employees who authorize transactions from having custody of related assets.
Authorizations can be either general or specific. Which of the following is not an example of a general authorization?
A sales manager’s authorization for a sales return.
The most important type of protective measure for safeguarding assets and records is
the use of physical precautions.
Which of the following statements is correct with respect to the design and use of business documents?
None of the above statements is correct.
The SEC prohibits U.S. stock exchanges from listing securities if a company’s audit committee is
All of the above are correct.
All of the following are substantive tests except
tests of controls.
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,
this information can be updated and carried forward to the current year’s audit.
Narratives, flowcharts, and internal control questionnaires are three common methods of
documenting the auditor’s understanding of internal controls.
Which of the following is not an element of a proper narrative of an accounting system and related controls?
There should be an indication of all controls affecting the applicable process.
Which of the following statements about the internal control questionnaire is not correct?
A questionnaire is usually applicable to a wide variety of companies, especially smaller ones.
Specific assessments must be made to arrive at the preliminary assessment of control risk. Which of the following is not one of these assessments?
Is management committed to internal control?
Which of the following is not one of the levels of an absence of internal controls?
Internal control weakness.
Which of the following is the correct definition of “control deficiency?”
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.
The purpose of an entity’s accounting information and communication system is to ______.
initiate transactions and record and process transactions (a and b only).
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
observation.
Internal controls normally include procedures designed to provide reasonable assurance that
transactions are executed in accordance with management’s general or specific authorization.
Which of the following is not a common step used to identify internal control deficiencies?
Each of the above is a common step used to identify internal control deficiencies.
Which of the following is not a component of an entity’s internal control?
Control risk.
Before making the final assessment of internal control at the end of an integrated audit, the auditor must
test controls and perform substantive tests of details (a and b).
Significant deficiencies and material weaknesses in internal control of a public company must be reported to which of the following?
Audit committee of the company’s board of director.
Of the following statements about internal controls, which one is not valid?
Control procedures reasonably ensure that collusion among employees cannot occur.
Which of the following best describes the inherent limitations that should be recognized by an auditor when considering the potential effectiveness of internal control?
Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.
Which of the following is not one of the subcomponents of the control environment?
Adequate separation of duties.
It is important for the CPA to consider the competence of the audit clients’ employees because their competence bears directly and importantly upon the
achievement of the objectives of internal control.
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
direct participation by the owner of the business in the record-keeping activities of the business.
Evidential matter concerning proper segregation of duties ordinarily is best obtained by
direct personal observation of the employee who applies control procedures.
Proper segregation of functional responsibilities calls for separation of the functions of
authorization, recording, and custody.
When considering the objectivity of internal auditors, an independent auditor should
determine the organizational level to which the internal auditors report.
Internal controls are not designed to provide reasonable assurance that
all frauds will be eliminated.
Which of the following statements regarding auditor documentation of the client’s internal controls is correct?
No one particular form of documentation is necessary.
Significant deficiencies are matters that come to an auditor’s attention, which should be communicated to an entity’s audit committee because they represent
internal control deficiencies that could adversely affect a company’s ability to initiate, record, process, or report external financial statements reliably.
Which of the following statements, if any, is correct?
The NASDAQ market requires listed companies to have audit committees that have only independent directors.
Which of the following is not typically one of management’s concerns in designing effective internal controls?
Obtaining the best internal control possible.
The Sarbanes-Oxley Act requires
all public companies to issue an internal control report.
When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the
costs of internal control should not exceed the benefits expected to be derived from internal control.
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
ensure reliability of financial reporting for external purposes.
The financial statements are not likely to correctly reflect generally accepted accounting principles if
the controls affecting the reliability of financial reporting are inadequate.
The primary emphasis by auditors is on controls over
classes of transactions.
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.
high
Having an audit committee composed of outside directors is a requirement of
all companies that are listed on the NYSE, AMEX, and NASDAQ.
An auditor should consider two key issues when obtaining an understanding of a client’s internal controls. These issues are
the design and utilization of the controls.
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
the work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor’s procedures.
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
place limited reliance on the work performed by the internal audit staff.
When planning an audit, the auditor’s assessed level of control risk is
an economic issue, trading off the costs of testing controls against the cost of testing balances.
When a compensating control exists, the absence of a key control
is no longer a concern because there is no longer a significant deficiency or material weakness.
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?
Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.
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
management may establish appropriate policies and procedures but not act on them.