Audit Test Test #3 Ch. 10 Test Bank

Front 1

Chapter 10

Back 1

Section 404 Audits of Internal Control and Control Risk

Front 2

LO 10-1

Back 2

LO 10-1

Front 3

1) Which of the following is not one of the three primary objectives of effective internal control?
A) reliability of financial reporting
B) efficiency and effectiveness of operations
C) compliance with laws and regulations
D) assurance of elimination of business risk

Back 3

D) assurance of elimination of business risk

Front 4

2) The Public Company Accounting Oversight Board states that reasonable assurance allows a:
A) small likelihood of ineffective internal controls.
B) remote likelihood that material misstatements will not be prevented or detected by internal control.
C) likelihood that material misstatements will not be prevented or detected by internal control.
D) high likelihood that material misstatements will not be prevented or detected by internal control.

Back 4

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

Front 5

3) Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes Oxley Act?
A) The audits of internal control and the financial statements provide reasonable assurance as to misstatements.
B) The audit of internal control provides absolute assurance of misstatement.
C) The audit of financial statements provides absolute assurance of misstatement.
D) The audits of internal control and the financial statements provide absolute assurance as to misstatements.

Back 5

A) The audits of internal control and the financial statements provide reasonable assurance as to misstatements.

Front 6

4) Which of management's assertions with respect to implementing internal controls is the auditor primarily concerned?
A) efficiency of operations
B) reliability of financial reporting
C) effectiveness of operations
D) compliance with applicable laws and regulations

Back 6

B) reliability of financial reporting

Front 7

5) To issue a report on internal control over financial reporting for a public company, an auditor must:
A) evaluate management's assessment process.
B) independently assess the design and operating effectiveness of internal control.
C) evaluate management's assessment process and independently assess the design and operating effectiveness of internal control.
D) test controls over significant account balances.

Back 7

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

Front 8

6) A company frequently sells products at a price below inventory cost. Essential controls in the risk assessment process would include:
A) adequate controls that address the risk of overstating inventory.
B) adequate controls that address the risk of not including a purchased item in inventory.
C) adequate controls that address the risk of understatement of inventory.
D) adequate controls that address the risk of overstatement of cost of goods sold.

Back 8

A) adequate controls that address the risk of overstating inventory.

Front 9

7) Internal controls are not designed to provide reasonable assurance that:
A) all frauds will be detected.
B) transactions are executed in accordance with management's authorization.
C) access to assets is permitted only in accordance with management's authorization.
D) company personnel comply with applicable rules and regulations.

Back 9

A) all frauds will be detected.

Front 10

9) The Sarbanes-Oxley Act of 2002 requires that public companies issue an internal control report.
A) True
B) False

Back 10

True

Front 11

The primary emphasis by auditors when evaluating and testing internal control is on controls over classes of transactions rather than controls over account balances.

Back 11

True

Front 12

LO 10-2

Back 12

LO 10-2

Front 13

1) Which of the following is responsible for establishing a private company's internal control?
A) Senior Management
B) Internal Auditors
C) Senior Management and auditors
D) Audit committee

Back 13

A) Senior Management

Front 14

2) Two key concepts that underlie management's design and implementation of internal control are:
A) costs and materiality.
B) absolute assurance and costs.
C) inherent limitations and reasonable assurance.
D) collusion and materiality.

Back 14

C) inherent limitations and reasonable assurance.

Front 15

3) The PCAOB places responsibility for the reliability of internal controls over the financial reporting process to:
A) the company's board of directors.
B) the audit committee of the board of directors.
C) the CEO and the CFO.
D) the CFO and the Independent Auditors.

Back 15

C) the CEO and the CFO.

Front 16

4) Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies?
A)
Management Financial statement auditors
Yes Yes

B)
Management Financial statement auditors
No No

C)
Management Financial statement auditors
Yes No

D)
Management Financial statement auditors
No Yes

Back 16

A) Yes Yes

Front 17

5) An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as:
A) collusion.
B) a material weakness.
C) a control deficiency.
D) a significant deficiency.

Back 17

A) collusion.

Front 18

6) 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) A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
B) A statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
C) A statement that management, the board of directors, and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
D) A statement that the external auditors are solely responsible.

Back 18

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

Front 19

7) When management is evaluating the design of internal control, management evaluates whether the control can do which of the following?
A)
Detect material misstatements Correct material misstatements
Yes Yes

B)
Detect material misstatements Correct material misstatements
No No

C)
Detect material misstatements Correct material misstatements
Yes No

D)
Detect material misstatements Correct material misstatements
No Yes

Back 19

C) Yes No

Front 20

8) When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is:
A) insufficient.
B) inadequate.
C) ineffective.
D) inefficient.

Back 20

C) ineffective.

Front 21

9) The auditors primary purpose in auditing the client's system of internal control over financial reporting is:
A) to prevent fraudulent financial statements from being issued to the public.
B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements.
C) to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements.
D) to efficiently conduct the Audit of Financial Statements.

Back 21

B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements.

Front 22

10) Management must disclose material weaknesses in internal control in its audit report:
A) whenever the weakness is deemed significant to a single class of transactions.
B) whenever the weakness is significant to overall financial reporting objectives.
C) if the weakness exists at the end of the year.
D) only if the auditor identifies the weakness as significant.

Back 22

C) if the weakness exists at the end of the year.

Front 23

11) In performing the audit of internal control over financial reporting the auditor emphasizes internal control over class of transactions because:
A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.
B) the class of transaction is where most fraud schemes occur.
C) account balances are less important to the auditor then the changes in the account balances.
D) classes of transactions tests are the most efficient manner to compensate for inherent risk.

Back 23

A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.

Front 24

12) Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the:
A) adequacy of the computer system.
B) proper implementation by management.
C) ability of the internal audit staff to maintain it.
D) competency and dependability of the people using it.

Back 24

D) competency and dependability of the people using it.

Front 25

13) Even with the most effectively designed internal control, the auditor must obtain audit evidence, beyond testing the controls, for every:
A) transaction.
B) financial statement account.
C) material financial statement account.
D) financial statement account that will be relied upon by third parties.

Back 25

C) material financial statement account.

Front 26

14) Of the following statements about internal controls, which one is least likely to be correct?
A) No one person should be responsible for the custodial responsibility and the recording responsibility for an asset.
B) Transactions must be properly authorized before such transactions are processed.
C) Because of the cost-benefit relationship, a client may apply controls on a test basis.
D) Control procedures reasonably ensure that collusion among employees cannot occur.

Back 26

D) Control procedures reasonably ensure that collusion among employees cannot occur.

Front 27

15) The Sarbanes-Oxley Act requires:
A) all public companies to issue reports on internal controls.
B) all public companies to define adequate internal controls.
C) the auditor of public companies to design effective ICFR.
D) the auditor of public companies to provide recommendations to correct material weaknesses.

Back 27

A) all public companies to issue reports on internal controls.

Front 28

16) The financial statements may not correctly reflect accounting frameworks such as AAP or IFRS if the:
A) controls affecting the reliability of financial reporting are inadequate.
B) company's controls do not promote efficiency.
C) company's controls do not promote effectiveness.
D) company's controls do not promote compliance with applicable rules and regulations.

Back 28

A) controls affecting the reliability of financial reporting are inadequate.

Front 29

17) The primary emphasis by auditors is on controls over:
A) classes of transactions.
B) account balances.
C) both A and B, because they are equally important.
D) both A and B, because they vary from client to client.

Back 29

A) classes of transactions.

Front 30

18) An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are:
A) the effectiveness and efficiency of the controls.
B) the frequency and effectiveness of the controls.
C) the design and implementation of the controls.
D) the implementation and efficiency of the controls.

Back 30

C) the design and implementation of the controls.

Front 31

19) When a company designs and implements internal controls, cost of the controls is not a valid consideration.
A) True
B) False

Back 31

False

Front 32

LO 10-3

Back 32

LO 10-3

Front 33

1) Which of the following activities would be least likely to strengthen a company's internal control?
A) separating accounting from other financial operations
B) maintaining insurance for fire and theft
C) fixing responsibility for the performance of employee duties
D) carefully selecting and training employees

Back 33

B) maintaining insurance for fire and theft

Front 34

2) Which of the following components of the control environment define the existing lines of responsibility and authority?
A) Organizational Structure
B) Management philosophy and operating style
C) Human resource policies and practices
D) Management integrity and ethical values

Back 34

A) Organizational Structure

Front 35

3) Which of the following factors may increase risks to an organization?
A)
Geographic dispersion of
company operations Presence of new information technologies
Yes Yes

B)
Geographic dispersion of
company operations Presence of new information technologies
No No

C)
Geographic dispersion of
company operations Presence of new information technologies
Yes No

D)
Geographic dispersion of
company operations Presence of new information technologies
No Yes

Back 35

A) Yes Yes

Front 36

4) Which of the following statements is most correct with respect to separation of duties?
A) Employees should not have temporary and permanent custody of assets.
B) Employees who authorize transactions should not have custody of related assets.
C) It is permissible to allow an employee to open cash receipts and record those receipts.
D) Employees who authorize transactions should have recording responsibility for these transactions.

Back 36

B) Employees who authorize transactions should not have custody of related assets.

Front 37

5) Authorizations can be either general or specific. Which of the following is not an example of a general authorization?
A) Automatic reorder points for raw materials inventory.
B) A sales manager's authorization for a sales return.
C) Credit limits for various classes of customers.
D) A sales price list for merchandise.

Back 37

B) A sales manager's authorization for a sales return.

Front 38

6) Which of the following is correct with respect to the design and use of business documents?
A) Not all documents used for internal purposes need to be prenumbered.
B) Documents should be designed for single purposes only to avoid confusion in their use.
C) Documents should be designed to be understandable only by those who use them.
D) Documents designed for external use must be prenumbered.

Back 38

D) Documents designed for external use must be prenumbered.

Front 39

7) Which of the following best describes the purpose of control activities?
A) the actions, policies and procedures that reflect the overall attitudes of management
B) the identification and analysis of risks relevant to the preparation of financial statements
C) the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity's objectives
D) activities that deal with the ongoing assessment of the quality of internal control by management

Back 39

C) the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity's objectives

Front 40

8) Which of the following deal with ongoing or periodic assessment of the quality of internal control by management?
A) Quality monitoring activities
B) Monitoring activities
C) Oversight activities
D) Management activities

Back 40

B) Monitoring activities

Front 41

9) Which of the following best describes an entity's accounting information and communication system?
A)
Monitor
transactions Record and
process
transactions Initiate transactions
Yes Yes Yes

B)
Monitor
transactions Record and
process
transactions Initiate transactions
No No No

C)
Monitor
transactions Record and
process
transactions Initiate transactions
Yes No No

D)
Monitor
transactions Record and
process
transactions Initiate transactions
No Yes Yes

Back 41

D) No Yes Yes

Front 42

10) An audit procedure that would most likely be used by an auditor in performing tests of control procedures in which the segregation of functions and that leaves no "audit" trail is:
A) inspection.
B) observation.
C) reperformance.
D) reconciliation.

Back 42

B) observation.

Front 43

11) Internal controls normally include procedures designed to provide reasonable assurance that:
A) employees act with integrity when performing their assigned tasks.
B) transactions are executed in accordance with management's authorization.
C) decision processes leading to management's authorization of transactions are sound.
D) collusive activities would be detected by segregation of employee duties.

Back 43

B) transactions are executed in accordance with management's authorization.

Front 44

12) Which of the following is not one of the subcomponents of the control environment?
A) management's philosophy and operating style
B) organizational structure
C) adequate separation of duties
D) commitment to competence

Back 44

C) adequate separation of duties

Front 45

13) It is important for the CPA to consider the competence of the clients' personnel because their competence bears directly and importantly upon the:
A) cost/benefit relationship of the system of internal control.
B) achievement of the objectives of internal control.
C) comparison of recorded accountability with assets.
D) timing of the tests to be performed.

Back 45

B) achievement of the objectives of internal control.

Front 46

14) Proper segregation of functional responsibilities calls for separation of:
A) authorization, execution, and payment.
B) authorization, recording, and custody.
C) custody, execution, and reporting.
D) authorization, payment, and recording.

Back 46

B) authorization, recording, and custody.

Front 47

15) Which of the following is correct regarding management's documentation of internal controls?
A) inadequate documentation is not a control deficiency
B) documentation needs to focus on interim controls
C) documentation needs to have some focus on controls designed to detect fraud
D) documentation should only focus on system design

Back 47

C) documentation needs to have some focus on controls designed to detect fraud

Front 48

16) Which of the following groups establishes and maintains the company's internal controls?
A) Internal auditors
B) Board of Directors
C) Management
D) Audit committee

Back 48

C) Management

Front 49

17) 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 control because the:
A) audit programs, working papers, and reports of internal auditors can often be used as a substitute for the work of the independent auditor's staff.
B) procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control.
C) work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures.
D) understanding of the internal audit function is an important substantive test to be performed by the independent auditor.

Back 49

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

Front 50

18) To promote operational efficiency, the internal audit department would ideally report to:
A) line management.
B) senior management.
C) Chief Accounting Officer.
D) audit committee.

Back 50

D) audit committee.

Front 51

19) Hanlon Corp. maintains a large internal audit staff that reports directly to the chief financial officer. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably:
A) eliminate tests of controls.
B) increase the depth of the study and evaluation of administrative controls.
C) avoid duplicating the work performed by the internal audit staff.
D) place limited reliance on the work performed by the internal audit staff.

Back 51

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

Front 52

20) External financial statement auditors must obtain evidence regarding what attributes of an internal audit (IA) department if the external auditors intend to rely on IA's work?
A) Integrity
B) Objectivity
C) Competence
D) All of the above

Back 52

D) All of the above

Front 53

21) To obtain 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:
A) management may establish appropriate policies and procedures but not act on them.
B) the board of directors may not be aware of management's attitude toward the control environment.
C) the auditor may believe that the policies and procedures are inappropriate for that particular entity.
D) the policies and procedures may be so weak that no reliance is contemplated by the auditor.

Back 53

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

Front 54

30) As a client's information system becomes more complex, it is likely that an auditor will increase reliance on controls and decrease substantive tests to support a control risk assessment.
A) True
B) False

Back 54

True

Front 55

31) Adequate documents and records is a subcomponent of the control environment.
A) True
B) False

Back 55

False

Front 56

32) The chart of accounts is a control and is closely related to the controls related to adequate documents and records.
A) True
B) False

Back 56

True

Front 57

33) Auditing standards prohibit reliance on the work of internal auditors due to the lack of independence of the internal auditors.
A) True
B) False

Back 57

False

Front 58

34) If an auditor wishes to rely on the work of internal auditors (IA), the auditor must obtain satisfactory evidence related to the IA's competence, integrity, and objectivity.
A) True
B) False

Back 58

True

Front 59

LO 10-4

Back 59

LO 10-4

Front 60

1) When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be:
A) tracing.
B) vouching.
C) performing a walk-through.
D) testing controls.

Back 60

C) performing a walk-through.

Front 61

2) The purpose of phase 3 in the "process for understanding internal control and assessing control risk" is to:
A) design, perform and evaluate tests of controls.
B) obtain and document an understanding of internal control design an operation.
C) assess control risk.
D) decide planned detection risk and substantive tests.

Back 61

A) design, perform and evaluate tests of controls.

Front 62

3) Narratives, flowcharts, and internal control questionnaires are three common methods of:
A) testing the internal controls.
B) documenting the auditor's understanding of internal controls.
C) designing the audit manual and procedures.
D) documenting the auditor's understanding of a client's organizational structure.

Back 62

B) documenting the auditor's understanding of internal controls.

Front 63

4) Audit evidence concerning proper segregation of duties normally is best obtained by:
A) direct personal observation of the employee who applies control procedures.
B) making inquiries of co-workers about the employee who applies control procedures.
C) preparation of a flowchart of duties performed and available personnel.
D) inspection of third-party documents containing the initials of who applied control procedures.

Back 63

A) direct personal observation of the employee who applies control procedures.

Front 64

5) Audit evidence regarding the separation of duties is normally best obtained by:
A) preparing flowcharts of operational processes.
B) preparing narratives of operational processes.
C) observation of employees applying control activities.
D) inquiries of employees applying control activities.

Back 64

C) observation of employees applying control activities.

Front 65

6) Section 404 requires auditors to perform walkthroughs to assist in understanding internal control.
A) True
B) False

Back 65

True

Front 66

7) Procedures used to obtain an understanding of internal control are normally performed on fewer transactions than procedures used to test controls.
A) True
B) False

Back 66

True

Front 67

8) For most uses, flowcharts are superior to narratives as a method of communicating the characteristics of internal control.
A) True
B) False

Back 67

True

Front 68

9) When documenting their understanding of a client's internal controls, auditors are required to use narratives.
A) True
B) False

Back 68

False

Front 69

LO 10-5

Back 69

LO 10-5

Front 70

1) The person responsible for reconciling sales invoices to customer orders does not access to the company's master price list in order to correctly compute sales. This is an example of a(n):
A) operating deficiency.
B) design deficiency.
C) training deficiency.
D) management deficiency.

Back 70

B) design deficiency.

Front 71

2) You are performing the audit of internal control for Clifton Company. Which of the following would represent a material weakness in internal control?
A) The company's audit committee has experienced unusual turnover of members.
B) The company's CFO was indicted for embezzling from the company.
C) Bank reconciliations are done monthly.
D) The CEO was forced to resign due to an inappropriate relationship with an outside vendor.

Back 71

B) The company's CFO was indicted for embezzling from the company.

Front 72

3) The employee in charge of authorizing credit to the company's customers does not fully understand the concept of credit risk. This lack of knowledge would constitute:
A) a deficiency in operation of internal controls.
B) a deficiency in design of internal controls.
C) a deficiency of management.
D) not constitute a deficiency.

Back 72

A) a deficiency in operation of internal controls.

Front 73

4) Section 404 requires auditors to evaluate the effectiveness of the audit committee's oversight of the company's:
A)
External financial
reporting Efficiency of
operations Internal control over financial reporting
Yes No Yes

B)
External financial
reporting Efficiency of
operations Internal control over financial reporting
No No Yes

C)
External financial
reporting Efficiency of
operations Internal control over financial reporting
Yes Yes No

D)
External financial
reporting Efficiency of
operations Internal control over financial reporting
No Yes No

Back 73

A) Yes No Yes

Front 74

5) Once auditors determine that entity level controls are designed and placed in the operation they:
A) make a preliminary assessment for each transaction-related audit objective for each major type of transaction.
B) make a preliminary assessment of control risk.
C) obtain an understanding of the design and implementation of internal control.
D) prepare audit documentation in order to opine on the company's internal control system.

Back 74

A) make a preliminary assessment for each transaction-related audit objective for each major type of transaction.

Front 75

6) Which of the following is the correct definition of "control deficiency"?
A) 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.
B) A control deficiency exists if one or more deficiencies exist that adversely affect a company's ability to prepare external financial statements reliably.
C) A control deficiency exists if the design or operation of controls results in a more than remote likelihood that controls will not prevent or detect misstatements.
D) A control deficiency exists if the design or operation of controls results in a more than probable likelihood that controls will prevent or detect misstatements.

Back 75

A) 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 76

7) Which of the following deficiency exists if a necessary control is missing or not properly formulated?
A) control
B) significant
C) design
D) operating

Back 76

C) design

Front 77

8) To determine if significant internal control deficiencies are material weaknesses, they must be evaluated on their:
A)
Likelihood Significance
Yes Yes

B)
Likelihood Significance
No No

C)
Likelihood Significance
Yes No

D)
Likelihood Significance
No Yes

Back 77

A) Yes Yes

Front 78

9) Significant deficiencies need to be communicated to the company's audit committee because:
A) they represent material weaknesses that allow fraud to be perpetrated.
B) they represent significant design flaws in internal controls.
C) they represent falsification of accounting records.
D) they represent disclosure of information related to issuance of a "going-concern" opinion.

Back 78

B) they represent significant design flaws in internal controls.

Front 79

10) Before making the final assessment of internal control at the end of an integrated audit, the auditor must:
A)
Test controls Perform substantive tests of details
Yes Yes

B)
Test controls Perform substantive tests of details
No No

C)
Test controls Perform substantive tests of details
Yes No

D)
Test controls Perform substantive tests of details
No Yes

Back 79

A) Yes Yes

Front 80

11) Significant deficiencies and material weaknesses in internal control of a public company must be reported in writing to which of the following?
A) the Public Company Accounting Oversight Board
B) members of management who are responsible for the related area of the company
C) audit committee of the company's board of directors
D) the AICPA

Back 80

C) audit committee of the company's board of directors

Front 81

12) Significant deficiencies are matters that come to an auditor's attention and should be communicated to an entity's audit committee because they represent:
A) material frauds perpetrated by high-level management.
B) internal control deficiencies that could adversely affect a company's ability to initiate, record, process, or report external financial statements reliably.
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.

Back 81

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

Front 82

13) How must significant deficiencies and material weaknesses be communicated to those charged with governance?
A) Either oral or written communication is acceptable.
B) Oral communication is required.
C) Written communication is required.
D) Written communication is required for material weaknesses, but oral communication is allowed for significant deficiencies.

Back 82

C) Written communication is required.

Front 83

14) When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the:
A) segregation of incompatible functions is necessary to ascertain that internal control is effective.
B) employment of competent personnel provides assurance that the objectives of internal control will be achieved.
C) establishment and maintenance of internal control is an important responsibility of the management and not of the auditor.
D) concept allows for only a remote likelihood that material misstatements will not be prevented or detected on a timely basis.

Back 83

D) concept allows for only a remote likelihood that material misstatements will not be prevented or detected on a timely basis.

Front 84

15) When planning an audit, the auditor's assessed level of control risk is:
A) determined by using actuarial tables.
B) calculated by using the audit risk model.
C) a judgment issue, based on auditor knowledge.
D) calculated by using the formulas provided in the AICPA's auditing standards.

Back 84

C) a judgment issue, based on auditor knowledge.

Front 85

16) When a compensating control exists, the absence of a key control:
A) is no longer a concern because there is no longer a significant deficiency or material weakness.
B) is still a major concern to the auditor.
C) could cause a material loss, so it must be tested using substantive procedures.
D) is magnified and must be removed from the sampling process and examined in its entirety.

Back 85

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

Front 86

21) The most important component of internal control is risk assessment.
A) True
B) False

Back 86

False

Front 87

LO 10-6

Back 87

LO 10-6

Front 88

1) If the results of tests of controls support the design and operations of controls as expected, the auditor uses ________ control risk as the preliminary assessment.
A) a lower
B) the same
C) a higher
D) either a lower or higher

Back 88

B) the same

Front 89

2) An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls. Which of the following would generally NOT be used?
A) make inquiries of appropriate client personnel
B) examine documents, records, and reports
C) reperform client procedures
D) inspect design documents

Back 89

D) inspect design documents

Front 90

3) After considering a client's internal controls, an auditor has concluded that it is well designed and is functioning as intended. Under these circumstances the auditor would most likely:
A) perform tests of controls to the extent outlined in the audit program.
B) determine the control procedures that should prevent or detect errors and irregularities.
C) not increase the extent of predetermined substantive tests.
D) determine whether transactions are recorded to permit preparation of financial statements in conformity with generally accepted accounting principles.

Back 90

C) not increase the extent of predetermined substantive tests.

Front 91

5) When internal controls are highly effective in processing accounting transactions, the extent of substantive tests should be reduced.
A) True
B) False

Back 91

True

Front 92

6) When internal controls over a given financial statement account are assessed as highly effective, the auditor need not obtain audit evidence for that account beyond testing the controls.
A) True
B) False

Back 92

False

Front 93

LO 10-7

Back 93

LO 10-7

Front 94

1) In performing an audit of internal control over financial reporting which of the following is the auditor required to do?
A) Test routine and nonroutine transactions equally.
B) Form an opinion on the effectiveness of internal for financial reporting.
C) Rely on the work on internal auditors in order to promote audit efficiency.
D) Use the audit conclusions before starting the audit of financial statements.

Back 94

B) Form an opinion on the effectiveness of internal for financial reporting.

Front 95

2) The criterion that is most likely to be used as a framework in evaluating a company's internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act is the Enterprise Risk Management framework.
A) True
B) False

Back 95

False

Front 96

3) To issue an unqualified opinion on internal control over financial reporting, there must be no identified material weaknesses and no restrictions on the scope of the audit.
A) True
B) False

Back 96

True

Front 97

LO 10-8

Back 97

LO 10-8

Front 98

1) A control available in a small company, which may be necessitated because of lack of competent personnel, is:
A) a wider segregation of duties.
B) a voucher system.
C) fewer transactions to process.
D) the owner-manager's direct involvement in the control process.

Back 98

D) the owner-manager's direct involvement in the control process.

Front 99

2) When auditing a private company, the auditor should obtain an understanding of internal control sufficient to:
A) provide reasonable protection against client fraud and defalcations by client employees.
B) assess control risk.
C) provide a basis for suggestions to the client for improving the accounting system.
D) provide a method for safeguarding assets, checking the accuracy and reliability of accounting data, promoting operational efficiency, and encouraging adherence to prescribed managerial policies.

Back 99

B) assess control risk.

Front 100

3) In the audit of a private company, the auditor will test internal controls when control risk is initially assessed at:
A)
Low Moderate High
Yes No Yes

B)
Low Moderate High
No No Yes

C)
Low Moderate High
Yes Yes No

D)
Low Moderate High
No Yes No

Back 100

C) Yes Yes No

Front 101

4) The auditor's consideration of a private company's internal control is:
A) required by GAAP.
B) required by GAAS.
C) required by the IRS.
D) recommended by the SEC.

Back 101

B) required by GAAS.

Front 102

5) Which of the following may represent the biggest challenge smaller public companies face in implementing effective internal control?
A) a lack of expertise
B) reduced importance
C) limited resources
D) limited available guidance

Back 102

C) limited resources

Front 103

6) Which of the following is most correct for audits of non-public companies?
A) an audit of internal control is required
B) an audit of internal control is not required
C) an audit of the design of internal controls is required
D) an audit of the operational effectiveness of internal controls is required

Back 103

B) an audit of internal control is not required

Front 104

8) If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably set a high assessment of control risk.
A) True
B) False

Back 104

True

Front 105

9) If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably reassess whether the client is auditable.
A) True
B) False

Back 105

True

Front 106

10) Auditors of private companies may rely on prior periods' tests of controls.
A) True
B) False

Back 106

True

Front 107

11) In an audit of a non-public company, the less control risk there is, the smaller the amount of planned substantive evidence that is required.
A) True
B) False

Back 107

True

Front 108

12) For proper internal control, there should be adequate separation of duties. However, the extent of separation of duties considered "adequate" does not depend on the size of the organization.
A) True
B) False

Back 108

False

Front 109

13) In an audit of a non-public company, the auditor's assessment of control risk and the extent of tests of controls are inversely related.
A) True
B) False

Back 109

True

Front 110

14) Smaller companies usually have less extensive internal controls than larger companies which result in more frauds being committed at small companies.
A) True
B) False

Back 110

True