Question 1

Management safeguards assets by

Accepted Answer

A)  having the internal auditors conduct periodic counts of physical assets. 
B)  controlling access and by comparing physical items to records. 
C)  requiring the external auditors to do surprise audits. 
D)  having management sign a management representation letter. 
A)  having the internal auditors conduct periodic counts of physical assets. 
B)  controlling access and by comparing physical items to records. 
C)  requiring the external auditors to do surprise audits. 
D)  having management sign a management representation letter.

Question 2

A) The COSO internal control framework consists of five components. Describe each of these components.
B) Custody of assets and reconciliation should be separated to contribute to strong internal control. List the general categories of activities that should be separated.

Accepted Answer

A)The five components of internal contro

Question 3

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

Accepted Answer

A)  Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion. 
B)  The competence and integrity of client personnel provides an environment conducive to accounting 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 irregularities perpetrated by management. 
D)  The benefits expected to be derived from an effective accounting system usually do not exceed the costs of such control. 
A)  Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion. 
B)  The competence and integrity of client personnel provides an environment conducive to accounting 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 irregularities perpetrated by management. 
D)  The benefits expected to be derived from an effective accounting system usually do not exceed the costs of such control.

Question 4

Once an understanding of internal controls is obtained that is sufficient for audit planning, then the auditor must first assess

Accepted Answer

A)  whether a lower level of control risk could be supported. 
B)  whether the financial statements are auditable. 
C)  the level of control risk supported by the understanding obtained. 
D)  the level of control risk to use. 
A)  whether a lower level of control risk could be supported. 
B)  whether the financial statements are auditable. 
C)  the level of control risk supported by the understanding obtained. 
D)  the level of control risk to use.

Question 5

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

Accepted Answer

A)  employment of temporary personnel to aid in the segregation of duties. 
B)  direct participation by the owner of the business in the record-keeping activities of the business. 
C)  engaging a public accountant to perform monthly "write-up" work. 
D)  delegation of full, clear-cut responsibility to each employee for the functions assigned to each. 
A)  employment of temporary personnel to aid in the segregation of duties. 
B)  direct participation by the owner of the business in the record-keeping activities of the business. 
C)  engaging a public accountant to perform monthly "write-up" work. 
D)  delegation of full, clear-cut responsibility to each employee for the functions assigned to each.

Question 6

Which one of the following is an example of a specific authorization?

Accepted Answer

A)  The computer systems automatically reorder inventory when quantities fall below the economic order quantity. 
B)  The highest credit limit allowed for accounts receivable customers is $100 000. 
C)  Each sales transaction that exceeds the credit limit of a customer must be approved by the controller. 
D)  Grocery sales clerks may approve returns of goods less than ten dollars in value. 
A)  The computer systems automatically reorder inventory when quantities fall below the economic order quantity. 
B)  The highest credit limit allowed for accounts receivable customers is $100 000. 
C)  Each sales transaction that exceeds the credit limit of a customer must be approved by the controller. 
D)  Grocery sales clerks may approve returns of goods less than ten dollars in value.

Question 7

A) List the four types of general computer control systems.
B) Adequate segregation of duties is an important control procedure. Describe the specific functions that should be separated for segregation of duties to prevent both intentional and unintentional misstatements that are of significance to auditors.
C) Adequate documents and records are important for effective internal control. Five principles dictate the proper design and use of documents and records. One principle is that documents and records should be prenumbered consecutively to facilitate control over missing documents and to aid in locating documents when they are needed at a later date. Discuss each of the other four principles of adequate documents and records.

Accepted Answer

A)The four types of general computer con

Question 8

Management's objectives with respect to internal control include

Accepted Answer

A)  having reasonable assurance that the financial statements are in accordance with IFRS or ASPE. 
B)  ensuring that all policies and procedures are clearly documented to reduce employee training costs. 
C)  preventing fraud and illegal activities at all costs. 
D)  providing reasonable assurance that the goals and objectives important to the entity have been met. 
A)  having reasonable assurance that the financial statements are in accordance with IFRS or ASPE. 
B)  ensuring that all policies and procedures are clearly documented to reduce employee training costs. 
C)  preventing fraud and illegal activities at all costs. 
D)  providing reasonable assurance that the goals and objectives important to the entity have been met.

Question 9

A well-designed organizational structure at an entity

Accepted Answer

A)  has operations and programming personnel tasks combined. 
B)  clearly defines authority and responsibility assignments. 
C)  requires that wage rates are recorded and tracked by the human resources department. 
D)  has the internal audit department report to the Chief Financial Officer. 
A)  has operations and programming personnel tasks combined. 
B)  clearly defines authority and responsibility assignments. 
C)  requires that wage rates are recorded and tracked by the human resources department. 
D)  has the internal audit department report to the Chief Financial Officer.

Question 10

Joan is the owner of a small manufacturing company. In prior years, your firm has conducted a review engagement of the company. However, this year, Joan obtained a loan from the federal business development bank and is required to have an audit of her financial statements. When you started asking about controls and procedures at the company, Joan got pretty upset.
"All you need to be concerned about is the numbers! Why are you asking all of these questions? It takes too much time away from my staff to answer these questions! Just check the numbers and let us get on with our work!"
You calmed her down a bit, and reminded her about the general discussion that occurred with the engagement letter. You have invited her for coffee to briefly explain the following items:
1. Why auditors are concerned about internal controls
2. Why auditors are required to be concerned about internal controls
3. What you need to do to understand internal controls
4. What you will do once you have documented your understanding of internal controls
Required:
Explain what you will say to Joan.

Accepted Answer

1. Auditors are concerned about internal

Question 11

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

Accepted Answer

A)  tracing. 
B)  vouching. 
C)  tests of controls. 
D)  a walk-through. 
A)  tracing. 
B)  vouching. 
C)  tests of controls. 
D)  a walk-through.

Question 12

Ideally, tests of controls should be applied to controls

Accepted Answer

A)  at the balance sheet date. 
B)  at each quarterly interim period. 
C)  for the entire period under audit. 
D)  at the beginning of the fiscal period. 
A)  at the balance sheet date. 
B)  at each quarterly interim period. 
C)  for the entire period under audit. 
D)  at the beginning of the fiscal period.

Question 13

Which of the following controls would be of concern to management but not to the auditor?

Accepted Answer

A)  controls over the collection of accounts receivable amounts 
B)  controls over the entry of payroll wage rates into the computer systems 
C)  controls over the distribution of promotional information to potential clients 
D)  controls over the cost of inventory items as recorded in the perpetual inventory system 
A)  controls over the collection of accounts receivable amounts 
B)  controls over the entry of payroll wage rates into the computer systems 
C)  controls over the distribution of promotional information to potential clients 
D)  controls over the cost of inventory items as recorded in the perpetual inventory system

Question 14

External auditor Mary Smith may not rely on the work of internal auditor Ray Jones unless

Accepted Answer

A)  Jones is certified (CA, CGA, or CM
A) . 
B)  Jones is independent of the client. 
C)  Jones is supervised by Smith. 
D)  Smith obtains evidence that supports the competence, integrity, and objectivity of Jones. 
A)  Jones is certified (CA, CGA, or CM
A) . 
B)  Jones is independent of the client. 
C)  Jones is supervised by Smith. 
D)  Smith obtains evidence that supports the competence, integrity, and objectivity of Jones.

Question 15

Control risk is a measure of the auditor's expectation that internal controls will

Accepted Answer

A)  prevent material misstatements from occurring. 
B)  detect and correct material misstatements. 
C)  either prevent material misstatements or detect and correct them. 
D)  neither prevent material misstatements nor detect and correct them. 
A)  prevent material misstatements from occurring. 
B)  detect and correct material misstatements. 
C)  either prevent material misstatements or detect and correct them. 
D)  neither prevent material misstatements nor detect and correct them.

Question 16

A) Discuss what is meant by the term "control environment" and identify four control environment subcomponents that the auditor should consider.
B) List the steps that management follows in assessing risks relevant to the preparation of financial statements in conformity with an applicable financial reporting framework.
C) How does the auditor obtain knowledge about management's risk assessment process?
D) Explain how management's risk assessment process differs from the auditor's risk assessment process.
E) What is the relationship between management's risk assessment process and audit evidence?

Accepted Answer

A)The control environment consists of th

Question 17

If an external auditor's client has used a service organization during the year for some of its payroll processing and accounting, which of the following steps should the external auditor take if he or she decides to use the service organization auditor's report as audit evidence that the entity's controls are operating effectively for certain assertions?

Accepted Answer

A)  Consider the sufficiency and appropriateness of the evidence provided by the service organization auditor's report about the effectiveness of controls intended to prevent or detect material misstatements in the particular assertions. 
B)  Double-date the audit report to show the date of the service organization's audit and the date of the client's audit. 
C)  The auditor should make reference to the report of the service auditor as a basis, in part, for his or her own opinion on the entity's financial statements. 
D)  Re-perform each of the audit tests used by the service organization auditor. 
A)  Consider the sufficiency and appropriateness of the evidence provided by the service organization auditor's report about the effectiveness of controls intended to prevent or detect material misstatements in the particular assertions. 
B)  Double-date the audit report to show the date of the service organization's audit and the date of the client's audit. 
C)  The auditor should make reference to the report of the service auditor as a basis, in part, for his or her own opinion on the entity's financial statements. 
D)  Re-perform each of the audit tests used by the service organization auditor.

Question 18

To help with corporate governance and a positive "tone at the top," the board of directors and its committees, such as the audit committee, should

Accepted Answer

A)  rubber-stamp the financial statements once per year. 
B)  consist of all members of executive management. 
C)  follow the policies and procedures approved by management. 
D)  take an active role in overseeing the company. 
A)  rubber-stamp the financial statements once per year. 
B)  consist of all members of executive management. 
C)  follow the policies and procedures approved by management. 
D)  take an active role in overseeing the company.

Question 19

The control environment consists of actions, policies, and procedures that

Accepted Answer

A)  reflect the overall attitudes of top management, the directors, and the owners of an entity about control and its importance. 
B)  govern access to particular applications, such as how employees use passwords to change master file payroll rates. 
C)  are recorded on the web site (for example, access policies to data). 
D)  help implement the ethical attitudes at the organization, such as a computer usage policy. 
A)  reflect the overall attitudes of top management, the directors, and the owners of an entity about control and its importance. 
B)  govern access to particular applications, such as how employees use passwords to change master file payroll rates. 
C)  are recorded on the web site (for example, access policies to data). 
D)  help implement the ethical attitudes at the organization, such as a computer usage policy.

Question 20

Management assesses risks as a part of designing and operating internal controls to minimize fraud and errors. Auditors assess risks to

Accepted Answer

A)  decide the evidence needed in the audit. 
B)  fully implement the audit risk model. 
C)  enable them to assess the completeness of internal controls. 
D)  make sure that the company will continue to operate over the next year. 
A)  decide the evidence needed in the audit. 
B)  fully implement the audit risk model. 
C)  enable them to assess the completeness of internal controls. 
D)  make sure that the company will continue to operate over the next year.

Management safeguards assets by

A) The COSO internal control framework consists of five components. Describe each of these components. B) Custody of assets and reconciliation should be separated to contribute to strong internal control. List the general categories of activities that should be separated.

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

Once an understanding of internal controls is obtained that is sufficient for audit planning, then the auditor must first assess

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

Which one of the following is an example of a specific authorization?

Management's objectives with respect to internal control include

A well-designed organizational structure at an entity

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

Ideally, tests of controls should be applied to controls

Which of the following controls would be of concern to management but not to the auditor?

External auditor Mary Smith may not rely on the work of internal auditor Ray Jones unless

Control risk is a measure of the auditor's expectation that internal controls will

To help with corporate governance and a positive "tone at the top," the board of directors and its committees, such as the audit committee, should

The control environment consists of actions, policies, and procedures that

Management assesses risks as a part of designing and operating internal controls to minimize fraud and errors. Auditors assess risks to

The Demand for Audit and Other Assurance Services

The Public Accounting Profession and Audit Quality

Legal Liability

Professional Judgment and Ethics

Audit Responsibilities and Objectives

Client Acceptance and Planning the Audit

Materiality and Risk

Audit Evidence

Audit Strategy and Audit Program

Audit Sampling Concepts

Audit of the Revenue Cycle

Audit of the Acquisition and Payment Cycle

Audit of the Inventory and Distribution Cycle

Audit of the Human Resources and Payroll Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash Balances

Completing the Audit

Audit Reports on Financial Statements

Other Assurance and Nonassurance Services

Filters

Exam 8: Internal Controls and Control Risk

Management safeguards assets by

A) The COSO internal control framework consists of five components. Describe each of these components. B) Custody of assets and reconciliation should be separated to contribute to strong internal control. List the general categories of activities that should be separated.

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

Once an understanding of internal controls is obtained that is sufficient for audit planning, then the auditor must first assess

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

Which one of the following is an example of a specific authorization?

Management's objectives with respect to internal control include

A well-designed organizational structure at an entity

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

Ideally, tests of controls should be applied to controls

Which of the following controls would be of concern to management but not to the auditor?

External auditor Mary Smith may not rely on the work of internal auditor Ray Jones unless

Control risk is a measure of the auditor's expectation that internal controls will

To help with corporate governance and a positive "tone at the top," the board of directors and its committees, such as the audit committee, should

The control environment consists of actions, policies, and procedures that

Management assesses risks as a part of designing and operating internal controls to minimize fraud and errors. Auditors assess risks to

The Demand for Audit and Other Assurance Services

The Public Accounting Profession and Audit Quality

Legal Liability

Professional Judgment and Ethics

Audit Responsibilities and Objectives

Client Acceptance and Planning the Audit

Materiality and Risk

Audit Evidence

Audit Strategy and Audit Program

Audit Sampling Concepts

Audit of the Revenue Cycle

Audit of the Acquisition and Payment Cycle

Audit of the Inventory and Distribution Cycle

Audit of the Human Resources and Payroll Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash Balances

Completing the Audit

Audit Reports on Financial Statements

Other Assurance and Nonassurance Services

Filters