Question 1

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

Accepted Answer

A) Reliability of financial reporting 
B) Efficiency and effectiveness of operations 
C) Compliance with laws and regulations 
D) Assurance of elimination of business risk 
A) Reliability of financial reporting 
B) Efficiency and effectiveness of operations 
C) Compliance with laws and regulations 
D) Assurance of elimination of business risk D

Question 2

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):

Accepted Answer

A) operating deficiency. 
B) design deficiency. 
C) training deficiency. 
D) management deficiency. 
A) operating deficiency. 
B) design deficiency. 
C) training deficiency. 
D) management deficiency. B

Question 3

Certain principles dictate the proper design and use of documents and records.Briefly describe several of these principles.

Accepted Answer

•Documents should be prenumbered consecutively to facilitate control over missing documents and as an aid in locating documents when they are needed at a later date.
•Documents and records should be prepared at the time a transaction takes place, or as soon as possible thereafter, to minimize timing errors.
•Documents and records should be designed for multiple uses, when possible, to minimize the number of different forms.For example, a properly designed and used shipping document can be the basis for releasing goods from storage to the shipping department, informing billing of the quantity of goods to bill to the customer and the appropriate billing date, and updating the perpetual inventory records.
•Documents and records should be constructed in a manner that encourages correct preparation.This can be done by providing internal checks within the form or record.For example, computer screen prompts may force online data entry of critical information before the record is electronically routed for authorizations and approvals.Similarly, screen controls can validate the information entered, such as when an invalid general ledger account number is automatically rejected when the account number does not match the chart of accounts master file.

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

The internal control framework developed by COSO includes five so-called "components" of internal control.Discuss each of these five components.

Accepted Answer

Five components of internal control are:

Question 6

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

Accepted Answer

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 
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

Question 7

You are performing the audit of internal control for Clifton Company.Which of the following would represent a material weakness in internal control?

Accepted Answer

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 retired after twenty years of service to the company. 
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 retired after twenty years of service to the company.

Question 8

You are the audit manager for a new audit client.Your staff auditors are unsure of what constitutes a control deficiency.Discuss the terms control deficiency, design deficiency, and operating deficiency.

Accepted Answer

A control deficiency exists if the desig

Question 9

The auditors primary purpose in auditing the client's system of internal control over financial reporting is:

Accepted Answer

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. 
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.

Question 10

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

Accepted Answer

A) The documents should be in paper format. 
B) Documents should be designed for a single purposes to avoid confusion in their use. 
C) Documents should be designed to be understandable only by those who use them. 
D) Documents should be prenumbered consecutively to facilitate control over missing documents. 
A) The documents should be in paper format. 
B) Documents should be designed for a single purposes to avoid confusion in their use. 
C) Documents should be designed to be understandable only by those who use them. 
D) Documents should be prenumbered consecutively to facilitate control over missing documents.

Question 11

In performing the audit of internal control over financial reporting the auditor emphasizes internal control over class of transactions because:

Accepted Answer

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. 
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.

Question 12

The purpose of phase 3 in the "process for understanding internal control and assessing control risk" is to:

Accepted Answer

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. 
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.

Question 13

Which of the following groups establishes and maintains the company's internal controls?

Accepted Answer

A) Internal auditors 
B) Board of Directors 
C) Management 
D) Audit committee 
A) Internal auditors 
B) Board of Directors 
C) Management 
D) Audit committee

Question 14

Describe the auditor's responsibilities related to required communications between the auditor and those charged with governance (remove auditor committee)regarding internal control.

Accepted Answer

The auditor must communicate signiﬁcant

Question 15

Controls that are applied throughout the accounting period must be tested both at an interim date and then again on the balance sheet date.

Accepted Answer

A) True 
 B)False

Question 16

Hanlon Corp.maintains a large internal audit staff that reports directly to the accounting department.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:

Accepted Answer

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. 
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.

Question 17

Which of the following deal with ongoing or periodic assessment of the quality of internal control by management?

Accepted Answer

A) Quality monitoring activities 
B) Monitoring activities 
C) Oversight activities 
D) Management activities 
A) Quality monitoring activities 
B) Monitoring activities 
C) Oversight activities 
D) Management activities

Question 18

A company's size should have no impact on the nature of internal control and the controls that are implemented.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 20

Which of the following may represent the biggest challenge smaller public companies face in implementing effective internal control?

Accepted Answer

A) A lack of expertise 
B) Reduced importance 
C) Limited resources 
D) Limited available guidance 
A) A lack of expertise 
B) Reduced importance 
C) Limited resources 
D) Limited available guidance

Exam 10: Internal Control, Control Risk, and Section 404 Audits

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

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):

Certain principles dictate the proper design and use of documents and records.Briefly describe several of these principles.

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.

The internal control framework developed by COSO includes five so-called "components" of internal control.Discuss each of these five components.

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

You are performing the audit of internal control for Clifton Company.Which of the following would represent a material weakness in internal control?

You are the audit manager for a new audit client.Your staff auditors are unsure of what constitutes a control deficiency.Discuss the terms control deficiency, design deficiency, and operating deficiency.

The auditors primary purpose in auditing the client's system of internal control over financial reporting is:

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

In performing the audit of internal control over financial reporting the auditor emphasizes internal control over class of transactions because:

The purpose of phase 3 in the "process for understanding internal control and assessing control risk" is to:

Which of the following groups establishes and maintains the company's internal controls?

Describe the auditor's responsibilities related to required communications between the auditor and those charged with governance (remove auditor committee)regarding internal control.

Controls that are applied throughout the accounting period must be tested both at an interim date and then again on the balance sheet date.

Hanlon Corp.maintains a large internal audit staff that reports directly to the accounting department.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:

Which of the following deal with ongoing or periodic assessment of the quality of internal control by management?

A company's size should have no impact on the nature of internal control and the controls that are implemented.

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

Which of the following may represent the biggest challenge smaller public companies face in implementing effective internal control?

The Demand for Audit and Other Assurance Services

The Cpa Profession

Audit Reports

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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