Question 1

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

Accepted Answer

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. 
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.

Question 2

Auditors of private companies may rely on prior periods' tests of controls.

Accepted Answer

A) True 
 B)False

Question 3

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:

Accepted Answer

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. 
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.

Question 4

Two key concepts that underlie management's design and implementation of internal control are:

Accepted Answer

A) costs and materiality. 
B) absolute assurance and costs. 
C) inherent limitations and reasonable assurance. 
D) collusion and materiality. 
A) costs and materiality. 
B) absolute assurance and costs. 
C) inherent limitations and reasonable assurance. 
D) collusion and materiality.

Question 5

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

Accepted Answer

A) Management's philosophy and operating style 
B) Organizational structure 
C) Adequate separation of duties 
D) Commitment to competence 
A) Management's philosophy and operating style 
B) Organizational structure 
C) Adequate separation of duties 
D) Commitment to competence

Question 6

Walkthroughs combine observation, inspection, and inquiry to assure that the controls designed by management have been implemented.

Accepted Answer

A) True 
 B)False

Question 7

To promote operational efficiency, the internal audit department would ideally report to:

Accepted Answer

A) line management. 
B) PCAOB. 
C) Chief Accounting Officer. 
D) audit committee. 
A) line management. 
B) PCAOB. 
C) Chief Accounting Officer. 
D) audit committee.

Question 8

Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies?

Accepted Answer

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

Question 9

The auditor's consideration of a private company's internal control is:

Accepted Answer

A) required by GAAP. 
B) required by GAAS. 
C) required by the IRS. 
D) recommended by the SEC. 
A) required by GAAP. 
B) required by GAAS. 
C) required by the IRS. 
D) recommended by the SEC.

Question 10

The auditor must communicate:

Accepted Answer

A) only material weaknesses in internal control to those charged with governance. 
B) both significant deficiencies and material weaknesses in internal control to those charged with governance. 
C) any significant deficiencies in internal control to those charged with governance using a management letter. 
D) issues regarding internal control to those charged with governance in writing within 90 days following the audit report release. 
A) only material weaknesses in internal control to those charged with governance. 
B) both significant deficiencies and material weaknesses in internal control to those charged with governance. 
C) any significant deficiencies in internal control to those charged with governance using a management letter. 
D) issues regarding internal control to those charged with governance in writing within 90 days following the audit report release.

Question 11

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.

Accepted Answer

A) a lower 
B) the same 
C) a higher 
D) either a lower or higher 
A) a lower 
B) the same 
C) a higher 
D) either a lower or higher

Question 12

When documenting their understanding of a client's internal controls, auditors are required to use narratives.

Accepted Answer

A) True 
 B)False

Question 13

The chart of accounts is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.

Accepted Answer

A) True 
 B)False

Question 14

Internal controls normally include procedures designed to provide reasonable assurance that:

Accepted Answer

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. 
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.

Question 15

When dealing with the documentation of internal control:

Accepted Answer

A) in a narrative, most questions simply require a "yes" or "no" response. 
B) questionnaires offer useful checklists to remind the auditor of the many different types of internal controls that should exist. 
C) questionnaires and flowcharts should not be used together. 
D) flowcharts fail to show the segregation of duties in the company. 
A) in a narrative, most questions simply require a "yes" or "no" response. 
B) questionnaires offer useful checklists to remind the auditor of the many different types of internal controls that should exist. 
C) questionnaires and flowcharts should not be used together. 
D) flowcharts fail to show the segregation of duties in the company.

Question 16

Which of the following deficiency exists if a necessary control is missing or not properly formulated?

Accepted Answer

A) Control 
B) Significant 
C) Design 
D) Operating 
A) Control 
B) Significant 
C) Design 
D) Operating

Question 17

Control risk is generally set at minimum for most private companies.

Accepted Answer

A) True 
 B)False

Question 18

In developing an understanding of the client's accounting information system the auditor follows a sequential process.Describe the process below:

Accepted Answer

1.Major classes of transactions of the e

Question 19

If a company has an effective internal audit department:

Accepted Answer

A) the internal auditors can express an opinion on the fairness of the financial statements. 
B) their work cannot be used by the external auditors per PCAOB Standard 5. 
C) it can reduce external audit costs by providing direct assistance to the external auditors. 
D) the internal auditors must be CPAs in order for the external auditors to rely on their work. 
A) the internal auditors can express an opinion on the fairness of the financial statements. 
B) their work cannot be used by the external auditors per PCAOB Standard 5. 
C) it can reduce external audit costs by providing direct assistance to the external auditors. 
D) the internal auditors must be CPAs in order for the external auditors to rely on their work.

Question 20

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

Accepted Answer

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. 
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.

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

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

Auditors of private companies may rely on prior periods' tests of controls.

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:

Two key concepts that underlie management's design and implementation of internal control are:

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

Walkthroughs combine observation, inspection, and inquiry to assure that the controls designed by management have been implemented.

To promote operational efficiency, the internal audit department would ideally report to:

Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies?

The auditor's consideration of a private company's internal control is:

The auditor must communicate:

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.

When documenting their understanding of a client's internal controls, auditors are required to use narratives.

The chart of accounts is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.

Internal controls normally include procedures designed to provide reasonable assurance that:

When dealing with the documentation of internal control:

Which of the following deficiency exists if a necessary control is missing or not properly formulated?

Control risk is generally set at minimum for most private companies.

In developing an understanding of the client's accounting information system the auditor follows a sequential process.Describe the process below:

If a company has an effective internal audit department:

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

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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