Question 1

When documenting an entity's internal control, the independent auditor sometimes uses a systems flowchart, which can best be described as a:

Accepted Answer

A) pictorial presentation of the flow of instructions in an entity's internal computer system. 
B) diagram which clearly indicates an organization's internal reporting structure. 
C) graphic illustration of the flow of operations which is used to replace the auditor's internal control questionnaire. 
D) symbolic representation that represents the flow of documents and the processing steps among departments in the entity. 
A) pictorial presentation of the flow of instructions in an entity's internal computer system. 
B) diagram which clearly indicates an organization's internal reporting structure. 
C) graphic illustration of the flow of operations which is used to replace the auditor's internal control questionnaire. 
D) symbolic representation that represents the flow of documents and the processing steps among departments in the entity.

Question 2

General controls include all of the following except:

Accepted Answer

A) Data center and network operations controls. 
B) Data validation controls. 
C) Access security controls. 
D) Application system acquisition controls. 
A) Data center and network operations controls. 
B) Data validation controls. 
C) Access security controls. 
D) Application system acquisition controls.

Question 3

Potential benefits of an entity's controls in an IT environment include all of the following except:

Accepted Answer

A) reduction in the risk that controls will be circumvented. 
B) eliminate human errors or mistakes. 
C) consistent application of predefined business rules. 
D) more timely information. 
A) reduction in the risk that controls will be circumvented. 
B) eliminate human errors or mistakes. 
C) consistent application of predefined business rules. 
D) more timely information.

Question 4

In obtaining an understanding of an entity's internal control in a financial statement audit of a nonpublic company, an auditor is not obligated to:

Accepted Answer

A) determine whether the control activities have been placed in operation. 
B) perform procedures to understand the design of the internal control policies. 
C) document the understanding of the entity's internal control components. 
D) search for significant deficiencies in the operation of the internal control. 
A) determine whether the control activities have been placed in operation. 
B) perform procedures to understand the design of the internal control policies. 
C) document the understanding of the entity's internal control components. 
D) search for significant deficiencies in the operation of the internal control.

Question 5

While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because:

Accepted Answer

A) substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested. 
B) the records may be accurate even though they are maintained by persons having incompatible functions. 
C) substantive procedures relate to the entire period under audit, but compliance tests ordinarily are confined to the period during which the auditor is on the entity's premises. 
D) many computerized procedures leave no audit trail of who performed them, so substantive procedures may necessarily be limited to inquiries and observation of office personnel. 
A) substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested. 
B) the records may be accurate even though they are maintained by persons having incompatible functions. 
C) substantive procedures relate to the entire period under audit, but compliance tests ordinarily are confined to the period during which the auditor is on the entity's premises. 
D) many computerized procedures leave no audit trail of who performed them, so substantive procedures may necessarily be limited to inquiries and observation of office personnel.

Question 6

An auditor is least likely to test the internal controls that provide for:

Accepted Answer

A) approval of the purchase and sale of marketable securities. 
B) vouching a sample of sales transactions to make sure each one has an accompanying shipping document. 
C) segregation of the functions of recording disbursements and reconciling the bank account. 
D) comparison of receiving reports and vendors' invoices with purchase orders. 
A) approval of the purchase and sale of marketable securities. 
B) vouching a sample of sales transactions to make sure each one has an accompanying shipping document. 
C) segregation of the functions of recording disbursements and reconciling the bank account. 
D) comparison of receiving reports and vendors' invoices with purchase orders.

Question 7

A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions but which leave no transaction trail is:

Accepted Answer

A) Inspection. 
B) Observation. 
C) Reperformance. 
D) Reconciliation. 
A) Inspection. 
B) Observation. 
C) Reperformance. 
D) Reconciliation.

Question 8

It is important for the CPA to consider the competence of the entity's employees because their competence bears directly and importantly upon the:

Accepted Answer

A) cost/benefit relationship of the system of internal control. 
B) achievement of the objectives of the system of internal control. 
C) comparison of recorded accountability with assets. 
D) timing of the tests to be performed. 
A) cost/benefit relationship of the system of internal control. 
B) achievement of the objectives of the system of internal control. 
C) comparison of recorded accountability with assets. 
D) timing of the tests to be performed.

Question 9

The concept of internal control includes IT systems and manual systems.

Accepted Answer

A) True 
 B)False

Question 10

An IT specialist is least likely to be necessary when:

Accepted Answer

A) data are shared extensively among systems. 
B) the entity participates heavily in electronic commerce. 
C) the system has not changed from the prior year. 
D) significant audit evidence is in electronic form. 
A) data are shared extensively among systems. 
B) the entity participates heavily in electronic commerce. 
C) the system has not changed from the prior year. 
D) significant audit evidence is in electronic form.

Question 11

A high detection risk strategy includes all of the following except:

Accepted Answer

A) interim testing. 
B) reduced testing of transactions. 
C) heavy reliance on analytical procedures as substantive procedures. 
D) audit work only completed at year-end. 
A) interim testing. 
B) reduced testing of transactions. 
C) heavy reliance on analytical procedures as substantive procedures. 
D) audit work only completed at year-end.

Question 12

What are two potential benefits and two potential risks of using IT for an entity's internal control?

Accepted Answer

Student answers should include two benef

Question 13

The program flowcharting symbol representing a decision is a:

Accepted Answer

A) Triangle. 
B) Circle. 
C) Rectangle. 
D) Diamond. 
A) Triangle. 
B) Circle. 
C) Rectangle. 
D) Diamond.

Question 14

Which of the following procedures most likely would be included as part of an auditor's tests of controls?

Accepted Answer

A) Inspection. 
B) Reconciliation. 
C) Confirmation. 
D) Analytical procedures. 
A) Inspection. 
B) Reconciliation. 
C) Confirmation. 
D) Analytical procedures.

Question 15

The independent auditor selects several transactions in each functional area and traces them through the entire system, paying special attention to evidence about whether or not the control activities are in operation. This is an example of a(n):

Accepted Answer

A) Analytical procedure. 
B) Test of controls. 
C) Substantive procedure. 
D) Functional test. 
A) Analytical procedure. 
B) Test of controls. 
C) Substantive procedure. 
D) Functional test.

Question 16

Based on a study and evaluation completed at an interim date, the auditor concludes that no significant internal control weaknesses exist. The records and procedures would most likely be tested again at year-end if:

Accepted Answer

A) compliance tests were not performed by the internal audit staff during the remaining period. 
B) the internal control system provides a basis for reliance in reducing the extent of substantive procedures. 
C) the auditor used nonstatistical sampling during interim compliance testing. 
D) inquiries and observations lead the auditor to believe that conditions within the internal control system have changed. 
A) compliance tests were not performed by the internal audit staff during the remaining period. 
B) the internal control system provides a basis for reliance in reducing the extent of substantive procedures. 
C) the auditor used nonstatistical sampling during interim compliance testing. 
D) inquiries and observations lead the auditor to believe that conditions within the internal control system have changed.

Question 17

Reports on service organizations typically:

Accepted Answer

A) provide reasonable assurance that their financial statements are free of material misstatements. 
B) ensure that the entity will not have any misstatements in areas related to the service organization's activities. 
C) ensure that the auditee is billed correctly. 
D) assess whether the service organization's controls are suitably designed to achieve internal control objectives. 
A) provide reasonable assurance that their financial statements are free of material misstatements. 
B) ensure that the entity will not have any misstatements in areas related to the service organization's activities. 
C) ensure that the auditee is billed correctly. 
D) assess whether the service organization's controls are suitably designed to achieve internal control objectives.

Question 18

A flowchart is most frequently used by an auditor in connection with the:

Accepted Answer

A) preparation of generalized computer audit programs. 
B) review of the entity's internal controls. 
C) use of statistical sampling in performing an audit. 
D) performance of analytical procedures of account balances. 
A) preparation of generalized computer audit programs. 
B) review of the entity's internal controls. 
C) use of statistical sampling in performing an audit. 
D) performance of analytical procedures of account balances.

Question 19

Factors that the auditor should consider as increasing the effectiveness of the audit committee include all of the following except whether:

Accepted Answer

A) It is independent of management. 
B) It is comprised almost exclusively of members of management, ensuring detailed knowledge of the company's operations. 
C) It asks management difficult questions. 
D) It interacts regularly with internal audit personnel. 
A) It is independent of management. 
B) It is comprised almost exclusively of members of management, ensuring detailed knowledge of the company's operations. 
C) It asks management difficult questions. 
D) It interacts regularly with internal audit personnel.

Question 20

The extent of an entity's use of IT can affect internal control.

Accepted Answer

A) True 
 B)False

Exam 6: Internal Control in a Financial Statement Audit

When documenting an entity's internal control, the independent auditor sometimes uses a systems flowchart, which can best be described as a:

General controls include all of the following except:

Potential benefits of an entity's controls in an IT environment include all of the following except:

In obtaining an understanding of an entity's internal control in a financial statement audit of a nonpublic company, an auditor is not obligated to:

While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because:

An auditor is least likely to test the internal controls that provide for:

A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions but which leave no transaction trail is:

It is important for the CPA to consider the competence of the entity's employees because their competence bears directly and importantly upon the:

The concept of internal control includes IT systems and manual systems.

An IT specialist is least likely to be necessary when:

A high detection risk strategy includes all of the following except:

What are two potential benefits and two potential risks of using IT for an entity's internal control?

The program flowcharting symbol representing a decision is a:

Which of the following procedures most likely would be included as part of an auditor's tests of controls?

The independent auditor selects several transactions in each functional area and traces them through the entire system, paying special attention to evidence about whether or not the control activities are in operation. This is an example of a(n):

Based on a study and evaluation completed at an interim date, the auditor concludes that no significant internal control weaknesses exist. The records and procedures would most likely be tested again at year-end if:

Reports on service organizations typically:

A flowchart is most frequently used by an auditor in connection with the:

Factors that the auditor should consider as increasing the effectiveness of the audit committee include all of the following except whether:

The extent of an entity's use of IT can affect internal control.

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Risk Assessment

Evidence and Documentation

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment

Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders' Equity, and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professional Conduct, Independence, and Quality Control

Legal Liability

Assurance, Attestation, and Internal Auditing Services

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