Question 1

Auditors are most likely to gather audit evidence solely using substantive procedures:

Accepted Answer

A) if transactions are recurring. 
B) if the implemented controls are assessed as ineffective. 
C) if control risk is very low. 
D) if the entity has a well-designed automated system. 
A) if transactions are recurring. 
B) if the implemented controls are assessed as ineffective. 
C) if control risk is very low. 
D) if the entity has a well-designed automated system.

Question 2

All of the following are significant deficiencies except:

Accepted Answer

A) inadequate design of internal control over a significant account or process. 
B) management override of controls. 
C) inadequate provisions for safeguarding assets. 
D) inventory is highly subject to obsolescence. 
A) inadequate design of internal control over a significant account or process. 
B) management override of controls. 
C) inadequate provisions for safeguarding assets. 
D) inventory is highly subject to obsolescence.

Question 3

Management philosophy and operating style most likely would have a significant influence on an entity's control environment when:

Accepted Answer

A) internal audit personnel have direct access to the board of directors and the entity's management. 
B) the entity does not have sound personnel policies for hiring, training, and evaluating competent individuals. 
C) accurate management job descriptions delineate specific duties. 
D) the audit committee actively oversees the financial reporting process. 
A) internal audit personnel have direct access to the board of directors and the entity's management. 
B) the entity does not have sound personnel policies for hiring, training, and evaluating competent individuals. 
C) accurate management job descriptions delineate specific duties. 
D) the audit committee actively oversees the financial reporting process.

Question 4

An entity's IT infrastructure refers to:

Accepted Answer

A) Hardware components. 
B) Programmers. 
C) Software. 
D) Data provided by the system. 
A) Hardware components. 
B) Programmers. 
C) Software. 
D) Data provided by the system.

Question 5

A substantive strategy differs from a reliance strategy in that a substantive strategy includes:

Accepted Answer

A) increased implementation of detailed tests of transactions and balances. 
B) extra tests of controls. 
C) increased emphasis on verbal representations from management. 
D) setting control risk at a minimum level. 
A) increased implementation of detailed tests of transactions and balances. 
B) extra tests of controls. 
C) increased emphasis on verbal representations from management. 
D) setting control risk at a minimum level.

Question 6

Proper monitoring within an internal control framework may include all of the following except:

Accepted Answer

A) an external auditor. 
B) an effective audit committee. 
C) an internal audit function. 
D) the internal revenue service. 
A) an external auditor. 
B) an effective audit committee. 
C) an internal audit function. 
D) the internal revenue service.

Question 7

The risk assessment component of internal control refers to:

Accepted Answer

A) The auditor's assessment of control risk. 
B) The auditor's assessment of client risk. 
C) The entity's identification and analysis of risks relevant to achievement of its objectives. 
D) The entity's monitoring of the potential for material misstatements. 
A) The auditor's assessment of control risk. 
B) The auditor's assessment of client risk. 
C) The entity's identification and analysis of risks relevant to achievement of its objectives. 
D) The entity's monitoring of the potential for material misstatements.

Question 8

In terms of an audit, define substantive strategy and reliance strategy. Include in your definition how the different strategies relate to internal control. Which strategy would best relate to a lower control risk?

Accepted Answer

A substantive strategy means that the au

Question 9

Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent:

Accepted Answer

A) disclosures of information that significantly contradict the auditor's going concern assumption. 
B) material fraud or illegal acts perpetrated by high-level management. 
C) deficiencies in the design of controls or failures in the operation of internal controls. 
D) manipulation or falsification of accounting records or documents from which financial statements are prepared. 
A) disclosures of information that significantly contradict the auditor's going concern assumption. 
B) material fraud or illegal acts perpetrated by high-level management. 
C) deficiencies in the design of controls or failures in the operation of internal controls. 
D) manipulation or falsification of accounting records or documents from which financial statements are prepared.

Question 10

The documentation of an auditor's understanding of internal controls:

Accepted Answer

A) is optional. 
B) must be exclusively in narrative, questionnaires, or flowchart form. 
C) must include flowcharts. 
D) can include any combination of narratives, questionnaires, or flowcharts. 
A) is optional. 
B) must be exclusively in narrative, questionnaires, or flowchart form. 
C) must include flowcharts. 
D) can include any combination of narratives, questionnaires, or flowcharts.

Question 11

Where computer processing is used in significant accounting applications, internal control activities may be defined by classifying control activities into two types: general and

Accepted Answer

A) Administrative. 
B) Specific. 
C) Application. 
D) Authorization. 
A) Administrative. 
B) Specific. 
C) Application. 
D) Authorization.

Question 12

Information and communication includes all of the following except:

Accepted Answer

A) identifying and recording all valid transactions. 
B) determining the time period in which transactions occurred. 
C) communicating price changes to customers. 
D) properly presenting transactions and related disclosures in the financial statements. 
A) identifying and recording all valid transactions. 
B) determining the time period in which transactions occurred. 
C) communicating price changes to customers. 
D) properly presenting transactions and related disclosures in the financial statements.

Question 13

Internal control has become a very important focus for publicly traded and privately-held companies alike. Internal control is intended to accomplish at least three objectives and consists of five components of internal control. List the three objectives and five components of internal control.

Accepted Answer

Objectives of internal control include:

Question 14

In evaluating internal control, the auditor is basically concerned that the system provides reasonable assurance that:

Accepted Answer

A) operational efficiency has been achieved in accordance with management plans. 
B) material misstatements have been prevented, or detected and corrected. 
C) controls have not been circumvented by collusion. 
D) management cannot override the system. 
A) operational efficiency has been achieved in accordance with management plans. 
B) material misstatements have been prevented, or detected and corrected. 
C) controls have not been circumvented by collusion. 
D) management cannot override the system.

Question 15

Walkthroughs usually involve all of the following audit procedures except:

Accepted Answer

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

Question 16

Tests of controls must be performed if control risk is set at a lower level.

Accepted Answer

A) True 
 B)False

Question 17

To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including:

Accepted Answer

A) Inquiry. 
B) Analytical procedures. 
C) Calculation. 
D) Confirmation. 
A) Inquiry. 
B) Analytical procedures. 
C) Calculation. 
D) Confirmation.

Question 18

A field test is a:

Accepted Answer

A) test to ensure that a numerical value in a field does not exceed some predetermined value. 
B) check to ensure that the value in a field falls within an allowable range of values. 
C) check to ensure that the data in a field have the proper arithmetic sign. 
D) check on a field to ensure that it contains either all numeric or all alphabetic characters. 
A) test to ensure that a numerical value in a field does not exceed some predetermined value. 
B) check to ensure that the value in a field falls within an allowable range of values. 
C) check to ensure that the data in a field have the proper arithmetic sign. 
D) check on a field to ensure that it contains either all numeric or all alphabetic characters.

Question 19

An entity's internal controls are most relevant to the auditor when the policies and procedures:

Accepted Answer

A) affect the financial statement assertions. 
B) relate to management's planning decisions. 
C) address management's operating decisions. 
D) reflect management's philosophy and operating style. 
A) affect the financial statement assertions. 
B) relate to management's planning decisions. 
C) address management's operating decisions. 
D) reflect management's philosophy and operating style.

Question 20

Once a level of control risk has been established, it cannot be changed.

Accepted Answer

A) True 
 B)False

Exam 6: Internal Control in a Financial Statement Audit

Auditors are most likely to gather audit evidence solely using substantive procedures:

All of the following are significant deficiencies except:

Management philosophy and operating style most likely would have a significant influence on an entity's control environment when:

An entity's IT infrastructure refers to:

A substantive strategy differs from a reliance strategy in that a substantive strategy includes:

Proper monitoring within an internal control framework may include all of the following except:

The risk assessment component of internal control refers to:

In terms of an audit, define substantive strategy and reliance strategy. Include in your definition how the different strategies relate to internal control. Which strategy would best relate to a lower control risk?

Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent:

The documentation of an auditor's understanding of internal controls:

Where computer processing is used in significant accounting applications, internal control activities may be defined by classifying control activities into two types: general and

Information and communication includes all of the following except:

Internal control has become a very important focus for publicly traded and privately-held companies alike. Internal control is intended to accomplish at least three objectives and consists of five components of internal control. List the three objectives and five components of internal control.

In evaluating internal control, the auditor is basically concerned that the system provides reasonable assurance that:

Walkthroughs usually involve all of the following audit procedures except:

Tests of controls must be performed if control risk is set at a lower level.

To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including:

A field test is a:

An entity's internal controls are most relevant to the auditor when the policies and procedures:

Once a level of control risk has been established, it cannot be changed.

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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