Question 1

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. A

Question 2

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. B

Question 3

During consideration of internal control in a financial statement audit of a nonpublic company, an auditor is not obligated to

Accepted Answer

A)  Search for significant deficiencies in the operation of internal control. 
B)  Understand the internal control environment and the information system. 
C)  Determine whether the controls relevant to audit planning have been placed in operation. 
D)  Perform procedures to understand the design of internal control. 
A)  Search for significant deficiencies in the operation of internal control. 
B)  Understand the internal control environment and the information system. 
C)  Determine whether the controls relevant to audit planning have been placed in operation. 
D)  Perform procedures to understand the design of internal control. A

Question 4

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 5

In the audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure

Accepted Answer

A)  Reflects management's philosophy and operating style. 
B)  Affects management's financial statement assertions. 
C)  Provides adequate safeguards over access to assets. 
D)  Enhances management's decision-making processes. 
A)  Reflects management's philosophy and operating style. 
B)  Affects management's financial statement assertions. 
C)  Provides adequate safeguards over access to assets. 
D)  Enhances management's decision-making processes.

Question 6

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when

Accepted Answer

A)  External policies established by parties outside the entity affect its accounting practices. 
B)  Management is dominated by one individual. 
C)  Internal audit personnel have direct access to the board of directors and the entity's management. 
D)  The audit committee is active in overseeing the entity's financial reporting policies. 
A)  External policies established by parties outside the entity affect its accounting practices. 
B)  Management is dominated by one individual. 
C)  Internal audit personnel have direct access to the board of directors and the entity's management. 
D)  The audit committee is active in overseeing the entity's financial reporting policies.

Question 7

All of the following are significant deficiencies except:

Accepted Answer

A)  Absence of appropriate reviews of transactions. 
B)  Evidence of willful wrongdoing by lower-level employees. 
C)  Inadequate provisions for safeguarding assets. 
D)  Inventory is highly subject to obsolescence. 
A)  Absence of appropriate reviews of transactions. 
B)  Evidence of willful wrongdoing by lower-level employees. 
C)  Inadequate provisions for safeguarding assets. 
D)  Inventory is highly subject to obsolescence.

Question 8

The concept of reasonable assurance in the context of an entity's internal controls recognizes that

Accepted Answer

A)  Auditors may fail to detect material misstatements. 
B)  Proper internal controls guarantee that material misstatements will not occur. 
C)  Proper internal controls preclude fraud. 
D)  The costs of some controls may be too high to implement in relation to potential benefits. 
A)  Auditors may fail to detect material misstatements. 
B)  Proper internal controls guarantee that material misstatements will not occur. 
C)  Proper internal controls preclude fraud. 
D)  The costs of some controls may be too high to implement in relation to potential benefits.

Question 9

What are some typical types of evidence that may be collected in testing an entity's internal controls?

Accepted Answer

Applicable procedures include inquiry of

Question 10

The independent auditor should acquire an understanding of the internal audit function as it relates to the assessment of control risk because

Accepted Answer

A)  Internal audit programs, audit documents, and reports can eliminate the need for the independent auditor's staff. 
B)  The procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control. 
C)  The work performed by internal audit personnel may be a factor in determining the nature, timing, and extent of the independent auditor's procedures. 
D)  The understanding of the internal audit function is an important substantive procedure to be performed by the independent auditor. 
A)  Internal audit programs, audit documents, and reports can eliminate the need for the independent auditor's staff. 
B)  The procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control. 
C)  The work performed by internal audit personnel may be a factor in determining the nature, timing, and extent of the independent auditor's procedures. 
D)  The understanding of the internal audit function is an important substantive procedure to be performed by the independent auditor.

Question 11

A well-prepared flowchart should make it easier for the auditor to

Accepted Answer

A)  Prepare audit procedure manuals. 
B)  Prepare detailed job descriptions. 
C)  Perform walkthroughs. 
D)  Assess the degree of accuracy of financial data. 
A)  Prepare audit procedure manuals. 
B)  Prepare detailed job descriptions. 
C)  Perform walkthroughs. 
D)  Assess the degree of accuracy of financial data.

Question 12

An auditor's primary consideration regarding an entity's internal controls is whether the policies and procedures

Accepted Answer

A)  Affect the financial statement assertions. 
B)  Prevent management override. 
C)  Relate to the control environment. 
D)  Reflect management's philosophy and operating style. 
A)  Affect the financial statement assertions. 
B)  Prevent management override. 
C)  Relate to the control environment. 
D)  Reflect management's philosophy and operating style.

Question 13

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 of a system or series of sequential processes. 
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 of a system or series of sequential processes.

Question 14

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the

Accepted Answer

A)  Extent of tests of details. 
B) Level of inherent risk. 
C) Extent of tests of controls. 
D) Level of detection risk. 
A)  Extent of tests of details. 
B) Level of inherent risk. 
C) Extent of tests of controls. 
D) Level of detection risk.

Question 15

After completing the preliminary phase of the review of internal control, the auditor decides not to rely on the system to restrict substantive procedures. Documentation may be limited to the auditor's

Accepted Answer

A)  Understanding of the internal control. 
B)  Reasons for deciding not to extend the review. 
C)  Basis for concluding that errors and fraud will be prevented. 
D)  Completed internal control questionnaire. 
A)  Understanding of the internal control. 
B)  Reasons for deciding not to extend the review. 
C)  Basis for concluding that errors and fraud will be prevented. 
D)  Completed internal control questionnaire.

Question 16

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 17

A limit test is a

Accepted Answer

A)  Test to ensure that a numerical value 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 alphabetic characters. 
A)  Test to ensure that a numerical value 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 alphabetic characters.

Question 18

Of the following statements about an internal control system, which one is correct?

Accepted Answer

A)  The maintenance of the system of internal control is an important responsibility of the internal audit function. 
B)  Administrative controls relate directly to the safeguarding of assets. 
C)  Because of the cost/benefit relationship, tests of controls may be applied on a test basis in some circumstances. 
D)  Well designed internal control activities always prevent collusion among employees. 
A)  The maintenance of the system of internal control is an important responsibility of the internal audit function. 
B)  Administrative controls relate directly to the safeguarding of assets. 
C)  Because of the cost/benefit relationship, tests of controls may be applied on a test basis in some circumstances. 
D)  Well designed internal control activities always prevent collusion among employees.

Question 19

What are four potential tools available to the auditor for documenting her understanding of an entity's system of internal control?

Accepted Answer

1. Copies of the entity's procedures man

Question 20

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.

Exam 6: Internal Control in a Financial Statement Audit

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

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)

During consideration of internal control in a financial statement audit of a nonpublic company, an auditor is not obligated to

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

In the audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when

All of the following are significant deficiencies except:

The concept of reasonable assurance in the context of an entity's internal controls recognizes that

What are some typical types of evidence that may be collected in testing an entity's internal controls?

The independent auditor should acquire an understanding of the internal audit function as it relates to the assessment of control risk because

A well-prepared flowchart should make it easier for the auditor to

An auditor's primary consideration regarding an entity's internal controls is whether the policies and procedures

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

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the

After completing the preliminary phase of the review of internal control, the auditor decides not to rely on the system to restrict substantive procedures. Documentation may be limited to the auditor's

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

A limit test is a

Of the following statements about an internal control system, which one is correct?

What are four potential tools available to the auditor for documenting her understanding of an entity's system of internal control?

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

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 Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Auditing the Financing Investing 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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