Question 1

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 2

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)  Significant design flaws in internal controls or poor implementation 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)  Significant design flaws in internal controls or poor implementation of internal controls. 
D)  Manipulation or falsification of accounting records or documents from which financial statements are prepared.

Question 3

The basic concept of internal control that recognizes the cost of internal control should not exceed the benefits expected to be derived is known as

Accepted Answer

A)  Reasonable assurance. 
B)  Management responsibility. 
C)  Limited liability. 
D)  Management by exception. 
A)  Reasonable assurance. 
B)  Management responsibility. 
C)  Limited liability. 
D)  Management by exception.

Question 4

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 5

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

Accepted Answer

A)  If transactions are recurring. 
B)  For nonrecurring, unusual transactions. 
C)  If control risk is very low. 
D)  If the entity has a well-designed automated system. 
A)  If transactions are recurring. 
B)  For nonrecurring, unusual transactions. 
C)  If control risk is very low. 
D)  If the entity has a well-designed automated system.

Question 6

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 7

Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If an IT application control which performs a limit check for each check request is to be subjected to the auditor's test data approach, the sample should include

Accepted Answer

A)  Approximately 1,000 test items. 
B)  A number of test items determined by the auditor to be sufficient under the circumstances. 
C)  A number of test items determined by the auditor's reference to the appropriate sampling tables. 
D)  One transaction. 
A)  Approximately 1,000 test items. 
B)  A number of test items determined by the auditor to be sufficient under the circumstances. 
C)  A number of test items determined by the auditor's reference to the appropriate sampling tables. 
D)  One transaction.

Question 8

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)  Errors and fraud have been prevented, or detected and corrected. 
C)  Controls have not been circumvented by collusion. 
D)  Management can not override the system. 
A)  Operational efficiency has been achieved in accordance with management plans. 
B)  Errors and fraud have been prevented, or detected and corrected. 
C)  Controls have not been circumvented by collusion. 
D)  Management can not override the system.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by

Accepted Answer

A)  Employment of temporary personnel to aid in the separation of duties. 
B)  Direct participation by the owner of the business in the recordkeeping activities of the business. 
C)  Engaging a CPA to perform monthly bookkeeping. 
D)  Delegation of full, clear-cut responsibility to each employee for the functions assigned to each. 
A)  Employment of temporary personnel to aid in the separation of duties. 
B)  Direct participation by the owner of the business in the recordkeeping activities of the business. 
C)  Engaging a CPA to perform monthly bookkeeping. 
D)  Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.

Question 11

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 12

When communicating internal control-related matters noted in an audit of a nonpublic company, an auditor's report issued on significant deficiencies should indicate that

Accepted Answer

A)  Errors or fraud may occur and not be detected because there are inherent limitations in any internal control system. 
B)  The issuance of an unqualified opinion on the financial statements may depend on corrective follow-up action. 
C)  The deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions. 
D)  The purpose of the audit was to report on the financial statements and not to provide assurance on internal control. 
A)  Errors or fraud may occur and not be detected because there are inherent limitations in any internal control system. 
B)  The issuance of an unqualified opinion on the financial statements may depend on corrective follow-up action. 
C)  The deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions. 
D)  The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

Question 13

A primary purpose of internal controls is to

Accepted Answer

A)  Form a basis for evaluating employees. 
B)  Monitor production quality. 
C)  Avoid clerical errors. 
D)  Meet objectives of maintaining reliable documents and records and accurate financial reporting. 
A)  Form a basis for evaluating employees. 
B)  Monitor production quality. 
C)  Avoid clerical errors. 
D)  Meet objectives of maintaining reliable documents and records and accurate financial reporting.

Question 14

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?

Accepted Answer

A)  Incompatible duties. 
B)  Management override. 
C)  Mistakes in judgment. 
D)  Collusion among employees. 
A)  Incompatible duties. 
B)  Management override. 
C)  Mistakes in judgment. 
D)  Collusion among employees.

Question 15

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)  Classification of revenue and expense transactions by product line. 
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)  Classification of revenue and expense transactions by product line. 
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 16

An entity's control activities include all of the following except:

Accepted Answer

A)  Performance reviews. 
B)  Information processing. 
C)  External auditor's tests of controls. 
D)  Segregation of duties. 
A)  Performance reviews. 
B)  Information processing. 
C)  External auditor's tests of controls. 
D)  Segregation of duties.

Question 17

If auditors conduct substantive procedures as of 10/31 for an entity with a 12/31 year-end

Accepted Answer

A)  Additional tests are seldom conducted for the remaining period. 
B)  Additional control tests are required in the remaining period. 
C)  The entity's controls likely are ineffective. 
D)  Additional tests likely will be performed in the remaining period. 
A)  Additional tests are seldom conducted for the remaining period. 
B)  Additional control tests are required in the remaining period. 
C)  The entity's controls likely are ineffective. 
D)  Additional tests likely will be performed in the remaining period.

Question 18

A customer intended to order 100 units of product Z96014, but incorrectly ordered 100 units of a nonexistent product Z96015. Which of the following controls most likely would detect this error?

Accepted Answer

A)  Check digit verification. 
B)  Record count. 
C)  Hash total. 
D)  Redundant data check. 
A)  Check digit verification. 
B)  Record count. 
C)  Hash total. 
D)  Redundant data check.

Question 19

After the auditor has prepared a flowchart of the internal controls surrounding sales and evaluated the design of the system, the auditor would perform tests of controls on all control activities

Accepted Answer

A)  Documented in the flowchart. 
B)  Considered to be weaknesses that might allow errors to enter the accounting system. 
C)  That the auditor plans to rely on. 
D)  That would aid in preventing fraud. 
A)  Documented in the flowchart. 
B)  Considered to be weaknesses that might allow errors to enter the accounting system. 
C)  That the auditor plans to rely on. 
D)  That would aid in preventing fraud.

Question 20

As the acceptable level of detection risk increases, an auditor may change the

Accepted Answer

A)  Assessed level of control risk from a lower level to a higher level. 
B)  Assurance provided by tests of controls by using a larger sample size than planned. 
C)  Timing of substantive procedures from year-end to an interim date. 
D)  Nature of substantive procedures from less effective to more effective procedures. 
A)  Assessed level of control risk from a lower level to a higher level. 
B)  Assurance provided by tests of controls by using a larger sample size than planned. 
C)  Timing of substantive procedures from year-end to an interim date. 
D)  Nature of substantive procedures from less effective to more effective procedures.

Exam 6: Internal Control in a Financial Statement Audit

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

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 basic concept of internal control that recognizes the cost of internal control should not exceed the benefits expected to be derived is known as

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

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

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

Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If an IT application control which performs a limit check for each check request is to be subjected to the auditor's test data approach, the sample should include

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

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

Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by

A field test is a

When communicating internal control-related matters noted in an audit of a nonpublic company, an auditor's report issued on significant deficiencies should indicate that

A primary purpose of internal controls is to

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?

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

An entity's control activities include all of the following except:

If auditors conduct substantive procedures as of 10/31 for an entity with a 12/31 year-end

A customer intended to order 100 units of product Z96014, but incorrectly ordered 100 units of a nonexistent product Z96015. Which of the following controls most likely would detect this error?

After the auditor has prepared a flowchart of the internal controls surrounding sales and evaluated the design of the system, the auditor would perform tests of controls on all control activities

As the acceptable level of detection risk increases, an auditor may change the

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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