Question 1

Adequate documents and records is a subcomponent of the control environment.

Accepted Answer

A) True 
 B)False

Question 2

The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor's study and evaluation of internal control because the:

Accepted Answer

A)  audit programs, working papers, and reports of internal auditors can often be used as a substitute for the work of the independent auditor's staff. 
B)  procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control. 
C)  work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures. 
D)  understanding of the internal audit function is an important substantive test to be performed by the independent auditor. 
A)  audit programs, working papers, and reports of internal auditors can often be used as a substitute for the work of the independent auditor's staff. 
B)  procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control. 
C)  work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures. 
D)  understanding of the internal audit function is an important substantive test to be performed by the independent auditor.

Question 3

Smaller companies usually have less extensive internal controls than larger companies which result in more frauds being committed at small companies.

Accepted Answer

A) True 
 B)False

Question 4

The Sarbanes-Oxley Act requires:

Accepted Answer

A)  all public companies to issue reports on internal controls. 
B)  all public companies to define adequate internal controls. 
C)  the auditor of public companies to design effective ICFR. 
D)  the auditor of public companies to provide recommendations to correct material weaknesses. 
A)  all public companies to issue reports on internal controls. 
B)  all public companies to define adequate internal controls. 
C)  the auditor of public companies to design effective ICFR. 
D)  the auditor of public companies to provide recommendations to correct material weaknesses.

Question 5

Section 404 requires auditors to evaluate the effectiveness of the audit committee's oversight of the company's:

Accepted Answer

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

Question 6

Narratives, flowcharts, and internal control questionnaires are three common methods of:

Accepted Answer

A)  testing the internal controls. 
B)  documenting the auditor's understanding of internal controls. 
C)  designing the audit manual and procedures. 
D)  documenting the auditor's understanding of a client's organizational structure. 
A)  testing the internal controls. 
B)  documenting the auditor's understanding of internal controls. 
C)  designing the audit manual and procedures. 
D)  documenting the auditor's understanding of a client's organizational structure.

Question 7

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 8

Discuss what is meant by the term "control environment" and identify four control environment subcomponents that the auditor should consider.

Accepted Answer

The control environment consists of the

Question 9

Which of the following groups establishes and maintains the company's internal controls?

Accepted Answer

A)  Internal auditors 
B)  Board of Directors 
C)  Management 
D)  Audit committee 
A)  Internal auditors 
B)  Board of Directors 
C)  Management 
D)  Audit committee

Question 10

The primary emphasis by auditors is on controls over:

Accepted Answer

A)  classes of transactions. 
B)  account balances. 
C)  both A and B, because they are equally important. 
D)  both A and B, because they vary from client to client. 
A)  classes of transactions. 
B)  account balances. 
C)  both A and B, because they are equally important. 
D)  both A and B, because they vary from client to client.

Question 11

Which of the following is most correct for audits of non-public companies?

Accepted Answer

A)  an audit of internal control is required 
B)  an audit of internal control is not required 
C)  an audit of the design of internal controls is required 
D)  an audit of the operational effectiveness of internal controls is required 
A)  an audit of internal control is required 
B)  an audit of internal control is not required 
C)  an audit of the design of internal controls is required 
D)  an audit of the operational effectiveness of internal controls is required

Question 12

Match seven of the terms (a-i) with the definitions provided below (1-7):
a. Control environment
b. Control activities
c. Independent checks on performance
d. Internal control
e. Monitoring
f. Separation of duties
g. General authorization
h. Specific authorization
i. Risk assessment
________ 1. Management's ongoing and periodic assessment of the quality of internal control performance to determine that controls are operating as intended and are modified when needed.
________ 2. Company-wide policies for the approval of all transactions within stated limits.
________ 3. The actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal control and its importance to the entity.
________ 4. Segregation of the following activities in an organization: custody of assets, accounting, authorization, and operational responsibility.
________ 5. Management's identification and analysis of risks relevant to the preparation of financial statements in accordance with an applicable accounting framework.
________ 6. Policies and procedures that help ensure that necessary actions are taken to address risks in the achievement of the entity's objectives.
________ 7. A process designed to provide reasonable assurance regarding the achievement of management's objectives in the following categories: (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations.

Accepted Answer

1. E
2. G

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is not one of the three primary objectives of effective internal control?

Accepted Answer

A)  reliability of financial reporting 
B)  efficiency and effectiveness of operations 
C)  compliance with laws and regulations 
D)  assurance of elimination of business risk 
A)  reliability of financial reporting 
B)  efficiency and effectiveness of operations 
C)  compliance with laws and regulations 
D)  assurance of elimination of business risk

Question 15

When internal controls over a given financial statement account are assessed as highly effective, the auditor need not obtain audit evidence for that account beyond testing the controls.

Accepted Answer

A) True 
 B)False

Question 16

Certain principles dictate the proper design and use of documents and records. Briefly describe several of these principles.

Accepted Answer

• Documents should be prenumbered consec

Question 17

The primary emphasis by auditors when evaluating and testing internal control is on controls over classes of transactions rather than controls over account balances.

Accepted Answer

A) True 
 B)False

Question 18

Of the following statements about internal controls, which one is least likely to be correct?

Accepted Answer

A)  No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. 
B)  Transactions must be properly authorized before such transactions are processed. 
C)  Because of the cost-benefit relationship, a client may apply controls on a test basis. 
D)  Control procedures reasonably ensure that collusion among employees cannot occur. 
A)  No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. 
B)  Transactions must be properly authorized before such transactions are processed. 
C)  Because of the cost-benefit relationship, a client may apply controls on a test basis. 
D)  Control procedures reasonably ensure that collusion among employees cannot occur.

Question 19

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 20

The text suggested a five-step approach to identify deficiencies, significant deficiencies, and material weaknesses. Describe this approach.

Accepted Answer

1. Identify existing controls. Because d

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

Adequate documents and records is a subcomponent of the control environment.

The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor's study and evaluation of internal control because the:

Smaller companies usually have less extensive internal controls than larger companies which result in more frauds being committed at small companies.

The Sarbanes-Oxley Act requires:

Section 404 requires auditors to evaluate the effectiveness of the audit committee's oversight of the company's:

Narratives, flowcharts, and internal control questionnaires are three common methods of:

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

Discuss what is meant by the term "control environment" and identify four control environment subcomponents that the auditor should consider.

Which of the following groups establishes and maintains the company's internal controls?

The primary emphasis by auditors is on controls over:

Which of the following is most correct for audits of non-public companies?

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

Which of the following is not one of the three primary objectives of effective internal control?

When internal controls over a given financial statement account are assessed as highly effective, the auditor need not obtain audit evidence for that account beyond testing the controls.

Certain principles dictate the proper design and use of documents and records. Briefly describe several of these principles.

The primary emphasis by auditors when evaluating and testing internal control is on controls over classes of transactions rather than controls over account balances.

Of the following statements about internal controls, which one is least likely to be correct?

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

The text suggested a five-step approach to identify deficiencies, significant deficiencies, and material weaknesses. Describe this approach.

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

The CPA Profession

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Plan 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 and Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls and 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 Balances

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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