Question 1

When auditing a private company, the auditor should obtain an understanding of internal control sufficient to:

Accepted Answer

A)  provide reasonable protection against client fraud and defalcations by client employees. 
B)  assess control risk. 
C)  provide a basis for suggestions to the client for improving the accounting system. 
D)  provide a method for safeguarding assets, checking the accuracy and reliability of accounting data, promoting operational efficiency, and encouraging adherence to prescribed managerial policies. 
A)  provide reasonable protection against client fraud and defalcations by client employees. 
B)  assess control risk. 
C)  provide a basis for suggestions to the client for improving the accounting system. 
D)  provide a method for safeguarding assets, checking the accuracy and reliability of accounting data, promoting operational efficiency, and encouraging adherence to prescribed managerial policies.

Question 2

External financial statement auditors must obtain evidence regarding what attributes of an internal audit (IA) department if the external auditors intend to rely on IA's work?

Accepted Answer

A)  Integrity 
B)  Objectivity 
C)  Competence 
D)  All of the above 
A)  Integrity 
B)  Objectivity 
C)  Competence 
D)  All of the above

Question 3

It is important for the CPA to consider the competence of the clients' personnel 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 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 internal control. 
C)  comparison of recorded accountability with assets. 
D)  timing of the tests to be performed.

Question 4

A company frequently sells products at a price below inventory cost. Essential controls in the risk assessment process would include:

Accepted Answer

A)  adequate controls that address the risk of overstating inventory. 
B)  adequate controls that address the risk of not including a purchased item in inventory. 
C)  adequate controls that address the risk of understatement of inventory. 
D)  adequate controls that address the risk of overstatement of cost of goods sold. 
A)  adequate controls that address the risk of overstating inventory. 
B)  adequate controls that address the risk of not including a purchased item in inventory. 
C)  adequate controls that address the risk of understatement of inventory. 
D)  adequate controls that address the risk of overstatement of cost of goods sold.

Question 5

If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably set a high assessment of control risk.

Accepted Answer

A) True 
 B)False

Question 6

An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are:

Accepted Answer

A)  the effectiveness and efficiency of the controls. 
B)  the frequency and effectiveness of the controls. 
C)  the design and implementation of the controls. 
D)  the implementation and efficiency of the controls. 
A)  the effectiveness and efficiency of the controls. 
B)  the frequency and effectiveness of the controls. 
C)  the design and implementation of the controls. 
D)  the implementation and efficiency of the controls.

Question 7

Which of the following is correct with respect to the design and use of business documents?

Accepted Answer

A)  Not all documents used for internal purposes need to be prenumbered. 
B)  Documents should be designed for single purposes only to avoid confusion in their use. 
C)  Documents should be designed to be understandable only by those who use them. 
D)  Documents designed for external use must be prenumbered. 
A)  Not all documents used for internal purposes need to be prenumbered. 
B)  Documents should be designed for single purposes only to avoid confusion in their use. 
C)  Documents should be designed to be understandable only by those who use them. 
D)  Documents designed for external use must be prenumbered.

Question 8

Control activities help assure that the necessary actions are taken to address risks to the achievement of the company's objectives. List the five types of control activities.

Accepted Answer

1. Adequate separation of duties
2. Prop

Question 9

Separation of duties is essential in preventing errors and intentional misstatements on the financial statements. List below the four general guidelines.

Accepted Answer

1. Separation of custody of the assets f

Question 10

When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be:

Accepted Answer

A)  tracing. 
B)  vouching. 
C)  performing a walk-through. 
D)  testing controls. 
A)  tracing. 
B)  vouching. 
C)  performing a walk-through. 
D)  testing controls.

Question 11

For proper internal control, there should be adequate separation of duties. However, the extent of separation of duties considered "adequate" does not depend on the size of the organization.

Accepted Answer

A) True 
 B)False

Question 12

Before making the final assessment of internal control at the end of an integrated audit, the auditor must:

Accepted Answer

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

Question 13

If an auditor wishes to rely on the work of internal auditors (IA), the auditor must obtain satisfactory evidence related to the IA's competence, integrity, and objectivity.

Accepted Answer

A) True 
 B)False

Question 14

The most important component of internal control is risk assessment.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes Oxley Act?

Accepted Answer

A)  The audits of internal control and the financial statements provide reasonable assurance as to misstatements. 
B)  The audit of internal control provides absolute assurance of misstatement. 
C)  The audit of financial statements provides absolute assurance of misstatement. 
D)  The audits of internal control and the financial statements provide absolute assurance as to misstatements. 
A)  The audits of internal control and the financial statements provide reasonable assurance as to misstatements. 
B)  The audit of internal control provides absolute assurance of misstatement. 
C)  The audit of financial statements provides absolute assurance of misstatement. 
D)  The audits of internal control and the financial statements provide absolute assurance as to misstatements.

Question 16

Define the following terms: control deficiency, significant deficiency, and material weakness.

Accepted Answer

• A control deﬁciency exists if the desi

Question 17

Management's identification and analysis of risk is an ongoing process and is a critical component of effective internal control. An important first step is for management to identify factors that may increase risk. Identify at least five factors, observable by management, which may lead to increased risk in a typical business organization.

Accepted Answer

There are many factors that may lead to

Question 18

In evaluating the operational effectiveness of internal controls the auditor is likely to use four types of audit procedures. List the procedures below.

Accepted Answer

• Make inquiries of appropriat

Question 19

To issue an unqualified opinion on internal control over financial reporting, there must be no identified material weaknesses and no restrictions on the scope of the audit.

Accepted Answer

A) True 
 B)False

Question 20

When documenting their understanding of a client's internal controls, auditors are required to use narratives.

Accepted Answer

A) True 
 B)False

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

When auditing a private company, the auditor should obtain an understanding of internal control sufficient to:

External financial statement auditors must obtain evidence regarding what attributes of an internal audit (IA) department if the external auditors intend to rely on IA's work?

It is important for the CPA to consider the competence of the clients' personnel because their competence bears directly and importantly upon the:

A company frequently sells products at a price below inventory cost. Essential controls in the risk assessment process would include:

If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably set a high assessment of control risk.

An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are:

Which of the following is correct with respect to the design and use of business documents?

Control activities help assure that the necessary actions are taken to address risks to the achievement of the company's objectives. List the five types of control activities.

Separation of duties is essential in preventing errors and intentional misstatements on the financial statements. List below the four general guidelines.

When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be:

For proper internal control, there should be adequate separation of duties. However, the extent of separation of duties considered "adequate" does not depend on the size of the organization.

Before making the final assessment of internal control at the end of an integrated audit, the auditor must:

If an auditor wishes to rely on the work of internal auditors (IA), the auditor must obtain satisfactory evidence related to the IA's competence, integrity, and objectivity.

The most important component of internal control is risk assessment.

Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes Oxley Act?

Define the following terms: control deficiency, significant deficiency, and material weakness.

In evaluating the operational effectiveness of internal controls the auditor is likely to use four types of audit procedures. List the procedures below.

To issue an unqualified opinion on internal control over financial reporting, there must be no identified material weaknesses and no restrictions on the scope of the audit.

When documenting their understanding of a client's internal controls, auditors are required to use narratives.

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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