Deck 3: Internal Control Over Financial Reporting: Managements Responsibilities and Importance to the External Auditors

Question 1

Monitoring of the internal controls involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions.

Answer 1

True

Question 2

In addition to controls being specific,they may be broad,such as policies regarding a code of ethics.

Answer 2

True

Question 3

Investors and lenders are not concerned with internal control of the companies in which they invest.

Answer 3

False

Question 4

A material weakness in internal control is a deficiency,or a combination of deficiencies,in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

Question 5

Control activities are the component of internal control that includes control actions that have been established by policies and procedures

Question 6

Control activities implemented to mitigate transaction processing risk that typically affect only certain processes,transactions,accounts,and assertions are referred as transaction or application controls.

Question 7

Internal controls are considered to be part of corporate governance.

Question 8

Internal control is a process designed to guarantee the achievement of the objectives of reliable financial reporting,compliance with laws and regulations and ineffective and inefficient operations.

Question 9

Physical controls are necessary to protect and safeguard assets from accidental or intentional destruction and theft.

Question 10

The five major components of an organization's internal control are: the control environment,risk assessment,control activities,information and communication,and monitoring.

Question 11

The quality of an organization's internal control will affect both the audit approach and the amount of testing needed for an engagement.

Question 12

An organization's control environment is established and maintained by the internal auditing department.

Question 13

A company's internal auditing function should not be considered when assessing the effectiveness of internal controls.

Question 14

Preventative controls are designed to prevent the occurrence of a misstatement.

Question 15

The better the quality of the internal controls,the more an auditor can rely on the controls.

Question 16

Segregation of duties is a control activity that is designed to protect against the risk that an individual could both perpetrate and cover up a fraud.

Question 17

Effective control not only identifies risk but also responds to these risks appropriately.

Question 18

Internal control are needed for all activities of the organization

Question 19

An auditor is not required to obtain evidence about the design and operation of the internal controls to conclude the controls are effective at preventing material misstatements from occurring.

Question 20

Internal control is a process,effected by an entity's board of directors,management,and other personnel,designed to provide reasonable assurance regarding the achievement of objectives relating to operations,reporting,and compliance.

Question 21

Even if auditors believe internal controls are ineffective,they must still collect some evidence to conclude they are ineffective.

Question 22

Several significant deficiencies in internal controls may constitute a material weakness.

Question 23

Performing a walkthrough provides an auditor an understanding of the nature of processing in important accounting applications.

Question 24

A strong control environment can reduce all the financial reporting risks to zero.

Question 25

One of the advantages of a computerized accounting system is that the computerized system eliminates the need for internal controls.

Question 26

Managers must use professional judgment to determine whether identified control deficiencies rise to the level of a significant deficiency or material weakness.

Question 27

A well-controlled organization has an appropriate structure and clearly defined lines of responsibility and authority where everyone in the organization has equal responsibility for the effective operation of internal control.

Question 28

Physical controls to safeguard assets are not intended to include simple controls such as fences and locks.

Question 29

The payroll department should be responsible for signing payroll checks.

Question 30

All organizations should evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action,including senior management and the board of directors,as appropriate.

Question 31

An auditor will conclude an internal control is effective if he or she believes the control can be relied upon to prevent or detect material misstatements.

Question 32

The auditor is obligated to report significant deficiencies in the control structure discovered during an audit to the audit committee or its equivalent.

Question 33

Testing internal control for effectiveness is done in every audit.

Question 34

Transaction oriented controls are designed to operate on every transaction throughout the year.

Question 35

Self-checking digit algorithms have been developed to test for transposition errors associated with identification numbers

Question 36

The PCAOB's requirement is that documentation must be able to be interpreted by an auditor not connected to the engagement.

Question 37

The auditor's preliminary assessment of internal control effectiveness is based on an understanding of the control system as it has operated in the past and is designed to operate.

Question 38

A walkthrough involves following a transaction back from when it is reflected in the financial records to when it originated to determine if the controls are effectively designed and have been implemented.

Question 39

A deficiency in design of internal controls exists when an existing control is not properly designed so that,even if the control operates as designed,the control objective would not be met.

Question 40

A transaction trail includes the documents and records that allow an auditor to trace a transaction from its origination through to its final disposition,or vice versa.

Question 41

The information and communication component of internal control includes which of the following?

A)The organization deploys control activities through policies that establish what is expected and in procedures that put policies into action.
B)The organization obtains or generates and uses relevant,quality information to support the functioning of other components of internal control.
C)The organization identifies and assesses changes that could significantly impact the system of internal control.
D)All of the above.

Question 42

Internal control is a process designed to achieve objectives in which one of the following categories?

A)Reliability of financial reporting.
B)Compliance with applicable laws.
C)Ineffectiveness of operations.
D)Both A and B.

Question 43

What is the component of COSO's internal control system that concerns the process of identifying,capturing,and exchanging information in a timely fashion to enable accomplishment of the organization's objective called?

A)Control activities.
B)Information and communication.
C)Monitoring.
D)Control environment.

Question 44

One of the components of internal control,the control environment,is considered pervasive and the auditor should start the evaluation of controls at this level.

Question 45

The quality of an organization's internal controls affect which of the following?

A)The reliability of financial data.
B)The ability of management to make good decisions.
C)The ability to remain in business.
D)All of the above.

Question 46

Which of the following is not a major components of an organization's internal control structure?

A)Control risk.
B)The control environment.
C)Risk assessment.
D)Control activities.

Question 47

Which one of the following groups is interested in an organization's control structure?

A)Board members.
B)Lenders.
C)Auditors.
D)All of the above.

Question 48

Which of the following is not part of the control environment?

A)Management philosophy and operating style.
B)Methods of assigning authority and responsibility.
C)Personnel policies and practices.
D)Control activities.

Question 49

Which of the following is not a reason that the auditor must gain an understanding of the client's internal control system?

A)Better understand the client,its risks,and how it manages those risks.
B)Assess control risk and identify the types of financial statement misstatements that are most likely to occur.
C)Plan direct tests of account balances to determine if misstatements have occurred.
D)All are reasons why auditors must gain an understanding of the client's internal control system.

Question 50

Which of the following is a major component of an organization's internal control structure?

A)Major new financing.
B)The financial environment.
C)Risk assessment.
D)Telecommunication equipment.

Question 51

Preventive controls are designed to provide reasonable assurance that the correct program is used for processing,all transactions are processed,and the transactions update appropriate files.

Question 52

Which one of the following components of the system of internal controls influences the tone for the organization?

A)Control risk assessment.
B)Control environment.
C)Information and communication.
D)Monitoring.

Question 53

With whom does the tone of internal control typically originate?

A)Auditors.
B)Employees.
C)Management.
D)Stockholders.

Question 54

One of the components of internal control,monitoring,refers to the process of identifying,capturing,and exchanging information in a timely fashion to enable accomplishment of the organization's objectives.

Question 55

Which of the following services does the PCAOB require auditors of public companies to perform?

A)A financial statement audit and an attest audit.
B)A financial statement audit and an assurance audit.
C)A financial statement audit and agreed upon procedures.
D)A financial statement audit and an examination of the effectiveness of internal controls.

Question 56

Which of the following best describes the purpose of personnel policies and procedures?

A)Ensure the organization hires the right people.
B)Ensure the organization complies with federal and state laws in its hiring and retention decisions.
C)Ensure the organization has employees that are properly trained and supervised.
D)Ensure the organization performs all of the above.

Question 57

What is the primary benefit of effective internal control in an organization?

A)Achievement of certain organizational goals.
B)Completion of a successful audit for the entity.
C)Shareholder involvement in the company's success.
D)Obtaining profitability and financial strength.

Question 58

Which of the following is not part of management's report on internal controls?

A)Management responsibility for control of financial reporting.
B)The framework used to evaluate internal control.
C)An assessment of the effectiveness of the company's internal control.
D)A statement that the company is not required to have an audit on internal control.

Question 59

Control activities may be implemented at the organizational level and at the transactional level.

Question 60

Which of the following is not one of the underlying principles of an effective control environment as developed by COSO?

A)The organization demonstrates a commitment to integrity and ethical values.
B)The board of directors demonstrates independence from management and exercises oversight for the development and performance of internal control.
C)Management establishes,with board oversight,structures,reporting lines,and appropriate authorities and responsibilities in pursuit of objectives.
D)The organization considers the potential for fraud in assessing risks to the achievement of objectives.

Question 61

Which one of the following represents a control deficiency?

A)A missing control that is required for achievement of objectives.
B)A control that operates as designed.
C)A control that ensures the reliability of financial reporting.
D)A control that does not prevent immaterial errors.

Question 62

The PCAOB's AS No.5 states that internal controls may be preventive or detective. Which of the following controls is preventive?

A)Requiring two persons to open mail containing payments.
B)Reconciling the accounts receivable subsidiary file with the control account.
C)Using batch totals.
D)Preparing bank reconciliations.

Question 63

What is the typical outcome when an auditor discovers a material weakness in the design or operation of controls?

A)An adverse opinion unless management corrects the defect before year-end.
B)An adverse opinion even if management corrects the defect before year-end.
C)The firing of the auditors.
D)Adjusting audit journal entries.

Question 64

Which one of the following is considered effective documentation of an internal control system?

A)Electronically pre-numbered records.
B)A cathode ray screen used in input.
C)Verbal authorization.
D)The financial statements.

Question 65

Which of the following documents will an auditor use to demonstrate an understanding of internal control?

A)Checklists,disclosures and procedures.
B)The audit report,internal control opinions and confirmations.
C)Workpapers,engagement letters and management representation letters.
D)Questionnaires,narratives and flowcharts.

Question 66

Which of the following is an example of a test of controls?

A)Examining the reasonableness of interest accrued on notes payable.
B)Verify that cash surrender value of life insurance is classified as a long-term asset.
C)Using a spreadsheet to create a pivot table for the summarization of accounts receivable.
D)Reviewing management's monthly bank reconciliations.

Question 67

A financial statement auditor concludes that internal controls over cash are not functioning as designed.She believes that material misstatements to the cash accounts are possible because of the deficiencies.What course of action is the auditor most likely to take?

A)Report the audit to the regulatory agencies of the IRS and SEC.
B)Develop specific tests for cash balances to determine the extent of misstatement.
C)Explain to the client that the audit firm will not be able to complete the audit.
D)Test the internal control over cash.

Question 68

Which of the following procedures will an auditor use to better understand a client's internal control over accounting systems?

A)An auditor will look over subsequent year working papers.
B)An auditor will review previous year working papers.
C)An auditor will copy previous year working papers.
D)An auditor will re-draft subsequent year working papers.

Question 69

Which of the following is not a way an auditor obtains evidence regarding the effectiveness of internal control over the accounting system?

A)Performing a walkthrough of the accounting system.
B)Making inquiries of banks and attorneys.
C)Reviewing system flowcharts.
D)Taking plant and operational tours.

Question 70

Which of the following facts would result in an auditor issuing an adverse report over internal control?

A)The controls are believed to be effective.
B)The tests of controls support the documented understanding of controls.
C)There is a material weakness in the design or operation of controls.
D)A confirmation is not returned by a customer timely.

Question 71

Requiring the mail clerk to prepare a listing of all checks received,with copies of the list going to the cashier and to accounting,is an example of which type of control?

A)Preventive.
B)Corrective.
C)Detective.
D)Directive.

Question 72

When obtaining an understanding of internal controls,what is the independent external auditor primary concerned with?

A)Detecting all errors.
B)Determining the effectiveness of operations.
C)Determining whether the internal controls can be relied upon.
D)Determining whether the controls promote efficiency.

Question 73

Which of the following best represents a walkthrough?

A)The controller reviews the bank reconciliation prepared by the accountant and its resulting journal entries.
B)The auditor walks the production line to find inefficiencies in the inventory process and reports them to management.
C)The controller takes a sample of write-offs to ensure they have been adequately documented and recorded.
D)The auditor traces three purchasing transactions from the purchase order to the financial statement for observation and understanding.

Question 74

Which of the following is an inherent limitation of internal controls?

A)Lack of auditor independence.
B)Collusion.
C)Separation of duties.
D)Employee peer review.

Question 75

What is the auditor's responsibility for testing internal controls when the auditor believes that the internal controls are effective and intends to rely upon them?

A)The auditor is required to test the controls.
B)The auditor may test the controls.
C)The auditor does need not to test the controls.
D)The auditor never has any responsibility for testing internal controls.

Question 76

To support an assessment that controls are effective,what must an auditor do?

A)Achieve the same conclusion after appropriately testing internal control.
B)Achieve the opposite conclusion after appropriately testing internal control.
C)Perform increased substantive procedures.
D)Perform limited substantive procedures as the assessment is justified.

Question 77

Which one of the following is not a control activity implemented in most accounting systems?

A)Segregation of duties.
B)Competent,trustworthy employees.
C)Authorization procedures.
D)All of these activities are normally implemented.

Question 78

Internal control is a process affected by the organization's board of directors,management,and other personnel to provide reasonable assurance of achieving certain objectives.Which of the following does not fit into one of these categories of objectives?

A)Reliability of financial reporting.
B)Compliance with laws and regulations.
C)Continuing existence.
D)Effectiveness and efficiency of operations.

Question 79

Which of the following is an example of a physical control to safeguard assets?

A)Hiring only trustworthy cashiers.
B)Separation of duties.
C)Locks on the warehouse doors.
D)Safety audits on the production-line.

Question 80

Which of the following is clearly a test of controls?

A)Walk-through of the expense cycle from performance of the service to the reporting in the balance sheet.
B)Examination of a sample of purchase order records for electronic,authenticated,authorization.
C)Observing the controller's use of company owned equipment.
D)Sending a letter to the client's attorney to determine litigation that is pending between plaintiff and the defendant.