Deck 6: Performing an Integrated Audit

Question 1

In an integrated audit both management and the auditor are required to report on the fairness of the internal control of the company.

Answer 1

True

Question 2

The concept of reasonable assurance regarding controls recognizes that the benefits of internal controls should not exceed the cost.

Answer 2

False

Question 3

The major changes in guidance since the original issuance of AS 2 include encouragement to both management and auditors to implement a top down,risk-based approach.

Answer 3

True

Question 4

A company with a strong control environment demonstrates a culture of high integrity and ethics.

Question 5

The auditor is required to report material weaknesses in internal control to the audit committee.

Question 6

The purpose of the auditor consideration of the strength of internal controls is to determine the nature,extent and timing of substantive testing.

Question 7

In an integrated audit the auditor is responsible to only form an opinion on the fairness of the financial statements.

Question 8

A material weakness in internal control is a deficiency in the design or operation of the control that adversely affects the company's ability to initiate,record,process or report external financial data reliably in accordance with GAAP.

Question 9

Internal control reporting must be based on evidence of both the design and the operation of internal controls.

Question 10

The auditor's report on the internal controls and the financial statements of the client are required to be reported in the same report.

Question 11

The requirement to report on internal control placed on public companies resulted from one particular type of internal control breakdown: front line employees of some major public companies overrode their control systems and issued misleading financial statements.

Question 12

The purpose of tests of controls is to determine that account balances are properly stated.

Question 13

Recent research by COSO reinforces the concept that the control environment is not a very important factor associated with fraud

Question 14

Substantive procedures performed by the auditor will include procedures to address fraud risks.

Question 15

If the auditor finds material weaknesses in the internal controls of the client a qualified report would be issued.

Question 16

Pervasive controls are those that affect the processing of specific computer applications of the client.

Question 17

During the course of the audit,the auditor should continually gather and update information on business risk,including the identification of any fraud risk factors noted during preliminary audit planning.

Question 18

The auditor should not attempt to analyze potential management motivations to misstate account balances since auditor is an accounting expert and not expected to perform behavioral assessments.

Question 19

In an integrated audit the auditor is required to issue two separate reports.One on the fairness of the internal controls and a second on the fairness of the financial statements.

Question 20

In an integrated audit the auditor is required to issue a report expressing an opinion on management's assessment of the effectiveness of controls.

Question 21

The direct tests of account balances are determined,in large part,by the specific nature of the identified control deficiencies.

Question 22

The auditor is responsible to understand the controls of the client and to test all of its controls in the process of evaluating the strength of the internal control system.

Question 23

The assessment of internal control is at the end of the client's reporting period.There is often an opportunity to correct a deficiency before the end of the year if it is identified early enough.

Question 24

To some extent,the external auditor can rely on some of the company's evaluation and/or testing of controls,particularly work performed by a competent and independent internal audit function.

Question 25

In an integrated audit an unqualified opinion on the internal controls over financial reporting can be issued by the auditor if no misstatements are found in the financial statement audit.

Question 26

The external auditor can never rely to any extent on some of the company's evaluation and/or testing of controls,even when performed by a competent and independent internal audit function.

Question 27

A risk-based approach to an integrated audit requires auditors to consider the materiality of account balances and processes along with the risks that the account balance may be misstated

Question 28

In an integrated audit the auditor conducts their audit of the internal controls of the company in accordance with the standards of COSO,which requires reasonable assurance of maintenance in material respects.

Question 29

If management's report on internal control indicates a material weakness,the auditor would express a qualified opinion on the internal controls.

Question 30

In evaluating the strength of internal control in determining the nature,timing and extent of substantive audit evidence to collect the auditor must form their own independent assessment.Audit evidence cannot be reduced based upon the work of the internal auditor.

Question 31

If management's report on internal control indicates one or more material weaknesses,the auditor would express an adverse opinion on the internal controls.

Question 32

A significant deficiency is a deficiency,or a combination of deficiencies,in internal control over financial reporting that is more severe than a material weakness.

Question 33

If the auditor finds material weaknesses in the internal controls of the client an adverse report would be issued.

Question 34

Management is responsible to document the COSO control elements,especially the control environment,risk analysis,and monitoring.

Question 35

No matter how low control risk is assessed,some substantive testing of account balances must be conducted for material account balances.

Question 36

Controls for all assertions need not be tested if the auditor believes that a misstatement related to a particular assertion would not be material.

Question 37

Under AS 5,the auditor's objective in an audit of internal control over financial reporting is to express an opinion on the effectiveness of the company's internal control over financial reporting.

Question 38

The size of the account (materiality)influences,but does not totally dictate,whether substantive testing should be performed.`

Question 39

In evaluating the strength of internal control in determining the nature,timing and extent of substantive audit evidence to collect the auditor must form their own independent assessment.Audit evidence can be reduced based upon the effectiveness of management's monitoring controls.

Question 40

Controls of the client that the auditor expects to depend upon in reducing substantive testing must be tested.

Question 41

In planning the audit,auditors assess control risk for

A)each relevant assertion.
B)important classes of transactions.
C)significant account balances.
D)all of the above.

Question 42

In the risk-based audit approach the control environment serves as the first line of defense in mitigating the risks that a company has to manage.

Question 43

Once a company establishes that it has effective internal control over processes,monitoring can be effective by assuring that any changes made to the processes are fully documented and tested and that controls have not deteriorated.

Question 44

For the auditor to assess control risk for account balances at less than the maximum

A)no significant weaknesses must have occurred.
B)the internal auditor must test and evaluate some of the controls.
C)the external auditor must test and evaluate some of the controls.
D)management must test and evaluate some of the controls.

Question 45

The risk-based audit approach requires the auditor to identify

A)account balances or related disclosures that might be materially misstated.
B)potential causes of the misstatement.
C)important processes that may affect one or more account balances.
D)all of the above.

Question 46

Under what circumstance is it appropriate for the auditor to rely on the work of an internal auditor?

A)It is never acceptable for the external auditor to rely upon the work of the internal auditor.
B)The external auditor may relay on certain of the work of the internal auditor after making a comprehensive assessment of the auditor and his/her work.
C)The external auditor may rely on the work of the internal auditor if he/she is also a CPA.
D)There is no restriction in relying upon the work of internal auditors.

Question 47

Which assertions and controls must be tested by the auditor?

A)All controls and assertions must be tested.
B)A sample of controls and assertions must be tested.
C)Material controls and assertions must be tested.
D)The majority of controls and assertions of the client must be tested.

Question 48

Regardless of the level of assessed control risk,the auditor must conduct some substantive procedures for material account balances.These procedures may include which of the following.

A)input from the audit team's brainstorming analysis regarding potential for fraud.
B)the size of the account balance.
C)how IT affects the company's flow of transactions.
D)all of the above.

Question 49

In evaluating the extent to which the external auditor can rely on the work of the internal auditor,which of the following factors would the external auditor consider?

A)The independence of the function from management.
B)The design and comprehensiveness of the internal audit testing approach.
C)The documentation of the internal audit testing.
D)All would be considered.

Question 50

If the auditor finds a material weakness in the controls of the client,it represents a deficiency in the design or operation of a control

A)that adversely affects the company's ability to initiate,record,process,or report external financial data reliably in accordance with GAAP.
B)that negatively affects the company's ability to initiate,record,process,or report external financial data reliably in accordance with GAAP.
C)that results in a remote possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.
D)that results in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Question 51

In examining controls for transactions and events,which of the following assertions would be included:

A)occurrence.
B)completeness.
C)valuation.
D)all are included.

Question 52

If the auditor assesses control risk dealing with account balances as being weak,the effect on residual risk is to

A)reduce residual risk.
B)increase residual risk.
C)no effect on residual risk.
D)either A or B depending upon presence or absence of significant deficiencies.

Question 53

Which of the following is not correct about the performance of tests of controls?

A)Tests of controls must be performed for every account.
B)Some tests of controls must be performed to rely upon controls to reduce substantive testing.
C)The work of the internal auditor can be used to reduce substantive testing.
D)All of the above are correct.

Question 54

The amount of direct testing to be performed by the auditor is inversely related to

A)audit risk.
B)enterprise risk.
C)subjectivity of accounting process.
D)materiality of account balance.

Question 55

An adverse report on internal controls is rendered when the auditor finds

A)a significant weakness in the internal controls of the client.
B)a material weakness in the internal controls of the client.
C)a deficiency in operation of the internal controls of the client.
D)all of the above would result in an adverse opinion.

Question 56

Regardless of the level of assessed control risk,the auditor must conduct some substantive procedures for material account balances.

Question 57

Research has found that the most fraudulent financial reporting,such as misleading reporting was perpetrated by which of the following.

A)lower-level employees.
B)external auditors.
C)internal auditors.
D)senior management.

Question 58

Management's evaluation of internal controls often presents opportunities to improve both the quality of controls and the efficiency of processing.

Question 59

A company with a strong control environment demonstrates which of the following:

A)a culture of high integrity and ethics.
B)a commitment to financial reporting competencies.
C)an independent,active,and knowledgeable audit committee.
D)all of the above.

Question 60

The financial competencies needed by an organization are directly correlated with the complexity of transactions in which the company engages and the size of the company.

Question 61

Segregation of duties deals with the segregation of which functions?

A)Recording and physical custody of assets.
B)Authorizing and recording assets.
C)Authorizing,recording,and physical custody of assets.
D)Authorizing,recording,physical custody,and access to assets.

Question 62

The probability that an account balance might be misstated after processes are complete and internal controls have been applied is

A)residual risk.
B)business risk.
C)audit risk.
D)control risk.

Question 63

Which of the following factor(s)is considered by the auditor in evaluating the potential for residual risk remaining in an account balance or class of transactions?

A)Sources of potential misstatement.
B)Extent of potential misstatement.
C)Type of potential misstatement.
D)All of the above should be considered.

Question 64

In an integrated audit,the amount of direct testing of account balances is inversely related to

A)subjectivity of estimates.
B)riskiness of the account.
C)effectiveness of internal control.
D)materiality of the account.

Question 65

In an integrated audit the auditor must test the controls of all material processes of the client unless

A)substantive testing would be more effective and efficient.
B)the controls were in place last year.
C)there have been changes to the controls during the year.
D)the design of the control would not prevent material misstatements.

Question 66

In evaluating residual risk of account balances,tests of controls by the auditor involves the assessment of

A)the design of controls.
B)the operation of controls.
C)the strength of the control environment.
D)all of the above

Question 67

When assessing the client which of the following factors is considered pervasive and creates both an attitude and culture that affects the client's reporting system,the process of recording transactions,and the process of making estimates and adjustments.

A)The control environment.
B)Audit testing of processes and controls.
C)Design and operation of controls.
D)Inherent and control risk.

Question 68

Reporting requirements
Discuss the reporting requirements of an integrated audit under Sarbanes Oxley Act for both management and the auditor.

Question 69

Reporting requirements
Discuss elements that should be included in the auditor's unqualified report.

Question 70

Planning an integrated audit
Discuss the different steps and phases that are required in planning an integrated audit.

Question 71

Which of the following is not one of the phases in planning an integrated audit?

A)identifying and assessing business risk.
B)documenting all controls.
C)assessing fraud risk.
D)determining the most efficient manner in which to conduct an integrated audit.

Question 72

In an integrated audit the auditor's report on internal control does not require the statement that

A)the audit was conducted in accordance with AICPA auditing standards.
B)management is responsible for maintaining effective internal control.
C)used COSO's internal control framework.
D)a reasonable basis exists for their opinion.

Question 73

Which of the following statements about internal control is not correct?

A)The costs of the control should not exceed the benefits.
B)The auditor's assessment of detection risk is inversely related to the assessment of control risk.
C)Stronger internal controls result in an increase in the number of required substantive audit procedures.
D)Management is responsible for the maintenance of internal control.

Question 74

If the auditor's assessment of an internal control is that it is effective,what is the effect on the amount of direct testing performed by the auditor?

A)Increase in direct testing.
B)decrease in direct testing
C)No change in direct testing.
D)Direct testing is not needed.

Question 75

Even though there was a material weakness in internal control,management of the company issues an unqualified report.What types of report(s)would the auditor issue?

A)An adverse opinion on management's assessment of internal control and in their report on internal control.
B)An unqualified opinion on management's assessment of internal control and an adverse opinion in their report on internal control.
C)An unqualified opinion on management's assessment of internal control and in their report on internal control.
D)An adverse opinion on management's assessment of internal control and an unqualified report on internal control.

Question 76

If the auditor's assessment of an account balance is material,what is the effect on the amount of direct testing performed by the auditor?

A)Increase in direct testing.
B)Decrease in direct testing
C)No change in direct testing.
D)Direct testing is not needed.

Question 77

If the auditor's assessment of audit risk is low (e.g. ,1% rather than 5%),what is the effect on the amount of direct testing performed by the auditor?

A)Increase in direct testing.
B)Decrease in direct testing
C)No change in direct testing.
D)Direct testing is not needed.

Question 78

In assessing internal controls the auditor is suppose to apply the concept of reasonable assurance,which indicates that

A)there should be a clear separation of duties between personnel who authorize,record,and hold assets.
B)the costs of a control should not exceed its benefits.
C)testing of the controls should provide assurance that they work most of the time.
D)testing of the controls should provide reasonable assurance that they are working properly.

Question 79

Ultimately,the starting point of the integrated audit should be to understand all of the following except

A)the risks that the business faces in meeting its objectives,with a focus on the objective of accurate financial reporting
B)the incentives that may motivate management or other employees to misstate the financial statements
C)the risks inherent in important business processes
D)the results of direct account substantive testing

Question 80

Indicate the proper sequence of steps in planning an integrated audit: 1.Consider the Possibility of Account Misstatements.
2)Complete Preliminary Analytical Procedures.
3)Identify Controls to Test.
4)Update Information about Various Risks.
5)Understand the Client's Internal Controls.

A)4,2,3,5,1
B)4,1,2,5,3
C)1,4,5,2,3
D)1,4,2,5,3