Question 1

Often, for efficiency, the auditor will ignore internal controls. This can occur because:

Accepted Answer

A)  detection risk is low. 
B)  it is a small entity. 
C)  control risk is assumed to be maximum. 
D)  all of the above

Question 2

The auditor's assessment of control risk and the extent of tests of controls are inversely related; that is, if the auditor's assessment of control risk decreases, more extensive tests of controls are applied.

Accepted Answer

A) True 
 B)False

Question 3

The auditor need NOT be concerned with all three areas of internal control that apply to management. The auditor's primary concerns are with the system's ability to:

Accepted Answer

A)  ensure reliability of financial reporting. 
B)  provide reliable data and promote efficiency. 
C)  promote efficiency and encourage adherence to policy. 
D)  provide reliable data, safeguard assets and comply with the Corporations Act.

Question 4

The reason to prevent those who authorise transactions from having control over the related asset is to protect the company primarily against:

Accepted Answer

A)  defalcation. 
B)  error. 
C)  non- compliance with accounting standards. 
D)  unbiased information.

Question 5

A system of internal accounting control normally would include procedures that are designed to provide reasonable assurance that:

Accepted Answer

A)  transactions are executed in accordance with management's general or specific authorisation. 
B)  employees act with integrity when performing their assigned tasks. 
C)  unusual transactions are accurately recorded. 
D)  collusive activities would be detected by segregation of employee duties.

Question 6

For IT equipment, there are three categories of controls related to safeguarding IT equipment, programs and data files. Discuss the categories of IT- related controls and for each category, give an example of a specific control.

Accepted Answer

The answer of For IT equipment, there are three categories...

Question 7

Inquiry as a type of audit evidence is used extensively in procedures to gain an understanding of controls.

Accepted Answer

A) True 
 B)False

Question 8

The study of the client's internal control by the auditor is:

Accepted Answer

A)  recommended by the Corporations Act. 
B)  required by auditing standards. 
C)  required by accounting standards. 
D)  required by the ASX for listed companies.

Question 9

Which of the following is NOT a type of audit evidence used in assessing internal control?

Accepted Answer

A)  Checking approval of customer sales orders 
B)  Matching prices on sales invoices against a standard price list 
C)  Observation of staff performing their duties 
D)  Observation of the inventory count

Question 10

For most uses, flowcharts are superior to narratives as a method of communicating the characteristics of a system of internal control.

Accepted Answer

A) True 
 B)False

Question 11

Proper segregation of functional responsibilities calls for separation of the functions of:

Accepted Answer

A)  authorisation, payment and recording. 
B)  authorisation, recording and custody. 
C)  custody, execution and reporting. 
D)  authorisation, execution and payment.

Question 12

An essential characteristic of the persons performing internal verification procedures is:

Accepted Answer

A)  a thorough knowledge of accounting. 
B)  independence from the original data preparer. 
C)  an analytical and inquisitive mind. 
D)  all of the above

Question 13

Tests of controls are conducted when:

Accepted Answer

A)  controls are not operating as effectively as initially assessed. 
B)  control risk may be higher than the initial assessment. 
C)  the auditor determines that substantive testing is not effective. 
D)  controls are expected to be operating effectively.

Question 14

Which one of the following statements about the internal control questionnaire is NOT correct?

Accepted Answer

A)  The primary disadvantage of the questionnaire approach is that individual parts of the system are examined without providing an overall view. 
B)  The questionnaire can cover each audit area reasonably quickly, and it can be accomplished at the beginning of the audit engagement. 
C)  The primary advantage of the questionnaire approach is the relative completeness of coverage of each audit area that a good instrument affords. 
D)  It is unacceptable for the auditor to rely on an internal control questionnaire that has been filled out by client's personnel.

Question 15

A well- designed system of management risk assessment is likely to help management identify the:

Accepted Answer

A)  risks of ineffective audit procedures. 
B)  risks of making a loss for the year. 
C)  risks of being over- audited. 
D)  risks relevant to the preparation of appropriate financial statements.

Question 16

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)  engaging a public accountant to perform monthly 'write- up' work. 
C)  direct participation by the owner of the business in the record- keeping activities of the business. 
D)  delegation of full, clear- cut responsibility to each employee for the functions assigned to each.

Question 17

Describe the three key concepts (assumptions) in the study of internal control.

Accepted Answer

The answer of Describe the three key concepts (assumptions) in...

Question 18

The reason for NOT permitting a person who has temporary or permanent custody of an asset to account for that asset is to protect the company primarily against:

Accepted Answer

A)  defalcation. 
B)  error. 
C)  non- compliance with accounting standards. 
D)  unbiased information.

Question 19

Which of the following is not an inherent limitation of internal controls?

Accepted Answer

A)  Management overriding a control 
B)  Misunderstanding of instructions 
C)  Collusion by employees 
D)  Inappropriate assessment of the effectiveness of internal controls

Question 20

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 low assessment of control risk.

Accepted Answer

A) True 
 B)False

Exam 8: Internal Control and Control Risk

Often, for efficiency, the auditor will ignore internal controls. This can occur because:

The auditor's assessment of control risk and the extent of tests of controls are inversely related; that is, if the auditor's assessment of control risk decreases, more extensive tests of controls are applied.

The auditor need NOT be concerned with all three areas of internal control that apply to management. The auditor's primary concerns are with the system's ability to:

The reason to prevent those who authorise transactions from having control over the related asset is to protect the company primarily against:

A system of internal accounting control normally would include procedures that are designed to provide reasonable assurance that:

For IT equipment, there are three categories of controls related to safeguarding IT equipment, programs and data files. Discuss the categories of IT- related controls and for each category, give an example of a specific control.

Inquiry as a type of audit evidence is used extensively in procedures to gain an understanding of controls.

The study of the client's internal control by the auditor is:

Which of the following is NOT a type of audit evidence used in assessing internal control?

For most uses, flowcharts are superior to narratives as a method of communicating the characteristics of a system of internal control.

Proper segregation of functional responsibilities calls for separation of the functions of:

An essential characteristic of the persons performing internal verification procedures is:

Tests of controls are conducted when:

Which one of the following statements about the internal control questionnaire is NOT correct?

A well- designed system of management risk assessment is likely to help management identify the:

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:

Describe the three key concepts (assumptions) in the study of internal control.

The reason for NOT permitting a person who has temporary or permanent custody of an asset to account for that asset is to protect the company primarily against:

Which of the following is not an inherent limitation of internal controls?

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 low assessment of control risk.