Question 1

The concept of reasonable assurance in the context of an entity's internal controls recognizes that:

Accepted Answer

A) auditors may fail to detect material misstatements. 
B) proper internal controls guarantee that material misstatements will not occur. 
C) proper internal controls preclude fraud. 
D) the costs of some controls may be too high to implement in relation to potential benefits.

Question 2

The basic concept of internal control that recognizes the cost of internal control should not exceed the benefits expected to be derived is known as:

Accepted Answer

A) Reasonable assurance. 
B) Management responsibility. 
C) Limited liability. 
D) Management by exception.

Question 3

For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by:

Accepted Answer

A) reperformance and corroboration. 
B) observation and inquiry. 
C) inspection and vouching. 
D) confirmation and recomputation.

Question 4

Before applying substantive procedures to the details of asset and liability accounts at an interim date, the auditor should:

Accepted Answer

A) consider the ability of the auditor to perform appropriate substantive procedures to cover the remaining period. 
B) investigate significant fluctuations that have occurred in the asset and liability accounts since the previous balance sheet date. 
C) select only those accounts which can effectively be sampled during year-end audit work. 
D) consider the compliance tests that must be applied at the balance sheet date to extend the audit conclusions reached at the interim date.

Question 5

As part of gaining an initial understanding of internal control, an auditor is required to do all of the following except:

Accepted Answer

A) consider factors that affect the risk of material misstatement. 
B) ascertain whether internal control policies and procedures have been placed in operation. 
C) identify the types of potential misstatements that can occur. 
D) obtain knowledge about the operating effectiveness of the internal control.

Question 6

Internal control consists of six components.

Accepted Answer

A) True 
 B)False

Question 7

The auditor should consider all of the following when deciding whether substantive procedures will be performed at an interim date except:

Accepted Answer

A) the control environment and other relevant controls. 
B) scheduling conflicts in the audit firm that make interim testing more convenient. 
C) the purpose of the substantive procedure. 
D) the assessed risk of material misstatement.

Question 8

The auditor must understand internal control before assessing inherent risk.

Accepted Answer

A) True 
 B)False

Question 9

After completing the preliminary phase of the review of internal control, the auditor decides not to rely on the system to restrict substantive procedures. Documentation may be limited to the auditor's:

Accepted Answer

A) understanding of the internal control. 
B) reasons for deciding not to extend the review. 
C) basis for concluding that errors and fraud will be prevented. 
D) completed internal control questionnaire.

Question 10

Data capture occurs through source documentation, direct data entry, or a combination of the two. List three purposes of data capture controls.

Accepted Answer

The answer of Data capture occurs through source documentation, direct...

Question 11

The auditor's communication of material weaknesses in internal control for a nonpublic company is:

Accepted Answer

A) required to enable the auditor to state that the examination has been made in accordance with generally accepted auditing standards. 
B) the principle reason for studying and evaluating the system of internal controls. 
C) required even though the financial statement audit for private companies does not require an audit of the entity's system of internal control. 
D) required to be included as part of the audit opinion.

Question 12

A substantive strategy is used when control risk has been set at high.

Accepted Answer

A) True 
 B)False

Question 13

Assessing control risk at a lower level most likely would involve:

Accepted Answer

A) changing the timing of substantive procedures by omitting interim testing and performing the tests at year-end. 
B) identifying specific internal controls relevant to specific assertions. 
C) performing more extensive substantive procedures with larger sample sizes than originally planned. 
D) reducing inherent risk for most of the assertions relevant to significant account balances.

Question 14

Trumpeter Corporation is a small publicly traded company that specializes in the restoration and sale of fine musical instruments. The audit committee is made up of a CEO from a technology company, a college accounting professor, and a local marketing executive. All are sufficiently independent from management. Members of the audit committee meet three times a year. Each time they meet, a different member, who chooses the topics to discuss, leads the meeting. The audit committee then sends the minutes of its meetings to the entity's CFO. Solely from this information, what are your conclusions about this audit committee's role within the control environment?

Accepted Answer

The answer of Trumpeter Corporation is a small publicly traded...

Question 15

What are four potential tools available to the auditor for documenting her understanding of an entity's system of internal control?

Accepted Answer

The answer of What are four potential tools available to...

Question 16

Internal control includes monitoring of controls.

Accepted Answer

A) True 
 B)False

Question 17

If auditors conduct substantive procedures as of 10/31 for an entity with a 12/31 year-end:

Accepted Answer

A) additional tests are seldom conducted for the remaining period. 
B) additional control tests are required in the remaining period. 
C) the entity's controls likely are ineffective. 
D) additional tests likely will be performed in the remaining period.

Question 18

Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of:

Accepted Answer

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

Question 19

An effective control environment:

Accepted Answer

A) identifies and responds to business risks. 
B) creates a commitment to competence. 
C) guarantees that all controls are followed as prescribed. 
D) does not need an effective board of directors or internal audit function.

Question 20

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) direct participation by the owner of the business in the recordkeeping activities of the business. 
C) engaging a CPA to perform monthly bookkeeping. 
D) delegation of full, clear-cut responsibility to each employee for the functions assigned to each.

Exam 6: Internal Control in a Financial Statement Audit

The concept of reasonable assurance in the context of an entity's internal controls recognizes that:

The basic concept of internal control that recognizes the cost of internal control should not exceed the benefits expected to be derived is known as:

For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by:

Before applying substantive procedures to the details of asset and liability accounts at an interim date, the auditor should:

As part of gaining an initial understanding of internal control, an auditor is required to do all of the following except:

Internal control consists of six components.

The auditor should consider all of the following when deciding whether substantive procedures will be performed at an interim date except:

The auditor must understand internal control before assessing inherent risk.

After completing the preliminary phase of the review of internal control, the auditor decides not to rely on the system to restrict substantive procedures. Documentation may be limited to the auditor's:

Data capture occurs through source documentation, direct data entry, or a combination of the two. List three purposes of data capture controls.

The auditor's communication of material weaknesses in internal control for a nonpublic company is:

A substantive strategy is used when control risk has been set at high.

Assessing control risk at a lower level most likely would involve:

What are four potential tools available to the auditor for documenting her understanding of an entity's system of internal control?

Internal control includes monitoring of controls.

If auditors conduct substantive procedures as of 10/31 for an entity with a 12/31 year-end:

Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of:

An effective control environment:

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: