Question 1

In obtaining an understanding of the internal control policies and procedures that are relevant to audit planning, the auditor should perform procedures to provide sufficient knowledge of:

Accepted Answer

A) design of the relevant policies, procedures and records and their operating effectiveness. 
B) design of the relevant policies, procedures and records and their relationships to assertions. 
C) the complexity of the entity and the sophistication of its systems and operations. 
D) design of the relevant policies, procedures and records and whether they have been placed in operation.

Question 2

When considering the internal control for inventory with respect to segregation of duties, an auditor would be least likely to:

Accepted Answer

A) inspect documents. 
B) make enquiries. 
C) observe procedures. 
D) consider policies and procedures manuals.

Question 3

Which of the following situations is not a reason to assess control risk as high?

Accepted Answer

A) Internal control policies or procedures are unlikely to be effective. 
B) Evaluating the effectiveness of the internal control policies or procedures would be more time consuming than another audit approach. 
C) The auditor has assessed detection risk as high. 
D) Internal control policies or procedures are unlikely to pertain to an assertion.

Question 4

An auditor reviews a client's payroll procedures.The auditor would consider the internal control to be less than effective if a payroll department supervisor was assigned the responsibility for:

Accepted Answer

A) reviewing and approving time reports for subordinate employees. 
B) distributing payroll cheques to employees. 
C) hiring subordinate employees. 
D) initiating requests for salary adjustments for subordinate employees.

Question 5

An effective internal control for the payroll function would generally include which of the following?

Accepted Answer

A) Total time recorded on time-clock cards should be reconciled to job reports by employees responsible for those specific jobs. 
B) Payroll department employees should be supervised by the management of the personnel department. 
C) Payroll department employees should be responsible for maintaining employee personnel records. 
D) Total time spent on jobs should be compared with total time indicated on time-clock cards.

Question 6

When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to:

Accepted Answer

A) assess the risk of material misstatement and plan the audit. 
B) provide suggestions for improvement to the client. 
C) serve as a basis for setting audit risk and materiality. 
D) comply with the Corporations Act 2001.

Question 7

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:

Accepted Answer

A) external policies established by parties outside the entity affect its accounting practices. 
B) management is dominated by one individual. 
C) internal auditors have direct access to the board of directors and the entity's management. 
D) the audit committee is active in overseeing the entity's financial reporting policies.

Question 8

Walk-throughs usually involve all of the following audit procedures except:

Accepted Answer

A) re-performance. 
B) ienquiry. 
C) observation. 
D) inspection.

Question 9

The risk assessment component of internal controls refers to:

Accepted Answer

A) the auditor's assessment of control risk. 
B) the auditor's assessment of engagement risk. 
C) the entity's identification and analysis of risks relevant to achievement of its objectives. 
D) the entity's monitoring of the potential for material misstatements.

Question 10

An auditor assesses the level of control risk to:

Accepted Answer

A) determine whether the entity is a going concern. 
B) determine the extent of substantive tests to be performed. 
C) ascertain whether irregularities are probable. 
D) ascertain whether any employees have incompatible duties.

Question 11

The auditor observes client employees in obtaining an understanding of the internal control in order to:

Accepted Answer

A) prepare a flowchart. 
B) update information contained in the organisation and procedure manuals. 
C) corroborate the information obtained during the initial phases of obtaining an understanding of the internal control. 
D) determine the extent of compliance with quality control standards.

Question 12

A primary purpose of internal controls is to:

Accepted Answer

A) form a basis for evaluating employees. 
B) monitor production quality. 
C) avoid clerical errors. 
D) meet objectives of maintaining sound documents and records and accurate financial reporting.

Question 13

The control environment component of internal controls includes all of the following except:

Accepted Answer

A) management's operating style. 
B) access to computer programs. 
C) organisational structure. 
D) human resource policies and practices.

Question 14

If a control total were to be calculated on each of the following data items, which would best be identified as a hash total for a payroll IT application?

Accepted Answer

A) Net pay. 
B) Department numbers. 
C) Hours worked. 
D) Total debits and total credits.

Question 15

Which of the following procedures is essential to determine whether effective internal control policies and procedures have been prescribed and are being followed?

Accepted Answer

A) Developing questionnaires and checklists. 
B) Understanding control policies directed towards operating efficiency. 
C) Understanding the internal control and performing tests of controls. 
D) Observing employee functions and making enquiries.

Question 16

A procedural control used in the management of a computer centre to minimise the possibility of data or program file destruction through operator error includes:

Accepted Answer

A) control figures. 
B) cross-adding tests. 
C) limit checks. 
D) external labels.

Question 17

One of the major problems with IT systems is that incompatible functions may be performed by the same individual.One compensating control for this is the use of:

Accepted Answer

A) a tape library. 
B) a check-digit system. 
C) computer-generated hash totals. 
D) a computer log.

Question 18

The auditor obtains evidence supporting the notion that proper segregation of duties exists by:

Accepted Answer

A) personally observing the employees who apply the control procedures. 
B) reviewing job descriptions in the personnel department. 
C) preparing a flowchart of duties performed by personnel. 
D) performing tests to determine whether control procedures operated consistently throughout the period.

Question 19

A company policy should clearly indicate that defective merchandise returned by customers is to be delivered to the:

Accepted Answer

A) sales clerk. 
B) receiving clerk. 
C) inventory control clerk. 
D) accounts receivable clerk.

Question 20

The completeness of IT-generated sales figures can be tested by comparing the number of items listed on the daily sales report with the number of items billed on the actual invoices.This process uses:

Accepted Answer

A) control totals. 
B) validity tests. 
C) process tracing data. 
D) check digits.

Exam 7: Understanding and Assessing Internal Control