Auditing A Business Risk Approach with Cases 8th Edition By Rittenberg Test Bank

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Auditing A Business Risk Approach with Cases 8th Edition By Rittenberg Test Bank

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WITH ANSWERS
Auditing A Business Risk Approach with Cases 8th Edition By Rittenberg Test Bank

Chapter 5: Internal Control over Financial Reporting

Student: ___________________________________________________________________________

  1. 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.
    True    False

 

  1. Auditing standards require that the auditor exercise professional judgment and maintain professional skepticism throughout the planning and performance of the audit.
    True    False

 

  1. If internal controls are not enforced they are useless and can lead to waste and fraud.
    True    False

 

  1. If an organization is too lenient in its treatment of employees who committed fraud, the control environment will be seen as stronger than if the treatment were harsher.
    True    False

 

  1. Weakness in the tone at the top have been associated with most financial frauds during the past decade.
    True    False

 

  1. Virtually all major financial frauds from the past decade were associated with organizations that had weaknesses in the control environment
    True    False

 

  1. Internal control is a process designed to provide reasonable assurance regarding the achievement of the objectives of reliable financial reporting, compliance with laws and regulations and effective and efficient operations, and safeguarding of the assets.
    True    False

 

  1. The quality of an organizations internal control will affect both the audit approach and the amount of testing needed for an engagement.
    True    False

 

  1. Control activities are the policies and procedures that are established to assist in accomplishing objectives and to mitigate risks.
    True    False

 

  1. Computer controls that are pervasive and affect every computerized system are referred as application controls.
    True    False

 

  1. Control is considered to be part of corporate governance.
    True    False

 

  1. Good control means that risks are identified and dealt with effectively.
    True    False

 

  1. Investors do not place much value on the internal control of the companies in which they invest.
    True    False

 

  1. The PCAOB, in Auditing Standard No. 5, indicates that auditors should use a bottom-up approach that begins at the financial statement level.
    True    False

 

  1. Internal control is applied across all activities of the organization.
    True    False

 

  1. The more effective the quality of internal control, the lower the control risk.
    True    False

 

  1. The five major components of an organizations internal control are: the control environment, risk assessment, control activities, information and communication, and materiality.
    True    False

 

  1. A companys internal auditing practices should not be considered when assessing control risk.
    True    False

 

  1. An organizations control environment is established and maintained by the internal auditing department.
    True    False

 

  1. Authorization Procedures include that all senior members of the accounting department have the authority to record any transaction.
    True    False

 

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

 

  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.
    True    False

 

  1. An auditor is not required to obtain evidence about the design and operation of the internal controls to reduce the assessment of control risk below maximum.
    True    False

 

  1. Segregation of duties refers to the duties of authorizing a transaction, recording the transaction, and taking physical custody of assets related to the transaction.
    True    False

 

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

 

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

 

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

 

  1. When control risk is assessed at a maximum level, the auditor assumes that the internal controls are reliable in preventing or detecting material misstatements.
    True    False

 

  1. When control risk is assessed at a minimum level, the auditor assumes that the internal controls are reliable in preventing or detecting material misstatements.
    True    False

 

  1. Performing a walk-through provides an auditor an understanding of the nature of processing in important accounting applications.
    True    False

 

  1. The payroll department should be responsible for signing payroll checks.
    True    False

 

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

 

  1. The auditors preliminary assessment of control risk is based on an understanding of the control system as it has operated in the past and is designed to operate.
    True    False

 

  1. When control risk is assessed at less than maximum, the auditor must gain assurance that the control procedures are effective.
    True    False

 

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

 

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

 

  1. Transaction-oriented controls should be tested using the guidelines developed for attribute testing utilizing statistical sampling techniques.
    True    False

 

  1. Control risk can be evaluated on a scale from high to low.
    True    False

 

  1. Testing internal control for effectiveness is done in every audit.
    True    False

 

  1. Walkthroughs and inquiries are often used to obtain an understanding of internal controls.
    True    False

 

  1. The auditor should obtain an understanding of whether the clients controls sufficiently address the risk of material misstatement due to fraud.
    True    False

 

  1. The PCAOBs requirement is that documentation must be able to be interpreted by an auditor not connected to the engagement.
    True    False

 

  1. When the auditor believes the design of controls of a non-public company is effective but does not test the controls, the auditor can assess control risk as moderate in some circumstances but otherwise it should be assessed as high.
    True    False

 

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

 

  1. An external auditor provides a separate opinion on the effectiveness of internal control for large publicly traded companies.
    True    False

 

  1. 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 organizations objectives.
    True    False

 

  1. 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.
    True    False

 

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

 

  1. Internal control objectives are designed to assist the organization in assuring which of the following:
    A. the organization has  effective and efficient operations related to its overall strategy
    B. the activities of the organization are in compliance with applicable laws and regulations
    C. the assets of the organization are safeguarded from theft and fraud
    D. all of the above.

 

  1. There is a high risk, as well as a history, that fraud is instituted through which of the following:
    A. adjusting entries.
    B. closing entries.
    C. unusual journal entries.
    D. all of the above.

 

  1. The quality of an organizations internal controls affects
    A. the reliability of financial data.
    B. the ability of management to make good decisions.
    C. the ability to sustain an effective business.
    D. all of the above.

 

  1. 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

 

  1. Which of the following is not a reason that the auditor must gain an understanding of the clients internal control system?
    A. to better understand the client, its risks, and how it manages those risks.
    B. to assess control risk and identify the types of financial statement misstatements that are most likely to occur.
    C. to plan direct tests of account balances to determine if misstatements have occurred.
    D. all are reasons why auditors must gain an understanding of the clients internal control system.

 

  1. Which one of the following groups is interested in an organizations control structure?
    A. board members
    B. lenders
    C. auditors
    D. all of the above

 

  1. The tone of internal control typically originates internally with:
    A. auditors.
    B. employees.
    C. management.
    D. stockholders.

 

  1. The major components of an organizations internal control structure consist of all of the following except
    A. control risk.
    B. the control environment.
    C. risk assessment.
    D. control activities.

 

  1. What is managements primary purpose of effective internal control in an organization?
    A. Obtaining high-quality data for making good business decisions.
    B. Completion of a successful audit for the entity.
    C. Shareholder involvement in the companys success.
    D. Obtaining profitability and financial strength.

 

  1. Which one of the following components of the system of internal controls sets the tone for the organization?
    A. control risk assessment
    B. control environment
    C. information and communication
    D. monitoring

 

  1. The control environment includes all of the following except
    A. management philosophy and operating style.
    B. methods of assigning authority and responsibility.
    C. personnel policies and practices.
    D. control activities.

 

  1. Which of the following is not one of the seven underlying principles of an effective control environment as developed by COSO?
    A. integrity and ethical values.
    B. managements philosophy and operating style.
    C. authority and responsibility.
    D. information and communication.

 

  1. One of the major components of an organizations internal control structure includes:
    A. major new financing.
    B. the financial environment.
    C. risk assessment.
    D. telecommunication equipment.

 

  1. A component of COSOs internal control system concerns the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organizations objective. This component is called
    A. control activities.
    B. information and communication.
    C. monitoring.
    D. control environment.

 

  1. The PCAOB requires 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 audit of internal control.

 

  1. The control environment includes which of the following?
    A. Control activities.
    B. Management philosophy and operating style.
    C. Assessing activity level risks.
    D. Application level controls.

 

  1. Personnel policies and procedures are designed to ensure that the organization
    A. hires the right people.
    B. complies with federal and state laws in its hiring and retention decisions.
    C. has employees that are properly trained and supervised.
    D. performs all of the above.

 

  1. Management of large public companies is required to report on its internal controls with its financial statements. This report is required to include all of the following except:
    A. its responsibility for control of financial reporting.
    B. the framework used for internal control.
    C. an assessment of the effectiveness of the companys internal control
    D. the statement that the company is not required to have an audit on internal control.

 

  1. Which one of the following represents a classification of control deficiency by the PCAOB?
    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. An immaterial individual misstatement in internal control.

 

  1. Which one of the following will an audit of a companys internal control include?
    A. Reliance on clients internal controls testing.
    B. Sampling of key controls and related testing.
    C. Concluding on the accuracy of income statement balances.
    D. Design of the internal control system by the auditor.

 

  1. All of the following are pervasive computer controls except:
    A. Planning and controlling the data processing function.
    B. Controlling access to equipment, data, and programs.
    C. Ensuring data is accessible to management on a timely basis.
    D. Controlling applications development and changes to programs.

 

  1. The personnel department should be responsible for:
    A. authorization of new employees.
    B. generation of payroll checks.
    C. timekeeping.
    D. all of the above.

 

  1. If the auditor of financial statements understands internal control and assesses control risk as low, it is assumed that internal control:
    A. will be tested to support the assessment.
    B. is not required to be tested as it is considered strong.
    C. is considered relatively weak and will not be tested.
    D. has been assessed erroneously by the auditor.

 

  1. To support an assessment that control risk is low, the auditor of financial statements must:
    A. achieve the same conclusion after appropriately testing internal control.
    B. achieve the same conclusion after appropriately performing substantive procedures.
    C. perform increased substantive procedures in order to compensate for the lower rating.
    D. perform limited substantive procedures as the assessment is justified.

 

  1. Which of the following is an example of a type of control that may be tested?
    A. Interest accrued on notes payable.
    B. Cash surrender value of life insurance classified as long-term asset.
    C. A spreadsheet used to create a pivot table for the summarization of accounts receivable.
    D. Reconciliations performed monthly on accounts.

 

  1. A graphic representation of an accounting application that normally identifies key controls that are effective in achieving specific control policies and procedures is:
    A. an internal control questionnaire.
    B. a flowchart.
    C. an internal control narrative.
    D. a walk-through.

 

  1. Which of the following best represents a walk-through?
    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.

 

  1. The auditor uses a variety of procedures to test whether controls effectively. These procedures may all of the following except:
    A. Take a sample of purchase orders and trace them through the system to determine whether (a) there was proper review of credit, and (b) credit authorization or denial was proper.
    B. Take a sample of recorded items (accounts payable) and send a positive confirmation to the related vendors to determine whether the balance is properly stated.
    C. Take a sample of recorded items (accounts receivable) and trace back to the credit approval process to determine that it was performed appropriately.
    D. Use a computer audit program to read all accounts receivable and develop a print-
    out of all account balances that exceed their credit authorization.

 

  1. Which of the following would result in an adverse report issued by an auditor on an audit of internal control?
    A. The control risk is assessed at a lower level.
    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 in a timely manner.

 

  1. Physical controls to safeguard assets would include:
    A. hiring only trustworthy cashiers
    B. segregation of duties
    C. locks on the warehouse doors
    D. safety audits on the production-line

 

  1. 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 is the course of action that the auditor will most likely 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.

 

  1. 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.

 

  1. A material weakness in the design of the operation of controls discovered in an audit of internal controls results in:
    A. A qualified management letter.
    B. An adverse report on internal controls.
    C. The firing of the auditors.
    D. Adjusting audit journal entries.

 

  1. An auditor obtains evidence of the internal control over the accounting system by all of the following except:
    A. performing walkthroughs of the accounting system.
    B. making inquiries of banks and attorneys.
    C. reviewing system flowcharts.
    D. taking plant and operational tours.

 

  1. Which of the following will an auditor perform to better understand a clients internal control over accounting systems?
    A. An auditor will re-test 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.

 

  1. Internal control is a process affected by the organizations 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.

 

  1. Which of the following will an auditor use to document 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.

 

  1. Which is clearly a test of control?
    A. Confirmation to a customer of an accounts receivable balance.
    B. Examination of a sample of purchase order records for electronic, authenticated, authorization.
    C. Observing the controllers use of company owned equipment.
    D. Sending a letter to the clients attorney to determine litigation that is pending between plaintiff and the defendant.

 

  1. An auditors test of transaction processing whereby the auditor is evaluating both the operation and effectiveness of controls and the correctness and completeness of processing and posting to an account balance is:
    A. a test of controls.
    B. a substantive test.
    C. a dual-purpose test.
    D. an analytical review procedure.

 

  1. An auditor of a client company that has multiple locations must:
    A. increase control risk to moderate or high.
    B. conclude that independent business units of the consolidation are immaterial.
    C. issue multiple audit reports for each segment of the company.
    D. determine the universal application of controls across the company.

 

  1. In order to further understand internal control, an auditor may use inquiry methods by:
    A. interviewing key employees to gain further insight into the internal control environment.
    B. observing the safeguarding of assets by checking locked doors and safes.
    C. tracing a transaction from the boundary of the organization through to the final reporting.
    D. documenting thoroughly the internal control through the use of narratives.

 

  1. In a large company, who usually actively performs the monitoring of internal control?
    A. Internal auditors
    B. PCAOB
    C. CFO
    D. External auditors

 

  1. Which of the following is not true of internal control as defined by COSO?
    A. it is narrower than internal control over financial reporting.
    B. it is a process that includes all elements of internal control working together.
    C. it includes all the people in the organization.
    D. it starts at the top of the organization in setting a tone.

 

  1. Which of the following is not true of the concepts that are embodied in the COSO framework of internal control?
    A. Internal control relates to the organizations objectives.
    B. The six components of internal control are logically and operationally intertwined.
    C. Internal control applies across all activities of the organization.
    D. All of the above are important concepts

 

  1. The major components of an organizations internal controls consists of all of the following except
    A. risk assessment.
    B. control environment.
    C. control activities.
    D. control risk

 

  1. Which of the following is part of the control environment of an organization?
    A. managements philosophy and operating style.
    B. organizational structure.
    C. human resources.
    D. all of the above

 

  1. When control risk is assessed as high the auditor needs to:
    A. perform more tests of controls.
    B. perform more direct testing of account balances.
    C. perform significantly fewer tests of controls.
    D. perform significantly less testing of account balances.

 

  1. Which of the following is a detective control designed to detect the occurrence of a misstatement?
    A. access controls.
    B. edit controls.
    C. reconciliations.
    D. all of the above are detective controls.

 

  1. A component of COSOs internal control system concerns the process that provides feedback on the effectiveness of the other components of internal control. This component is called:
    A. information and communication.
    B. monitoring.
    C. control activities.
    D. risk assessment.

 

  1. Internal control

    Define the term internal control and identify the major components of an internal control system.

 

 

 

 

 

  1. Control environment

    One of the elements of an organizations control system is the control environment. Identify at least four factors that the auditor should consider when reviewing the control environment and discuss how the auditor would relate this review to the assessment of control risk.

 

 

 

 

 

  1. Understanding internal control

    The auditor identifies four phases or steps in the control risk assessment procedure. Phase I involves obtaining an understanding of the internal control structure. Identify at least four methods the auditor might use in gathering the information and briefly describe each one.

 

 

 

 

 

  1. Documenting internal control understanding

    Auditors must document their understanding and evaluation of the internal control system. Identify and briefly describe the three most commonly used methods for such documentation.

 

 

 

 

 

  1. Integrated audit

    Explain the application of an integrated audit as it relates to regulation. Discuss the reasons that this integrated approach may occur.

 

 

 

 

 

  1. Assessing control risk

    Discuss the impact of control risk assessment on an audit of the financial statements.

 

 

 

 

 

  1. Documenting internal control

    Discuss how an auditor would utilize a clients flowchart documentation in the audit of financial statements.

 

 

 

 

 

  1. COSO: A Framework for Internal Control

    What is internal control as defined by COSO? Also explain, the other elements of the definition that are important to internal control

 

 

 

 

 

  1. Pervasive control activities

    Discuss what pervasive control activities are and provide an example of at least three.

 

 

 

 

 

  1. Auditor Evaluation of Internal Controls

    What are the steps in integrated audit process?

 

 

 

 

 

  1. IT Controls Integrated into Internal Control Evaluations

    Explain Input Controls

 

 

 

 

 

  1. Relationship of the five internal control components

    The five components of the COSO internal control system are conceptually and logically integrated. List the five components of the model and describe how they are integrated with each other in the internal control process.

    Use the following format:

Components Description
   
   
   
   
   
   
   
   

 

 

 

 

 

 

 

 

Chapter 5: Internal Control over Financial Reporting Key

  1. 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.
    FALSE

 

  1. Auditing standards require that the auditor exercise professional judgment and maintain professional skepticism throughout the planning and performance of the audit.
    TRUE

 

  1. If internal controls are not enforced they are useless and can lead to waste and fraud.
    TRUE

 

  1. If an organization is too lenient in its treatment of employees who committed fraud, the control environment will be seen as stronger than if the treatment were harsher.
    FALSE

 

  1. Weakness in the tone at the top have been associated with most financial frauds during the past decade.
    TRUE

 

  1. Virtually all major financial frauds from the past decade were associated with organizations that had weaknesses in the control environment
    TRUE

 

  1. Internal control is a process designed to provide reasonable assurance regarding the achievement of the objectives of reliable financial reporting, compliance with laws and regulations and effective and efficient operations, and safeguarding of the assets.
    TRUE

 

  1. The quality of an organizations internal control will affect both the audit approach and the amount of testing needed for an engagement.
    TRUE

 

  1. Control activities are the policies and procedures that are established to assist in accomplishing objectives and to mitigate risks.
    TRUE

 

  1. Computer controls that are pervasive and affect every computerized system are referred as application controls.
    FALSE

 

  1. Control is considered to be part of corporate governance.
    TRUE

 

  1. Good control means that risks are identified and dealt with effectively.
    TRUE

 

  1. Investors do not place much value on the internal control of the companies in which they invest.
    FALSE

 

  1. The PCAOB, in Auditing Standard No. 5, indicates that auditors should use a bottom-up approach that begins at the financial statement level.
    FALSE

 

  1. Internal control is applied across all activities of the organization.
    TRUE

 

  1. The more effective the quality of internal control, the lower the control risk.
    TRUE

 

  1. The five major components of an organizations internal control are: the control environment, risk assessment, control activities, information and communication, and materiality.
    FALSE

 

  1. A companys internal auditing practices should not be considered when assessing control risk.
    FALSE

 

  1. An organizations control environment is established and maintained by the internal auditing department.
    FALSE

 

  1. Authorization Procedures include that all senior members of the accounting department have the authority to record any transaction.
    FALSE

 

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

 

  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.
    TRUE

 

  1. An auditor is not required to obtain evidence about the design and operation of the internal controls to reduce the assessment of control risk below maximum.
    FALSE

 

  1. Segregation of duties refers to the duties of authorizing a transaction, recording the transaction, and taking physical custody of assets related to the transaction.
    TRUE

 

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

 

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

 

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

 

  1. When control risk is assessed at a maximum level, the auditor assumes that the internal controls are reliable in preventing or detecting material misstatements.
    FALSE

 

  1. When control risk is assessed at a minimum level, the auditor assumes that the internal controls are reliable in preventing or detecting material misstatements.
    TRUE

 

  1. Performing a walk-through provides an auditor an understanding of the nature of processing in important accounting applications.
    TRUE

 

  1. The payroll department should be responsible for signing payroll checks.
    FALSE

 

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

 

  1. The auditors preliminary assessment of control risk is based on an understanding of the control system as it has operated in the past and is designed to operate.
    TRUE

 

  1. When control risk is assessed at less than maximum, the auditor must gain assurance that the control procedures are effective.
    TRUE

 

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

 

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

 

  1. Transaction-oriented controls should be tested using the guidelines developed for attribute testing utilizing statistical sampling techniques.
    TRUE

 

  1. Control risk can be evaluated on a scale from high to low.
    TRUE

 

  1. Testing internal control for effectiveness is done in every audit.
    FALSE

 

  1. Walkthroughs and inquiries are often used to obtain an understanding of internal controls.
    TRUE

 

  1. The auditor should obtain an understanding of whether the clients controls sufficiently address the risk of material misstatement due to fraud.
    TRUE

 

  1. The PCAOBs requirement is that documentation must be able to be interpreted by an auditor not connected to the engagement.
    TRUE

 

  1. When the auditor believes the design of controls of a non-public company is effective but does not test the controls, the auditor can assess control risk as moderate in some circumstances but otherwise it should be assessed as high.
    TRUE

 

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

 

  1. An external auditor provides a separate opinion on the effectiveness of internal control for large publicly traded companies.
    TRUE

 

  1. 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 organizations objectives.
    FALSE

 

  1. 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.
    TRUE

 

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

 

  1. Internal control objectives are designed to assist the organization in assuring which of the following:
    A.the organization has  effective and efficient operations related to its overall strategy
    B. the activities of the organization are in compliance with applicable laws and regulations
    C. the assets of the organization are safeguarded from theft and fraud
    D. all of the above.

 

  1. There is a high risk, as well as a history, that fraud is instituted through which of the following:
    A.adjusting entries.
    B. closing entries.
    C. unusual journal entries.
    D. all of the above.

 

  1. The quality of an organizations internal controls affects
    A.the reliability of financial data.
    B. the ability of management to make good decisions.
    C. the ability to sustain an effective business.
    D. all of the above.

 

  1. 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

 

  1. Which of the following is not a reason that the auditor must gain an understanding of the clients internal control system?
    A.to better understand the client, its risks, and how it manages those risks.
    B. to assess control risk and identify the types of financial statement misstatements that are most likely to occur.
    C. to plan direct tests of account balances to determine if misstatements have occurred.
    D. all are reasons why auditors must gain an understanding of the clients internal control system.

 

  1. Which one of the following groups is interested in an organizations control structure?
    A.board members
    B. lenders
    C. auditors
    D. all of the above

 

  1. The tone of internal control typically originates internally with:
    A.auditors.
    B. employees.
    C. management.
    D. stockholders.

 

  1. The major components of an organizations internal control structure consist of all of the following except
    A. control risk.
    B. the control environment.
    C. risk assessment.
    D. control activities.

 

  1. What is managements primary purpose of effective internal control in an organization?
    A.Obtaining high-quality data for making good business decisions.
    B. Completion of a successful audit for the entity.
    C. Shareholder involvement in the companys success.
    D. Obtaining profitability and financial strength.

 

  1. Which one of the following components of the system of internal controls sets the tone for the organization?
    A.control risk assessment
    B. control environment
    C. information and communication
    D. monitoring

 

  1. The control environment includes all of the following except
    A. management philosophy and operating style.
    B. methods of assigning authority and responsibility.
    C. personnel policies and practices.
    D. control activities.

 

  1. Which of the following is not one of the seven underlying principles of an effective control environment as developed by COSO?
    A.integrity and ethical values.
    B. managements philosophy and operating style.
    C. authority and responsibility.
    D. information and communication.

 

  1. One of the major components of an organizations internal control structure includes:
    A.major new financing.
    B. the financial environment.
    C. risk assessment.
    D. telecommunication equipment.

 

  1. A component of COSOs internal control system concerns the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organizations objective. This component is called
    A.control activities.
    B. information and communication.
    C. monitoring.
    D. control environment.

 

  1. The PCAOB requires 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 audit of internal control.

 

  1. The control environment includes which of the following?
    A.Control activities.
    B. Management philosophy and operating style.
    C. Assessing activity level risks.
    D. Application level controls.

 

  1. Personnel policies and procedures are designed to ensure that the organization
    A.hires the right people.
    B. complies with federal and state laws in its hiring and retention decisions.
    C. has employees that are properly trained and supervised.
    D. performs all of the above.

 

  1. Management of large public companies is required to report on its internal controls with its financial statements. This report is required to include all of the following except:
    A.its responsibility for control of financial reporting.
    B. the framework used for internal control.
    C. an assessment of the effectiveness of the companys internal control
    D. the statement that the company is not required to have an audit on internal control.

 

  1. Which one of the following represents a classification of control deficiency by the PCAOB?
    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. An immaterial individual misstatement in internal control.

 

  1. Which one of the following will an audit of a companys internal control include?
    A.Reliance on clients internal controls testing.
    B. Sampling of key controls and related testing.
    C. Concluding on the accuracy of income statement balances.
    D. Design of the internal control system by the auditor.

 

  1. All of the following are pervasive computer controls except:
    A. Planning and controlling the data processing function.
    B. Controlling access to equipment, data, and programs.
    C. Ensuring data is accessible to management on a timely basis.
    D. Controlling applications development and changes to programs.

 

  1. The personnel department should be responsible for:
    A.authorization of new employees.
    B. generation of payroll checks.
    C. timekeeping.
    D. all of the above.

 

  1. If the auditor of financial statements understands internal control and assesses control risk as low, it is assumed that internal control:
    A.will be tested to support the assessment.
    B. is not required to be tested as it is considered strong.
    C. is considered relatively weak and will not be tested.
    D. has been assessed erroneously by the auditor.

 

  1. To support an assessment that control risk is low, the auditor of financial statements must:
    A.achieve the same conclusion after appropriately testing internal control.
    B. achieve the same conclusion after appropriately performing substantive procedures.
    C. perform increased substantive procedures in order to compensate for the lower rating.
    D. perform limited substantive procedures as the assessment is justified.

 

  1. Which of the following is an example of a type of control that may be tested?
    A.Interest accrued on notes payable.
    B. Cash surrender value of life insurance classified as long-term asset.
    C. A spreadsheet used to create a pivot table for the summarization of accounts receivable.
    D. Reconciliations performed monthly on accounts.

 

  1. A graphic representation of an accounting application that normally identifies key controls that are effective in achieving specific control policies and procedures is:
    A.an internal control questionnaire.
    B. a flowchart.
    C. an internal control narrative.
    D. a walk-through.

 

  1. Which of the following best represents a walk-through?
    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.

 

  1. The auditor uses a variety of procedures to test whether controls effectively. These procedures may all of the following except:
    A. Take a sample of purchase orders and trace them through the system to determine whether (a) there was proper review of credit, and (b) credit authorization or denial was proper.
    B. Take a sample of recorded items (accounts payable) and send a positive confirmation to the related vendors to determine whether the balance is properly stated.
    C. Take a sample of recorded items (accounts receivable) and trace back to the credit approval process to determine that it was performed appropriately.
    D. Use a computer audit program to read all accounts receivable and develop a print-
    out of all account balances that exceed their credit authorization.

 

  1. Which of the following would result in an adverse report issued by an auditor on an audit of internal control?
    A.The control risk is assessed at a lower level.
    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 in a timely manner.

 

  1. Physical controls to safeguard assets would include:
    A.hiring only trustworthy cashiers
    B. segregation of duties
    C. locks on the warehouse doors
    D. safety audits on the production-line

 

  1. 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 is the course of action that the auditor will most likely 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.

 

  1. 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.

 

  1. A material weakness in the design of the operation of controls discovered in an audit of internal controls results in:
    A.A qualified management letter.
    B. An adverse report on internal controls.
    C. The firing of the auditors.
    D. Adjusting audit journal entries.

 

  1. An auditor obtains evidence of the internal control over the accounting system by all of the following except:
    A. performing walkthroughs of the accounting system.
    B. making inquiries of banks and attorneys.
    C. reviewing system flowcharts.
    D. taking plant and operational tours.

 

  1. Which of the following will an auditor perform to better understand a clients internal control over accounting systems?
    A.An auditor will re-test 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.

 

  1. Internal control is a process affected by the organizations 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.

 

  1. Which of the following will an auditor use to document 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.

 

  1. Which is clearly a test of control?
    A.Confirmation to a customer of an accounts receivable balance.
    B. Examination of a sample of purchase order records for electronic, authenticated, authorization.
    C. Observing the controllers use of company owned equipment.
    D. Sending a letter to the clients attorney to determine litigation that is pending between plaintiff and the defendant.

 

  1. An auditors test of transaction processing whereby the auditor is evaluating both the operation and effectiveness of controls and the correctness and completeness of processing and posting to an account balance is:
    A.a test of controls.
    B. a substantive test.
    C. a dual-purpose test.
    D. an analytical review procedure.

 

  1. An auditor of a client company that has multiple locations must:
    A.increase control risk to moderate or high.
    B. conclude that independent business units of the consolidation are immaterial.
    C. issue multiple audit reports for each segment of the company.
    D. determine the universal application of controls across the company.

 

  1. In order to further understand internal control, an auditor may use inquiry methods by:
    A.interviewing key employees to gain further insight into the internal control environment.
    B. observing the safeguarding of assets by checking locked doors and safes.
    C. tracing a transaction from the boundary of the organization through to the final reporting.
    D. documenting thoroughly the internal control through the use of narratives.

 

  1. In a large company, who usually actively performs the monitoring of internal control?
    A.Internal auditors
    B. PCAOB
    C. CFO
    D. External auditors

 

  1. Which of the following is not true of internal control as defined by COSO?
    A.it is narrower than internal control over financial reporting.
    B. it is a process that includes all elements of internal control working together.
    C. it includes all the people in the organization.
    D. it starts at the top of the organization in setting a tone.

 

  1. Which of the following is not true of the concepts that are embodied in the COSO framework of internal control?
    A.Internal control relates to the organizations objectives.
    B. The six components of internal control are logically and operationally intertwined.
    C. Internal control applies across all activities of the organization.
    D. All of the above are important concepts

 

  1. The major components of an organizations internal controls consists of all of the following except
    A. risk assessment.
    B. control environment.
    C. control activities.
    D. control risk

 

  1. Which of the following is part of the control environment of an organization?
    A.managements philosophy and operating style.
    B. organizational structure.
    C. human resources.
    D. all of the above

 

  1. When control risk is assessed as high the auditor needs to:
    A.perform more tests of controls.
    B. perform more direct testing of account balances.
    C. perform significantly fewer tests of controls.
    D. perform significantly less testing of account balances.

 

  1. Which of the following is a detective control designed to detect the occurrence of a misstatement?
    A.access controls.
    B. edit controls.
    C. reconciliations.
    D. all of the above are detective controls.

 

  1. A component of COSOs internal control system concerns the process that provides feedback on the effectiveness of the other components of internal control. This component is called:
    A.information and communication.
    B. monitoring.
    C. control activities.
    D. risk assessment.

 

  1. Internal control

    Define the term internal control and identify the major components of an internal control system.

Internal control is defined as a process effected by management to provide reasonable assurance that the following objectives are met:

1. the reliability of financial reporting;
2. compliance with applicable laws and regulations;
3. effectiveness and efficiency of operations; and
4. the safeguarding of assets.
   

The major components of internal control are:

1. control environment;
2. risk assessment;
3. control activities;
4. information and communication; and
5. monitoring.
   

 

  1. Control environment

    One of the elements of an organizations control system is the control environment. Identify at least four factors that the auditor should consi

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