Audit Test 2


Quiz on Audit Test 2, created by taylordgarman on 27/03/2014.
Quiz by taylordgarman, updated more than 1 year ago
Created by taylordgarman almost 10 years ago

Resource summary

Question 1

Directors, management, external auditors, and internal auditors all play important roles in creating proper control processes. Senior management is primarily responsible for
  • Establishing risk management and control processes
  • Reviewing the reliability and integrity of financial and operational information
  • Ensuring that external and internal auditors oversee the administration of risk management and control processes
  • Implementing and monitoring controls designed by the board of directors

Question 2

In an audit of financial statements, and auditor's primary consideration regarding a control is whether it
  • Reflects management's philosophy and operating style
  • Affects management's financial statement assertions
  • Provides adequate safeguards over access to assets
  • Enhances management's decision-making processes

Question 3

Internal control cannot be designed to provide reasonable assurance regarding the achievement of objectives converning
  • Reducing the cost of an external audit
  • Elimination of all fraud
  • Availability of reliable data for decision-making purposes and protection of important documents and records
  • Compliance with the Foreign Corrupt Practices Act of 1977

Question 4

The primary reason to establish internal control is to
  • Safeguard the resources of the organization
  • Provide reasonable assurance that the objectives of the organization are achieved
  • Encourage compliance with organizational objectives
  • Ensure the accuracy, reliability, and timeliness of information

Question 5

Effective internal control
  • Reduces the need for management to review exception reports on a day-to-day basis
  • Eliminates risk and potential loss to the organization
  • Cannot be circumvented by management
  • Is unaffected by changing circumstances and conditions encountered by the organization

Question 6

Internal control is a function of management, and effective control is based upon the concept of charge and discharge of responsibility and duty. Which of the following is one of the overriding principles of internal control?
  • Responsibility for accounting and financial duties should be assigned to one responsible officer
  • Responsibility for the performance of each duty must be fixed
  • Responsibility for the accounting duties must be borne by the audit committee
  • Responsibility for accounting must be assigned only to bonded employees

Question 7

The PCAOB's AS No. 5 states that internal controls may be preventive or detective. Which of the following controls is preventive?
  • Requiring two persons to open mail
  • Reconciling the accounts receivable subsidiary file with the control account
  • Using batch totals
  • Preparing bank reconciliations

Question 8

Which of the following statements about internal control is true?
  • Properly maintained internal control reasonably ensures that collusion among employees cannot occur
  • The establishment and maintenance of internal controls are important responsibilities of the internal auditor
  • Exceptionally effective internal control is enough for the auditor to eliminate substantive procedures on a significant account balance
  • A limitation of internal control is that management makes judgments about the extent of controls it implements

Question 9

Internal controls are designed to provide reasonable assurance that
  • Material errors or fraud will be prevented, or detected and corrected, within a timely period by employees in the course of performing their assigned duties
  • Management's plans have not been circumvented by worker collusion
  • The internal auditing department's guidance and oversight of management's performance is accomplished economically and efficiently
  • Management's planning, organizing, and directing processes are properly evaluated

Question 10

The design or operation of a control may not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. According to AU-C 265, this circumstance is a
  • Material weakness
  • Significant deficiency
  • Control deficiency
  • Critical deficiency

Question 11

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control?
  • Incompatible duties
  • Management override
  • Mistakes in judgement
  • Collusion among employees

Question 12

Internal control can provide only reasonable assurance of achieving entity objectives. One factor limiting the likelihood of achieving those objectives in a small entity is that
  • The auditor's primary responsibility is the detection of fraud
  • The board of directors is active and independent
  • Effective segregation of duties may not be feasible
  • Management monitors internal control

Question 13

An entity should consider the cost of a control in relationship to the risk. Which of the following controls best reflects this philosophy for a large dollar investment in heavy machine tools?
  • Conducting a weekly physical inventory
  • Placing security guards at every entrance 24 hours a day
  • Imprinting a controlled identification number on each tool
  • Having all dispositions approved by the vice president of sales

Question 14

The organization chart is a graphic representation of the
  • Power structure
  • Communications channels
  • Locus of decision making
  • Formal authority structure

Question 15

Which of the following best describe the interrelated components of internal control?
  • Organizational structure, management philosophy, and planning
  • Control environment; risk assessment process; control activities; the information system, including related business processes; and monitoring of controls
  • Risk assessment process, backup facilities, responsibility accounting, and natural laws
  • Assignment of authority and responsibility, management philosophy, and organizational structure

Question 16

Control activities constitute one of the five components of internal control. Control activities do not encompass
  • Performance reviews
  • Reconciliations
  • Physical controls
  • An internal auditing function

Question 17

Monitoring of controls is an important component of internal control. Which of the following items is not an example of monitoring?
  • Management regularly compares divisional performance with budgets for the division
  • Data processing management regularly generates exception reports for unusual transactions or volumes of transactions and follows up with investigation as to causes
  • Data processing management regularly reconciles batch control totals for items processed with batch controls for items submitted
  • Management has asked internal auditing to perform regular audits of the controls over cash processing

Question 18

Control activities include physical controls over access to and use of assets and records. A departure from the purpose of such procedures is that
  • Access to the safe-deposit box requires two officers
  • Only storeroom personnel and line supervisors have access to the raw materials storeroom
  • The mail clerk compiles a list of the checks received in the incoming mail
  • Only salespersons and sales supervisors use sales department vehicles

Question 19

Basic to a proper control environment are the quality and integrity of personnel who must perform the prescribed procedures. Which is not a factor in providing for competent personnel?
  • Segregation of duties
  • Hiring practices
  • Training programs
  • Performance evaluations

Question 20

Proper segregation of duties reduces the opportunities for persons to be in positions to both
  • Journalize entries and prepare financial statements
  • Record cash receipts and cash disbursements
  • Establish internal control and authorize transactions
  • Perpetrate and conceal errors or fraud

Question 21

Management's aggressive attitude toward financial reporting and its emphasis on meeting projected profit goals most liely would significantly influence an entity's control environment when
  • The audit committee is active in overseeing the entity's financial reporting policies
  • External policies established by parties outside the entity affect its accounting practices
  • Management is dominated by one individual who is also a shareholder
  • Internal auditors have direct access to the board of directors and entity management

Question 22

It is important for the auditor to consider the competence of the audit client's employees because their competence bears directly and importantly upon the
  • Cost-benefit relationship of internal control
  • Achievement of the objectives of internal control
  • Comparison of recorded accountability with assets
  • Timing of the tests to be performed

Question 23

Transaction authorization within an organization may be specific transaction authorization is the
  • Setting of automatic reorder points for material or merchandise
  • Approval of a detailed construction budget for a warehouse
  • Establishment of requirements to be met in determining a customer's credit limits
  • Establishment of sales prices for products to be sold to any customer

Question 24

A proper segregation of duties requires that an individual
  • Authorizing a transaction records it
  • Authorizing a transaction maintain custody of the asset that resulted from the transaction
  • Maintaining custody of an asset be entitled to access the accounting records for the asset
  • Recording a transaction not compare the accounting record of the asset with the asset itself

Question 25

A small private entity may use less formal means to ensure that internal control objectives are achieved. For example, extensive accounting procedures, sophisticated accounting records, or formal controls are least likely to be needed if
  • Management is closely involved in operations
  • The entity is involved in complex transactions
  • The entity is subject to legal or regulatory requirements also found in larger entities
  • Financial reporting objectives have been established

Question 26

If internal control is properly designed, the same employee may be permitted to
  • Receive and deposit checks and also approve write-offs of customer accounts
  • Approve vouchers for payment and also sign checks
  • Reconcile the bank statements and also receive and deposit cash
  • Sign checks and also cancel supporting documents

Question 27

The frequency of the comparison of recorded accountability with assets (for the purpose of safeguarding assets) should be determined by
  • The amount of assets independent of the cost of the comparison
  • The nature and amount of the asset and the cost of making the comparison
  • The cost of the comparison and whether the susceptibility to loss results from errors of fraud
  • The auditor in consultation with client management

Question 28

Organizational charts are useful to an independent external auditor because they
  • Depict all lines of organizational communication
  • Provide a starting point for assessing the risk of material misstatement
  • Ensure the proper division of responsibilities
  • Are essential to effective internal control

Question 29

Audit evidence concerning segregation of duties ordinarily is best obtained by
  • Performing tests of transactions that corroborate management's financial statement assertions
  • Observing the employees as they apply specific controls
  • Obtaining a flowchart of activities performed by available personnel
  • Developing audit objectives that reduce control risk

Question 30

For which of the following transactions would the auditor ordinarily have the greatest difficulty in obtaining assurance that inernal control objectives are met?
  • Collection of interest and dividends by a retailer
  • Acquisition of production equipment by a manufacturer
  • Collection of contributions from the public by a not-for-profit organization
  • Collection of credit sales by a retailer

Question 31

An independent auditor of financial statements might consider the procedures performed by the internal auditors because
  • They are employees whose work must be reviewed during substantive testing
  • They are employees whose work may affect the nature, timing, and extent of audit procedures
  • Their work affects the cost-benefit trade-off
  • Their degree of independence may be inferred from the nature of their work

Question 32

Although substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because
  • Substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested
  • The records may be accurate even though they are maintained by a person who performs incompatible functions
  • Substantive procedures relate to the entire period under audit, but tests of controls ordinarily are confined to the period during which the auditor is on the client's premises
  • Many computerized procedures leave no audit trail of who performed them, so substantive procedures may necessarily by limited to inquires and observation of office personnel

Question 33

As part of understanding internal control relevant to the audit of a nonissuer, an auditor does not need to
  • Consider factors that affect the risks of material misstatement
  • Determine whether controls have been implemented
  • Identify the risks of material misstatement
  • Obtain knowledge about the operating effectiveness of internal control

Question 34

After obtaining an understanding of the entity and its environment, including its internal controls, the auditor assesses
  • The need to apply auditing standards
  • Detection risk to determine the acceptable level of inherent risk
  • Detection risk and inherent risk to determine the acceptable level of control risk
  • Control risk and inherent risk to determine the acceptable level of detection risk

Question 35

The primary purpose of obtaining an understanding of the entity and its environment, including its internal control, is to provide an auditor with
  • Evidence to use in reducing detection risk
  • A frame of reference within which to plan the audit
  • A basis for modifying tests of controls
  • Information necessary to prepare flowcharts

Question 36

The ultimate purpose of understanding internal control is to contribute to the auditor's evaluation of the risk that
  • Tests of controls may fail to identify controls relevant to assertions
  • Material misstatements may exist in the financial statements
  • Specified controls requiring segregation of duties may be circumvented by collusion
  • Entity policies may be overridden by senior management

Question 37

A CPA's understanding of internal control in a financial statement audit of a nonissuer
  • Is usually more limited than that made in an examination of internal control integrated with an audit of financial statements
  • Is usually more extensive than that made in an examination of internal control integrated with an audit of financial statements
  • Will usually be identical to that made in an examination of internal control integrated with an audit of financial statements
  • Will usually result in a report on the effectiveness of internal control

Question 38

A secondary result of the auditor's understanding of internal control in an audit of a nonissuer's financial statements is that the understanding may
  • Provide a basis for designing the nature, timing, and extent of further audit procedures
  • Assure that management's procedures to detect all fraud are properly functioning
  • Bring to the auditor's attention possible control deficiencies
  • Develop evidence to support the assessed risks of material misstatement

Question 39

A financial statement auditor is considering internal control for a client with an information system that makes extensive use of information technology. Which of the following statements related to the understanding of internal control for this client is false?
  • A lack of control at a single user entry point might compromise the security of a single database
  • The auditor may find it necessary to have an expectation of the operating effectiveness of controls for certain relevant assertions
  • The auditor must possess all the information technology skills necessary to complete the engagement
  • Because of the inherent consistency of computer processing, the auditor may be able to reduce the extent of testing an automated control

Question 40

In obtaining an understanding of internal control, the auditor may trace several transactions through the control process, including how the transactions interface with an service organizations whose services are part of the information system. The primary purpose of this task is to.
  • Replace substantive procedures
  • Determine whether the controls have been implemented
  • Determine the effectiveness of the control procedures
  • Detect fraud

Question 41

When obtaining an understanding of an entity's internal control, an auditor should concentrate on the substance of controls rather than their form because
  • The controls may be operating effectively but may not be flow charted
  • Management may establish appropriate controls but not act on them
  • The controls may be so inappropriate that no reliance is contemplated by the auditor
  • Management may implement controls with costs in excess of benefits

Question 42

In obtaining an understanding of a non-issuer's internal control in a financial statement audit, an auditor is not obligated to
  • Determine whether the controls have been implemented
  • Perform procedures to understand the design of controls
  • Document the understanding of the entity's internal control components
  • Search for significant deficiencies in the operation of internal control

Question 43

Which of the following statements regarding auditor documentation of the client's internal control is true?
  • Documentation must include flowcharts
  • Documentation must include procedural write-ups
  • No documentation is necessary, although it is desirable
  • No one particular form of documentation is necessary, and the extent of documentation may vary

Question 44

An auditor should obtain an understanding of an entity's information system, including
  • Safeguards used to limit access to computer facilities
  • Process used to prepare significant accounting estimates
  • Procedures used to assure the proper supervision of staff
  • Programs and controls intended to address the risks of fraud

Question 45

The auditor's understanding of internal control is documented to substantiate
  • Conformity of the accounting records with the applicable reporting framework
  • Compliance with auditing standards
  • Adherence to procedures for economic, effective, and efficient management decision making
  • The fairness of the financial statement presentation

Question 46

Which of the following is not a medium that can normally be used by an auditor to record information concerning a client's internal control?
  • Narrative memorandum
  • Procedures manual
  • Flowchart
  • Checklists

Question 47

Which of the following statements indicates the wrong way to use an internal control questionnaire?
  • Clarifying all answers with written remarks and explanations
  • Filling out the questionnaire during an interview with the person who has responsibility for the area that is being audited
  • Constructing the questionnaire so that no response requires attention
  • Supplementing the completed questionnaire with a narrative description or flowchart

Question 48

A well-designed internal control questionnaire should
  • Elicit "yes" or "no" responses rather than narrative responses and be organized by department
  • Be a sufficient source of data for assessment of control risk
  • Help evaluate the effectiveness of internal control
  • Be independent of the objectives of the audit

Question 49

In gaining an understanding of an issuer's internal control, an auditor would do all the following except
  • Inspect company documents
  • Observe employees
  • Perform a walk through of the transaction process
  • Send external confirmations

Question 50

Regardless of the nature of the client's information processing system, the auditor must consider internal control. In a computer environment, the auditor must, at a minimum, have
  • A basic familiarity with the computer's operating system
  • A sufficient understanding of the entire computer system
  • An expertise in computer systems analysis
  • A background in programming procedures
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