Question 1

Which of the following would most likely be classified as a material weakness?

Accepted Answer

A) Absence of appropriate separation of duties. 
B) Absence of appropriate reviews and approvals of transactions. 
C) Evidence of failure of control activities. 
D) Ineffective oversight of the financial reporting process by the company's audit committee. 
A) Absence of appropriate separation of duties. 
B) Absence of appropriate reviews and approvals of transactions. 
C) Evidence of failure of control activities. 
D) Ineffective oversight of the financial reporting process by the company's audit committee.

Question 2

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?

Accepted Answer

A) Distributing paychecks directly to department store employees. 
B) Setting the pay rate for departmental employees. 
C) Hiring employees and authorizing them to be added to payroll. 
D) Approving a summary of hours each employee worked during the pay period. 
A) Distributing paychecks directly to department store employees. 
B) Setting the pay rate for departmental employees. 
C) Hiring employees and authorizing them to be added to payroll. 
D) Approving a summary of hours each employee worked during the pay period.

Question 3

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?

Accepted Answer

A) Disclosing lack of segregation of duties to the external auditors during the annual review. 
B) Replacing personnel every three or four years. 
C) Requiring accountants to pass a yearly background check. 
D) Allowing for greater management oversight of incompatible activities. 
A) Disclosing lack of segregation of duties to the external auditors during the annual review. 
B) Replacing personnel every three or four years. 
C) Requiring accountants to pass a yearly background check. 
D) Allowing for greater management oversight of incompatible activities.

Question 4

Assessing control risk at below the maximum level most likely would involve:

Accepted Answer

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

Question 5

List and explain briefly the phases of an internal control evaluation.

Accepted Answer

Phase 1: Understanding and document the

Question 6

Which of the following is not an objective of internal controls over financial reporting as defined by the Sarbanes-Oxley Act?

Accepted Answer

A) Policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant. 
B) Policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant. 
C) Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations. 
D) Policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements. 
A) Policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant. 
B) Policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant. 
C) Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations. 
D) Policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements.

Question 7

Control strengths and weaknesses should be documented in audit documentation, sometimes called:

Accepted Answer

A) questionnaires, narratives, and flowcharts. 
B) bridge working papers. 
C) communications of significant deficiencies. 
D) internal control letters. 
A) questionnaires, narratives, and flowcharts. 
B) bridge working papers. 
C) communications of significant deficiencies. 
D) internal control letters.

Question 8

The appropriate separation of duties does not include:

Accepted Answer

A) authorization to execute transactions. 
B) recording of transactions. 
C) custody of assets involved in transactions. 
D) data preparation. 
A) authorization to execute transactions. 
B) recording of transactions. 
C) custody of assets involved in transactions. 
D) data preparation.

Question 9

An audit team's responsibility would not include:

Accepted Answer

A) designing client's internal controls. 
B) documentation of understanding of a client's internal controls. 
C) communicating internal control deficiencies. 
D) assessing the effectiveness of a client's internal controls. 
A) designing client's internal controls. 
B) documentation of understanding of a client's internal controls. 
C) communicating internal control deficiencies. 
D) assessing the effectiveness of a client's internal controls.

Question 10

What constitutes a material weakness?

Accepted Answer

A material weakness in internal control

Question 11

Explain the different opinions that auditors can issue for an entity's internal control over financial reporting.

Accepted Answer

Auditors can issue the following opinion

Question 12

An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern?

Accepted Answer

A) Matching purchase orders to accounts payable. 
B) Verifying that approved spending limits are not exceeded. 
C) Tracing sales orders to the revenue account. 
D) Reviewing minutes of board meeting. 
A) Matching purchase orders to accounts payable. 
B) Verifying that approved spending limits are not exceeded. 
C) Tracing sales orders to the revenue account. 
D) Reviewing minutes of board meeting.

Question 13

A sales clerk enters a customer's six-number customer account. The computer program uses the first five numbers to calculate a sixth number. This resulting number is then compared to the sixth number entered by the sales clerk. This is an example of a:

Accepted Answer

A) valid character test. 
B) missing data test. 
C) reasonableness test. 
D) check digit. 
A) valid character test. 
B) missing data test. 
C) reasonableness test. 
D) check digit.

Question 14

As part of understanding the internal control, an auditor is not required to:

Accepted Answer

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

Question 15

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?

Accepted Answer

A) Incompatible duties. 
B) Management override. 
C) Mistakes in judgment. 
D) Collusion among employees. 
A) Incompatible duties. 
B) Management override. 
C) Mistakes in judgment. 
D) Collusion among employees.

Question 16

Which of the following is an information technology general control?

Accepted Answer

A) Check digit. 
B) Run-to-run totals. 
C) Distribution of computerized output. 
D) Separation of duties in the IT department. 
A) Check digit. 
B) Run-to-run totals. 
C) Distribution of computerized output. 
D) Separation of duties in the IT department.

Question 17

Which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control?

Accepted Answer

A) To serve as a basis for constructive suggestions. 
B) To plan subsequent substantive tests. 
C) To identify types of possible misstatements that may occur. 
D) To consider factors that may affect the risk of material misstatement. 
A) To serve as a basis for constructive suggestions. 
B) To plan subsequent substantive tests. 
C) To identify types of possible misstatements that may occur. 
D) To consider factors that may affect the risk of material misstatement.

Question 18

Which of the following outcomes is a likely benefit of information technology used for internal control?

Accepted Answer

A) Processing of unusual or nonrecurring transactions. 
B) Enhanced timeliness of information. 
C) Potential loss of data. 
D) Recording of unauthorized transactions. 
A) Processing of unusual or nonrecurring transactions. 
B) Enhanced timeliness of information. 
C) Potential loss of data. 
D) Recording of unauthorized transactions.

Question 19

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?

Accepted Answer

A) The relevant internal control components are not well documented. 
B) The internal auditor already has tested the relevant controls and found them effective. 
C) Testing the operating effectiveness of the relevant controls would not be efficient. 
D) The cost of substantive procedures will exceed the cost of testing the relevant controls. 
A) The relevant internal control components are not well documented. 
B) The internal auditor already has tested the relevant controls and found them effective. 
C) Testing the operating effectiveness of the relevant controls would not be efficient. 
D) The cost of substantive procedures will exceed the cost of testing the relevant controls.

Question 20

After obtaining an understanding of the entity's internal control and assessing control risk, an auditor of a non-public company decided not to perform additional tests of controls. The auditor most likely concluded that the:

Accepted Answer

A) additional evidence to support a further reduction in control risk was not cost beneficial. 
B) assessed level of inherent risk exceeded the assessed level of control risk. 
C) internal control structure was properly designed and justifiably may be relied on. 
D) evidence obtainable through tests of controls would not support an increased level of control risk. 
A) additional evidence to support a further reduction in control risk was not cost beneficial. 
B) assessed level of inherent risk exceeded the assessed level of control risk. 
C) internal control structure was properly designed and justifiably may be relied on. 
D) evidence obtainable through tests of controls would not support an increased level of control risk.

Which of the following would most likely be classified as a material weakness?

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?

Assessing control risk at below the maximum level most likely would involve:

List and explain briefly the phases of an internal control evaluation.

Which of the following is not an objective of internal controls over financial reporting as defined by the Sarbanes-Oxley Act?

Control strengths and weaknesses should be documented in audit documentation, sometimes called:

The appropriate separation of duties does not include:

An audit team's responsibility would not include:

What constitutes a material weakness?

Explain the different opinions that auditors can issue for an entity's internal control over financial reporting.

An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern?

A sales clerk enters a customer's six-number customer account. The computer program uses the first five numbers to calculate a sixth number. This resulting number is then compared to the sixth number entered by the sales clerk. This is an example of a:

As part of understanding the internal control, an auditor is not required to:

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?

Which of the following is an information technology general control?

Which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control?

Which of the following outcomes is a likely benefit of information technology used for internal control?

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?

After obtaining an understanding of the entity's internal control and assessing control risk, an auditor of a non-public company decided not to perform additional tests of controls. The auditor most likely concluded that the:

Auditing and Assurance Services

Professional Standards

Engagement Planning

Management Fraud and Audit Risk

Employee Fraud and the Audit of Cash 227

Revenue and Collection Cycle 279

Acquisition and Expenditure Cycle 336

Production Cycle 394

Finance and Investment Cycle 443

Completing the Audit 500

Reports on Audited Financial Statements

Filters

Exam 5: Risk Assessment: Internal Control Evaluation

Which of the following would most likely be classified as a material weakness?

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?

Assessing control risk at below the maximum level most likely would involve:

List and explain briefly the phases of an internal control evaluation.

Which of the following is not an objective of internal controls over financial reporting as defined by the Sarbanes-Oxley Act?

Control strengths and weaknesses should be documented in audit documentation, sometimes called:

The appropriate separation of duties does not include:

An audit team's responsibility would not include:

What constitutes a material weakness?

Explain the different opinions that auditors can issue for an entity's internal control over financial reporting.

An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern?

A sales clerk enters a customer's six-number customer account. The computer program uses the first five numbers to calculate a sixth number. This resulting number is then compared to the sixth number entered by the sales clerk. This is an example of a:

As part of understanding the internal control, an auditor is not required to:

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?

Which of the following is an information technology general control?

Which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control?

Which of the following outcomes is a likely benefit of information technology used for internal control?

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?

After obtaining an understanding of the entity's internal control and assessing control risk, an auditor of a non-public company decided not to perform additional tests of controls. The auditor most likely concluded that the:

Auditing and Assurance Services

Professional Standards

Engagement Planning

Management Fraud and Audit Risk

Employee Fraud and the Audit of Cash 227

Revenue and Collection Cycle 279

Acquisition and Expenditure Cycle 336

Production Cycle 394

Finance and Investment Cycle 443

Completing the Audit 500

Reports on Audited Financial Statements

Filters