Question 1

The internal control framework developed by COSO includes five so-called "components" of internal control. Discuss each of these five components.

Accepted Answer

Five components of internal control are:
• The control environment. The control environment consists of the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal control and its importance to the company.
• Risk assessment. This is management's identification and analysis of risks relevant to the preparation of financial statements in accordance with appropriate accounting frameworks such as GAAP or IFRS.
• Information and communication. These are the methods used to initiate, record, process, and report the entity's transactions and to maintain accountability for the related assets.
• Control activities. These are the policies and procedures that management has established to meet its objectives for financial reporting.
• Monitoring. This is management's ongoing and periodic assessment of the quality of internal control performance to determine whether controls are operating as intended and are modified when needed.

Question 2

Firewalls are used to protect from

Accepted Answer

A)  erroneous internal handling of data. 
B)  insufficient documentation of transactions. 
C)  illogical programming commands. 
D)  unauthorized external users. 
A)  erroneous internal handling of data. 
B)  insufficient documentation of transactions. 
C)  illogical programming commands. 
D)  unauthorized external users. D

Question 3

Name five of the specific responsibilities specifically directed by the SEC under the Sarbanes-Oxley Act requiring companies listed on the national stock exchanges to strengthen their audit committee requirements.

Accepted Answer

1. The audit committee must not be comprised solely of independent directors
2. The audit committee must not be solely responsible for hiring and firing the
company's auditors
3. The audit committee must establish policies and procedures for complaints regarding
accounting, internal controls, or other auditing matters
4. The audit committee must have the ability to engage its own legal counsel and advisors
5. The audit committee must be adequately funded

Question 4

Which of the following describes the process of implementing a new system in one part of the organization, while other locations continue to use the current system?

Accepted Answer

A)  parallel testing 
B)  online testing 
C)  pilot testing 
D)  control testing 
A)  parallel testing 
B)  online testing 
C)  pilot testing 
D)  control testing

Question 5

One of management's broad objectives in designing an effective internal control system is to help ensure that the organization follows laws and regulations impacting the organization.

Accepted Answer

A) True 
 B)False

Question 6

________ protect(s) the security of electronic communication when information is transmitted and when it is stored.

Accepted Answer

A)  Firewalls 
B)  Digital signatures 
C)  Encryption 
D)  A database 
A)  Firewalls 
B)  Digital signatures 
C)  Encryption 
D)  A database

Question 7

Cost-benefit considerations should always be part of the consideration of most types of outsourcing-related decisions made by management.

Accepted Answer

A) True 
 B)False

Question 8

An example of a specific authorization is management setting a policy authorizing the ordering of inventory when less than a one-week supply is on hand.

Accepted Answer

A) True 
 B)False

Question 9

Enterprise resource planning (ERP) systems integrate limited aspects of an organization's business activities and transactions into one accounting information system.

Accepted Answer

A) True 
 B)False

Question 10

Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the

Accepted Answer

A)  adequacy of the computer system. 
B)  proper implementation by management. 
C)  ability of the internal audit staff to maintain it. 
D)  competency and dependability of the people using it. 
A)  adequacy of the computer system. 
B)  proper implementation by management. 
C)  ability of the internal audit staff to maintain it. 
D)  competency and dependability of the people using it.

Question 11

Controls specific to IT include all of the following except for

Accepted Answer

A)  adequately designed input screens. 
B)  pull-down menu lists. 
C)  validation tests of input accuracy. 
D)  separation of duties. 
A)  adequately designed input screens. 
B)  pull-down menu lists. 
C)  validation tests of input accuracy. 
D)  separation of duties.

Question 12

Processing controls are a category of application controls.

Accepted Answer

A) True 
 B)False

Question 13

If required under special circumstances, an auditor must step in at an audit client and establish and maintain the audit client's system of internal controls to ensure reliable financial reporting.

Accepted Answer

A) True 
 B)False

Question 14

Management is not as concerned about internal controls when they decide to outsource some or all of their IT needs to cloud computing environments and suppliers.

Accepted Answer

A) True 
 B)False

Question 15

When considering internal controls,

Accepted Answer

A)  auditors can ignore controls affecting internal management information. 
B)  auditors are concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements. 
C)  management is responsible for understanding and testing internal control over financial reporting. 
D)  companies must use the COSO framework to establish internal controls. 
A)  auditors can ignore controls affecting internal management information. 
B)  auditors are concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements. 
C)  management is responsible for understanding and testing internal control over financial reporting. 
D)  companies must use the COSO framework to establish internal controls.

Question 16

Hanlon Corp. maintains a large internal audit staff that reports directly to the accounting department. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably

Accepted Answer

A)  eliminate tests of controls. 
B)  increase the depth of the study and evaluation of administrative controls. 
C)  avoid duplicating the work performed by the internal audit staff. 
D)  place limited reliance on the work performed by the internal audit staff. 
A)  eliminate tests of controls. 
B)  increase the depth of the study and evaluation of administrative controls. 
C)  avoid duplicating the work performed by the internal audit staff. 
D)  place limited reliance on the work performed by the internal audit staff.

Question 17

In performing the audit of internal control over financial reporting, the auditor emphasizes internal control over classes of transactions because

Accepted Answer

A)  the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing. 
B)  the class of transaction is where most fraud schemes occur. 
C)  account balances are less important to the auditor then the changes in the account balances. 
D)  classes of transactions tests are the most efficient manner to compensate for inherent risk. 
A)  the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing. 
B)  the class of transaction is where most fraud schemes occur. 
C)  account balances are less important to the auditor then the changes in the account balances. 
D)  classes of transactions tests are the most efficient manner to compensate for inherent risk.

Question 18

As a result of the Dodd-Frank federal financial reform legislation passed by Congress in 2010, only larger public companies (accelerated filers) are now required to obtain an audit report from their auditors on internal control over financial reporting.

Accepted Answer

A) True 
 B)False

Question 19

The chart of accounts is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.

Accepted Answer

A) True 
 B)False

Question 20

Separation of duties is essential in preventing errors and intentional misstatements on the financial statements. List below the four general guidelines.

Accepted Answer

1. separation of custody of the assets f

Exam 11: Internal Control and Coso Framework

The internal control framework developed by COSO includes five so-called "components" of internal control. Discuss each of these five components.

Firewalls are used to protect from

Name five of the specific responsibilities specifically directed by the SEC under the Sarbanes-Oxley Act requiring companies listed on the national stock exchanges to strengthen their audit committee requirements.

Which of the following describes the process of implementing a new system in one part of the organization, while other locations continue to use the current system?

One of management's broad objectives in designing an effective internal control system is to help ensure that the organization follows laws and regulations impacting the organization.

________ protect(s) the security of electronic communication when information is transmitted and when it is stored.

Cost-benefit considerations should always be part of the consideration of most types of outsourcing-related decisions made by management.

An example of a specific authorization is management setting a policy authorizing the ordering of inventory when less than a one-week supply is on hand.

Enterprise resource planning (ERP) systems integrate limited aspects of an organization's business activities and transactions into one accounting information system.

Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the

Controls specific to IT include all of the following except for

Processing controls are a category of application controls.

If required under special circumstances, an auditor must step in at an audit client and establish and maintain the audit client's system of internal controls to ensure reliable financial reporting.

Management is not as concerned about internal controls when they decide to outsource some or all of their IT needs to cloud computing environments and suppliers.

When considering internal controls,

Hanlon Corp. maintains a large internal audit staff that reports directly to the accounting department. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably

In performing the audit of internal control over financial reporting, the auditor emphasizes internal control over classes of transactions because

As a result of the Dodd-Frank federal financial reform legislation passed by Congress in 2010, only larger public companies (accelerated filers) are now required to obtain an audit report from their auditors on internal control over financial reporting.

The chart of accounts is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.

Separation of duties is essential in preventing errors and intentional misstatements on the financial statements. List below the four general guidelines.

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Materiality

Assessing the Risk of Material Misstatement

Fraud Auditing

Assessing Control Risk and Reporting on Internal Controls

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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