Question 1

In a financial statement audit, CPAs are required to assess the operating effectiveness of most significant accounting oriented controls.

Accepted Answer

A) True 
 B)False

Question 2

CPA firms may use written narratives to describe internal control in their audit working papers.

Accepted Answer

A) True 
 B)False

Question 3

At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness?

Accepted Answer

A)  More than remote. 
B)  Probable. 
C)  Reasonable possibility. 
D)  Sufficient. 
A)  More than remote. 
B)  Probable. 
C)  Reasonable possibility. 
D)  Sufficient.

Question 4

Which of the following audit tests would be regarded as a test of control?

Accepted Answer

A)  Tests of the specific items making up the balance in a given general ledger account. 
B)  Tests confirming receivables. 
C)  Tests of the signatures on canceled checks to board of director's authorizations. 
D)  Tests of the additions to property, plant, and equipment by physical inspection. 
A)  Tests of the specific items making up the balance in a given general ledger account. 
B)  Tests confirming receivables. 
C)  Tests of the signatures on canceled checks to board of director's authorizations. 
D)  Tests of the additions to property, plant, and equipment by physical inspection.

Question 5

A service auditor's report on a service center should include a(n)

Accepted Answer

A)  Detailed description of the service center's internal control. 
B)  Statement that the user of the report may assess control risk at the minimum level. 
C)  Indication that no assurance is provided. 
D)  Opinion on the operating effectiveness of the service center's internal control. 
A)  Detailed description of the service center's internal control. 
B)  Statement that the user of the report may assess control risk at the minimum level. 
C)  Indication that no assurance is provided. 
D)  Opinion on the operating effectiveness of the service center's internal control.

Question 6

Tests of controls do not ordinarily address:

Accepted Answer

A)  By whom a control was applied. 
B)  How a control was applied. 
C)  The consistency with which a control was applied. 
D)  The cost effectiveness of the way a control was applied. 
A)  By whom a control was applied. 
B)  How a control was applied. 
C)  The consistency with which a control was applied. 
D)  The cost effectiveness of the way a control was applied.

Question 7

When a client uses a service organization to process certain transactions (e.g., its employee benefit plan), the auditor is least likely to obtain an understanding relating to these transactions by

Accepted Answer

A)  Contacting the service organization to obtain specific information. 
B)  Visiting the service organization and performing procedures. 
C)  Sending a confirmation request to the service organization. 
D)  Obtaining and reading a Type 1 or Type 2 report from the service organization. 
A)  Contacting the service organization to obtain specific information. 
B)  Visiting the service organization and performing procedures. 
C)  Sending a confirmation request to the service organization. 
D)  Obtaining and reading a Type 1 or Type 2 report from the service organization.

Question 8

The Sarbanes-Oxley Act of 2002 requires that the audit committee:

Accepted Answer

A)  Annually reassess control risk using information from the CPA firm. 
B)  Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm. 
C)  Require that the company's CPA firm rotate the partner in charge of the audit. 
D)  Review the level of management compensation. 
A)  Annually reassess control risk using information from the CPA firm. 
B)  Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm. 
C)  Require that the company's CPA firm rotate the partner in charge of the audit. 
D)  Review the level of management compensation.

Question 9

In assessing the competence of a client's internal auditor, an external auditor most likely would consider the:

Accepted Answer

A)  Internal auditor's compliance with professional internal auditing standards. 
B)  Client's policies that limit the internal auditor's access to management salary data. 
C)  Evidence supporting a further reduction in the assessed level of control risk. 
D)  Results of ratio analysis that may identify unusual transactions and events. 
A)  Internal auditor's compliance with professional internal auditing standards. 
B)  Client's policies that limit the internal auditor's access to management salary data. 
C)  Evidence supporting a further reduction in the assessed level of control risk. 
D)  Results of ratio analysis that may identify unusual transactions and events.

Question 10

Which is most likely when the assessed level of control risk increases?

Accepted Answer

A)  Change from performing substantive procedures at year-end to an interim date. 
B)  Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity. 
C)  Use the maximum number of dual purpose tests. 
D)  Use larger sample sizes for substantive procedures. 
A)  Change from performing substantive procedures at year-end to an interim date. 
B)  Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity. 
C)  Use the maximum number of dual purpose tests. 
D)  Use larger sample sizes for substantive procedures.

Question 11

Which of the following is true about the auditors' consideration of internal control in a financial statement audit?

Accepted Answer

A)  The auditors must assess control risk at a level lower than the maximum. 
B)  The auditors must prepare a flowchart description of internal control for their working papers. 
C)  The auditors must obtain an understanding of the steps in processing major types of transactions. 
D)  The auditors must perform tests of controls. 
A)  The auditors must assess control risk at a level lower than the maximum. 
B)  The auditors must prepare a flowchart description of internal control for their working papers. 
C)  The auditors must obtain an understanding of the steps in processing major types of transactions. 
D)  The auditors must perform tests of controls.

Question 12

The relatively low number of types of transactions incurred by small firms makes the segregation of duties impossible.

Accepted Answer

A) True 
 B)False

Question 13

Internal auditors should preferably report to the chief accounting officer of the company.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is not a component of the control environment?

Accepted Answer

A)  Integrity and ethical values. 
B)  Risk assessment. 
C)  Commitment to attracting, developing, and retaining competent employees. 
D)  Organizational structure. 
A)  Integrity and ethical values. 
B)  Risk assessment. 
C)  Commitment to attracting, developing, and retaining competent employees. 
D)  Organizational structure.

Question 15

Internal control is concerned with the reliability of financial information.

Accepted Answer

A) True 
 B)False

Question 16

Controls are not designed to provide assurance that:

Accepted Answer

A)  Transactions are executed in accordance with management's authorization. 
B)  Fraud will be eliminated. 
C)  Access to assets is permitted only in accordance with management's authorization. 
D)  The recorded accountability for assets is compared with the existing assets at reasonable intervals. 
A)  Transactions are executed in accordance with management's authorization. 
B)  Fraud will be eliminated. 
C)  Access to assets is permitted only in accordance with management's authorization. 
D)  The recorded accountability for assets is compared with the existing assets at reasonable intervals.

Question 17

Auditors are required to consider a client's internal control.
a. Describe the two purposes of the auditors' consideration of a client's internal control.
b. Even the best internal control has certain limitations. List three of those limitations.

Accepted Answer

a. The auditors' consideration of their

Question 18

Which of the following statements is correct concerning the understanding of internal control needed by auditors?

Accepted Answer

A)  The auditors must understand the information system, not the accounting system. 
B)  The auditors must understand monitoring and all preliminary accounting controls. 
C)  The auditors must have a sufficient understanding to assess the risks of material misstatement. 
D)  The auditors must understand the control environment, risk assessment, and all control activities. 
A)  The auditors must understand the information system, not the accounting system. 
B)  The auditors must understand monitoring and all preliminary accounting controls. 
C)  The auditors must have a sufficient understanding to assess the risks of material misstatement. 
D)  The auditors must understand the control environment, risk assessment, and all control activities.

Question 19

A significant deficiency:

Accepted Answer

A)  Differs from a material weakness in that it involves internal control over operations rather than internal control over financial reporting. 
B)  Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality. 
C)  Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting. 
D)  Is less severe than a material weakness. 
A)  Differs from a material weakness in that it involves internal control over operations rather than internal control over financial reporting. 
B)  Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality. 
C)  Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting. 
D)  Is less severe than a material weakness.

Question 20

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both:

Accepted Answer

A)  Journalize cash receipts and disbursements and prepare the financial statements. 
B)  Monitor internal controls and evaluate whether the controls are operating as intended. 
C)  Adopt new accounting pronouncements and authorize the recording of transactions. 
D)  Record and conceal fraudulent transactions in the normal course of assigned tasks. 
A)  Journalize cash receipts and disbursements and prepare the financial statements. 
B)  Monitor internal controls and evaluate whether the controls are operating as intended. 
C)  Adopt new accounting pronouncements and authorize the recording of transactions. 
D)  Record and conceal fraudulent transactions in the normal course of assigned tasks.

Exam 7: Internal Control

In a financial statement audit, CPAs are required to assess the operating effectiveness of most significant accounting oriented controls.

CPA firms may use written narratives to describe internal control in their audit working papers.

At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness?

Which of the following audit tests would be regarded as a test of control?

A service auditor's report on a service center should include a(n)

Tests of controls do not ordinarily address:

When a client uses a service organization to process certain transactions (e.g., its employee benefit plan), the auditor is least likely to obtain an understanding relating to these transactions by

The Sarbanes-Oxley Act of 2002 requires that the audit committee:

In assessing the competence of a client's internal auditor, an external auditor most likely would consider the:

Which is most likely when the assessed level of control risk increases?

Which of the following is true about the auditors' consideration of internal control in a financial statement audit?

The relatively low number of types of transactions incurred by small firms makes the segregation of duties impossible.

Internal auditors should preferably report to the chief accounting officer of the company.

Which of the following is not a component of the control environment?

Internal control is concerned with the reliability of financial information.

Controls are not designed to provide assurance that:

Auditors are required to consider a client's internal control. a. Describe the two purposes of the auditors' consideration of a client's internal control. b. Even the best internal control has certain limitations. List three of those limitations.

Which of the following statements is correct concerning the understanding of internal control needed by auditors?

A significant deficiency:

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both:

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Legal Liability of Cpas

Audit Evidence and Documentation

Planning the Audit; Linking Audit Procedures to Risk

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Cash and Financial Investments

Accounts Receivable, Notes Receivable, and Revenue

Inventories and Cost of Goods Sold

Property, Plant, and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Report

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, Operational, and Compliance Auditing

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