Question 1

In an audit of financial statements of a non-public company in accordance with generally accepted auditing standards, an auditor is required to:

Accepted Answer

A) document the auditor's understanding of the entity's internal control. 
B) search for significant deficiencies in the operation of the internal controls. 
C) perform tests of controls to evaluate the effectiveness of the entity's accounting system. 
D) determine whether control activities are operating effectively to prevent or detect material misstatements.

Question 2

When obtaining an understanding of an entity's internal control in a financial statement audit at a non-public company, an auditor is not obligated to:

Accepted Answer

A) determine whether the control activities have been placed in operation. 
B) perform procedures to understand the design of the internal control system. 
C) document the understanding of the company's internal control system. 
D) search for significant deficiencies in the operation of the internal control system.

Question 3

Tracing bills of lading to sales invoices provides evidence that:

Accepted Answer

A) shipments to customers were invoiced. 
B) shipments to customers were recorded as sales. 
C) recorded sales were shipped. 
D) invoiced sales were recorded as sales.

Question 4

Which of the following client internal control activities is not usually performed in the treasurer's department?

Accepted Answer

A) Verifying the accuracy of checks and vouchers. 
B) Controlling the mailing of checks to vendors. 
C) Approving vendors' invoices for payment. 
D) Canceling payment vouchers when paid.

Question 5

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been:

Accepted Answer

A) authorized. 
B) implemented. 
C) tested. 
D) monitored.

Question 6

Regardless of the assessed level of control risk, an auditor of a non-public company would perform some:

Accepted Answer

A) tests of controls to determine the effectiveness of internal control policies. 
B) analytical procedures to verify the design of internal control activities. 
C) substantive tests to restrict detection risk for significant transaction classes. 
D) dual purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

Question 7

Each of the following types of controls is considered to be an entity-level control, except those:

Accepted Answer

A) relating to the control environment. 
B) pertaining to the company's risk assessment process. 
C) regarding the company's annual stockholder meeting. 
D) addressing policies over significant risk management practices.

Question 8

Which of the following is not a component of internal controls?

Accepted Answer

A) Control environment. 
B) Control activities. 
C) Inherent risk. 
D) Monitoring.

Question 9

Auditors are required to obtain a sufficient understanding of an entity's internal control. This understanding is required by the performance principle of GAAS.Required:What are some of the goals (purposes) for conducting an evaluation of an entity's internal control?What is the impact on substantive testing procedures if the auditor assesses control risk at the "maximum" level? What is the impact on substantive testing procedures if the auditor assesses control risk below the "maximum" level?Should auditors always try to obtain enough evidence to assess control risk below the "maximum" level? Explain.

Accepted Answer

The answer of Auditors are required to obtain a sufficient...

Question 10

Management's report on internal controls must include each of the following except:

Accepted Answer

A) a statement that management is responsible for establishing and maintaining adequate internal control over financial reporting. 
B) a statement identifying the framework management uses to evaluate the effectiveness of the company's internal control. 
C) a statement providing management's assessment of the effectiveness of the company's internal control. 
D) a statement providing management's evaluation of the company's control environment.

Question 11

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the:

Accepted Answer

A) factors that raise doubts about the auditability of the financial statements. 
B) operating effectiveness of internal control policies and procedures. 
C) risk that material misstatements exist in the financial statements. 
D) possibility that the nature and extent of substantive tests may be reduced.

Question 12

Sound internal control can be described as separating all of the following duties and responsibilities except for:

Accepted Answer

A) transaction authorization. 
B) recordkeeping. 
C) custody of, or direct access to, assets. 
D) hiring of employees.

Question 13

The overall attitude and awareness of an entity's board of directors concerning the importance of the client's internal control usually is reflected in its:

Accepted Answer

A) computer-based control activities. 
B) system of separation of duties. 
C) control environment. 
D) safeguards over access to assets.

Question 14

Which of the following is not an input control activity?

Accepted Answer

A) Reasonableness tests. 
B) Record counts. 
C) Financial totals. 
D) Hash totals.

Question 15

Control activities intended to ensure that transactions are recorded in the right period are designed to achieve the ASB assertion of:

Accepted Answer

A) occurrence. 
B) accuracy. 
C) valuation or allocation. 
D) cutoff.

Question 16

After obtaining an understanding of internal controls and assessing control risk on the audit of a non-public company, an auditor decided to perform tests of controls. The auditor most likely decided that:

Accepted Answer

A) it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. 
B) additional evidence to support a further reduction in control risk is not available. 
C) an increase in the assessed level of control risk is justified for certain financial statement assertions. 
D) there were many internal control weaknesses that could allow errors to enter the accounting system.

Question 17

Which of the following audit procedures most likely would provide an auditor with the most assurance about the effectiveness of the operation of an entity's internal control?

Accepted Answer

A) Confirmation with outside parties. 
B) Inquiry of client personnel. 
C) Successful re-performance of the control activity. 
D) Observation of client personnel.

Question 18

The internal control in small business is highly dependent on the:

Accepted Answer

A) separation of functional responsibilities. 
B) complexity of the client's internal controls. 
C) owner-manager's competence, as well as his/her ethics and integrity. 
D) bonding of employees.

Question 19

The primary objective of procedures performed to obtain an understanding of the entity's internal control is to provide an auditor with:

Accepted Answer

A) knowledge necessary for audit planning. 
B) evidential matter to use in assessing inherent risk. 
C) a basis for modifying tests of controls. 
D) an evaluation of the consistency of application of management's policies.

Question 20

Which of the following statements is correct regarding internal control?

Accepted Answer

A) A well-designed internal control environment ensures the achievement of an entity's control objectives. 
B) An inherent limitation to internal control is the fact that controls can be circumvented by management override. 
C) A well-designed and operated internal control environment should detect collusion perpetrated by two people. 
D) Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.

Exam 5: Risk Assessment: Internal Control Evaluation