Quiz
Audit Test 2
Questions in this quiz (50)
1Directors, management, external auditors, and internal auditors all play important roles in creating proper control processes. Senior management is primarily responsible for
- AEstablishing risk management and control processes
- BReviewing the reliability and integrity of financial and operational information
- CEnsuring that external and internal auditors oversee the administration of risk management and control processes
- DImplementing and monitoring controls designed by the board of directors
2In an audit of financial statements, and auditor's primary consideration regarding a control is whether it
- AReflects management's philosophy and operating style
- BAffects management's financial statement assertions
- CProvides adequate safeguards over access to assets
- DEnhances management's decision-making processes
3Internal control cannot be designed to provide reasonable assurance regarding the achievement of objectives converning
- AReducing the cost of an external audit
- BElimination of all fraud
- CAvailability of reliable data for decision-making purposes and protection of important documents and records
- DCompliance with the Foreign Corrupt Practices Act of 1977
4The primary reason to establish internal control is to
- ASafeguard the resources of the organization
- BProvide reasonable assurance that the objectives of the organization are achieved
- CEncourage compliance with organizational objectives
- DEnsure the accuracy, reliability, and timeliness of information
5Effective internal control
- AReduces the need for management to review exception reports on a day-to-day basis
- BEliminates risk and potential loss to the organization
- CCannot be circumvented by management
- DIs unaffected by changing circumstances and conditions encountered by the organization
6Internal 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?
- AResponsibility for accounting and financial duties should be assigned to one responsible officer
- BResponsibility for the performance of each duty must be fixed
- CResponsibility for the accounting duties must be borne by the audit committee
- DResponsibility for accounting must be assigned only to bonded employees
7The PCAOB's AS No. 5 states that internal controls may be preventive or detective. Which of the following controls is preventive?
- ARequiring two persons to open mail
- BReconciling the accounts receivable subsidiary file with the control account
- CUsing batch totals
- DPreparing bank reconciliations
8Which of the following statements about internal control is true?
- AProperly maintained internal control reasonably ensures that collusion among employees cannot occur
- BThe establishment and maintenance of internal controls are important responsibilities of the internal auditor
- CExceptionally effective internal control is enough for the auditor to eliminate substantive procedures on a significant account balance
- DA limitation of internal control is that management makes judgments about the extent of controls it implements
9Internal controls are designed to provide reasonable assurance that
- AMaterial errors or fraud will be prevented, or detected and corrected, within a timely period by employees in the course of performing their assigned duties
- BManagement's plans have not been circumvented by worker collusion
- CThe internal auditing department's guidance and oversight of management's performance is accomplished economically and efficiently
- DManagement's planning, organizing, and directing processes are properly evaluated
10The 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
- AMaterial weakness
- BSignificant deficiency
- CControl deficiency
- DCritical deficiency
11Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control?
- AIncompatible duties
- BManagement override
- CMistakes in judgement
- DCollusion among employees
12Internal 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
- AThe auditor's primary responsibility is the detection of fraud
- BThe board of directors is active and independent
- CEffective segregation of duties may not be feasible
- DManagement monitors internal control
13An 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?
- AConducting a weekly physical inventory
- BPlacing security guards at every entrance 24 hours a day
- CImprinting a controlled identification number on each tool
- DHaving all dispositions approved by the vice president of sales
14The organization chart is a graphic representation of the
- APower structure
- BCommunications channels
- CLocus of decision making
- DFormal authority structure
15Which of the following best describe the interrelated components of internal control?
- AOrganizational structure, management philosophy, and planning
- BControl environment; risk assessment process; control activities; the information system, including related business processes; and monitoring of controls
- CRisk assessment process, backup facilities, responsibility accounting, and natural laws
- DAssignment of authority and responsibility, management philosophy, and organizational structure
16Control activities constitute one of the five components of internal control. Control activities do not encompass
- APerformance reviews
- BReconciliations
- CPhysical controls
- DAn internal auditing function
17Monitoring of controls is an important component of internal control. Which of the following items is not an example of monitoring?
- AManagement regularly compares divisional performance with budgets for the division
- BData processing management regularly generates exception reports for unusual transactions or volumes of transactions and follows up with investigation as to causes
- CData processing management regularly reconciles batch control totals for items processed with batch controls for items submitted
- DManagement has asked internal auditing to perform regular audits of the controls over cash processing
18Control activities include physical controls over access to and use of assets and records. A departure from the purpose of such procedures is that
- AAccess to the safe-deposit box requires two officers
- BOnly storeroom personnel and line supervisors have access to the raw materials storeroom
- CThe mail clerk compiles a list of the checks received in the incoming mail
- DOnly salespersons and sales supervisors use sales department vehicles
19Basic 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?
- ASegregation of duties
- BHiring practices
- CTraining programs
- DPerformance evaluations
20Proper segregation of duties reduces the opportunities for persons to be in positions to both
- AJournalize entries and prepare financial statements
- BRecord cash receipts and cash disbursements
- CEstablish internal control and authorize transactions
- DPerpetrate and conceal errors or fraud
21Management'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
- AThe audit committee is active in overseeing the entity's financial reporting policies
- BExternal policies established by parties outside the entity affect its accounting practices
- CManagement is dominated by one individual who is also a shareholder
- DInternal auditors have direct access to the board of directors and entity management
22It is important for the auditor to consider the competence of the audit client's employees because their competence bears directly and importantly upon the
- ACost-benefit relationship of internal control
- BAchievement of the objectives of internal control
- CComparison of recorded accountability with assets
- DTiming of the tests to be performed
23Transaction authorization within an organization may be specific transaction authorization is the
- ASetting of automatic reorder points for material or merchandise
- BApproval of a detailed construction budget for a warehouse
- CEstablishment of requirements to be met in determining a customer's credit limits
- DEstablishment of sales prices for products to be sold to any customer
24A proper segregation of duties requires that an individual
- AAuthorizing a transaction records it
- BAuthorizing a transaction maintain custody of the asset that resulted from the transaction
- CMaintaining custody of an asset be entitled to access the accounting records for the asset
- DRecording a transaction not compare the accounting record of the asset with the asset itself
25A 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
- AManagement is closely involved in operations
- BThe entity is involved in complex transactions
- CThe entity is subject to legal or regulatory requirements also found in larger entities
- DFinancial reporting objectives have been established
26If internal control is properly designed, the same employee may be permitted to
- AReceive and deposit checks and also approve write-offs of customer accounts
- BApprove vouchers for payment and also sign checks
- CReconcile the bank statements and also receive and deposit cash
- DSign checks and also cancel supporting documents
27The frequency of the comparison of recorded accountability with assets (for the purpose of safeguarding assets) should be determined by
- AThe amount of assets independent of the cost of the comparison
- BThe nature and amount of the asset and the cost of making the comparison
- CThe cost of the comparison and whether the susceptibility to loss results from errors of fraud
- DThe auditor in consultation with client management
28Organizational charts are useful to an independent external auditor because they
- ADepict all lines of organizational communication
- BProvide a starting point for assessing the risk of material misstatement
- CEnsure the proper division of responsibilities
- DAre essential to effective internal control
29Audit evidence concerning segregation of duties ordinarily is best obtained by
- APerforming tests of transactions that corroborate management's financial statement assertions
- BObserving the employees as they apply specific controls
- CObtaining a flowchart of activities performed by available personnel
- DDeveloping audit objectives that reduce control risk
30For which of the following transactions would the auditor ordinarily have the greatest difficulty in obtaining assurance that inernal control objectives are met?
- ACollection of interest and dividends by a retailer
- BAcquisition of production equipment by a manufacturer
- CCollection of contributions from the public by a not-for-profit organization
- DCollection of credit sales by a retailer
31An independent auditor of financial statements might consider the procedures performed by the internal auditors because
- AThey are employees whose work must be reviewed during substantive testing
- BThey are employees whose work may affect the nature, timing, and extent of audit procedures
- CTheir work affects the cost-benefit trade-off
- DTheir degree of independence may be inferred from the nature of their work
32Although substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because
- ASubstantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested
- BThe records may be accurate even though they are maintained by a person who performs incompatible functions
- CSubstantive 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
- DMany computerized procedures leave no audit trail of who performed them, so substantive procedures may necessarily by limited to inquires and observation of office personnel
33As part of understanding internal control relevant to the audit of a nonissuer, an auditor does not need to
- AConsider factors that affect the risks of material misstatement
- BDetermine whether controls have been implemented
- CIdentify the risks of material misstatement
- DObtain knowledge about the operating effectiveness of internal control
34After obtaining an understanding of the entity and its environment, including its internal controls, the auditor assesses
- AThe need to apply auditing standards
- BDetection risk to determine the acceptable level of inherent risk
- CDetection risk and inherent risk to determine the acceptable level of control risk
- DControl risk and inherent risk to determine the acceptable level of detection risk
35The primary purpose of obtaining an understanding of the entity and its environment, including its internal control, is to provide an auditor with
- AEvidence to use in reducing detection risk
- BA frame of reference within which to plan the audit
- CA basis for modifying tests of controls
- DInformation necessary to prepare flowcharts
36The ultimate purpose of understanding internal control is to contribute to the auditor's evaluation of the risk that
- ATests of controls may fail to identify controls relevant to assertions
- BMaterial misstatements may exist in the financial statements
- CSpecified controls requiring segregation of duties may be circumvented by collusion
- DEntity policies may be overridden by senior management
37A CPA's understanding of internal control in a financial statement audit of a nonissuer
- AIs usually more limited than that made in an examination of internal control integrated with an audit of financial statements
- BIs usually more extensive than that made in an examination of internal control integrated with an audit of financial statements
- CWill usually be identical to that made in an examination of internal control integrated with an audit of financial statements
- DWill usually result in a report on the effectiveness of internal control
38A secondary result of the auditor's understanding of internal control in an audit of a nonissuer's financial statements is that the understanding may
- AProvide a basis for designing the nature, timing, and extent of further audit procedures
- BAssure that management's procedures to detect all fraud are properly functioning
- CBring to the auditor's attention possible control deficiencies
- DDevelop evidence to support the assessed risks of material misstatement
39A 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?
- AA lack of control at a single user entry point might compromise the security of a single database
- BThe auditor may find it necessary to have an expectation of the operating effectiveness of controls for certain relevant assertions
- CThe auditor must possess all the information technology skills necessary to complete the engagement
- DBecause of the inherent consistency of computer processing, the auditor may be able to reduce the extent of testing an automated control
40In 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.
- AReplace substantive procedures
- BDetermine whether the controls have been implemented
- CDetermine the effectiveness of the control procedures
- DDetect fraud
41When obtaining an understanding of an entity's internal control, an auditor should concentrate on the substance of controls rather than their form because
- AThe controls may be operating effectively but may not be flow charted
- BManagement may establish appropriate controls but not act on them
- CThe controls may be so inappropriate that no reliance is contemplated by the auditor
- DManagement may implement controls with costs in excess of benefits
42In obtaining an understanding of a non-issuer's internal control in a financial statement audit, an auditor is not obligated to
- ADetermine whether the controls have been implemented
- BPerform procedures to understand the design of controls
- CDocument the understanding of the entity's internal control components
- DSearch for significant deficiencies in the operation of internal control
43Which of the following statements regarding auditor documentation of the client's internal control is true?
- ADocumentation must include flowcharts
- BDocumentation must include procedural write-ups
- CNo documentation is necessary, although it is desirable
- DNo one particular form of documentation is necessary, and the extent of documentation may vary
44An auditor should obtain an understanding of an entity's information system, including
- ASafeguards used to limit access to computer facilities
- BProcess used to prepare significant accounting estimates
- CProcedures used to assure the proper supervision of staff
- DPrograms and controls intended to address the risks of fraud
45The auditor's understanding of internal control is documented to substantiate
- AConformity of the accounting records with the applicable reporting framework
- BCompliance with auditing standards
- CAdherence to procedures for economic, effective, and efficient management decision making
- DThe fairness of the financial statement presentation
46Which of the following is not a medium that can normally be used by an auditor to record information concerning a client's internal control?
- ANarrative memorandum
- BProcedures manual
- CFlowchart
- DChecklists
47Which of the following statements indicates the wrong way to use an internal control questionnaire?
- AClarifying all answers with written remarks and explanations
- BFilling out the questionnaire during an interview with the person who has responsibility for the area that is being audited
- CConstructing the questionnaire so that no response requires attention
- DSupplementing the completed questionnaire with a narrative description or flowchart
48A well-designed internal control questionnaire should
- AElicit "yes" or "no" responses rather than narrative responses and be organized by department
- BBe a sufficient source of data for assessment of control risk
- CHelp evaluate the effectiveness of internal control
- DBe independent of the objectives of the audit
49In gaining an understanding of an issuer's internal control, an auditor would do all the following except
- AInspect company documents
- BObserve employees
- CPerform a walk through of the transaction process
- DSend external confirmations
50Regardless 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
- AA basic familiarity with the computer's operating system
- BA sufficient understanding of the entire computer system
- CAn expertise in computer systems analysis
- DA background in programming procedures
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- Quiz on Audit Test 2, created by taylordgarman on 27/03/2014.
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