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Internal Control
Accountancy
STI College
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Internal Control
Internal control is concerned with the reliability of financial information. True
The Foreign Corrupt Practices Act prohibits bribes to foreign corporate officials to obtain business. False
Incompatible duties exist when an employee is in a position to perpetrate and conceal errors or fraud. True
Well-designed internal control will prevent all fraud by top management. False
CPA firms may use written narratives to describe internal control in their audit working papers True
Internal auditors should preferably report to the chief accounting officer of the company. False
The auditors' communication of internal control significant deficiencies should be addressed only to senior False management of the company.
If the auditors' assessment of the design of internal control reveals that it cannot be relied upon, the auditors False Are NOT required to prepare any documentation of internal control for their working papers
The relatively low number of types of transactions incurred by small firms makes the segregation of duties False impossible.
In a financial statement audit, CPAs are required to assess the operating effectiveness of most significant False Accounting oriented controls.
Which of the following would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee? A) Management's failure to negotiate unfavorable long-term purchase commitments B) Recurring operating losses that may indicate going concern problems C) Evidence of a lack of objectivity by those responsible for accounting decisions D) Management's current plans to reduce its ownership equity in the entity
In assessing the objectivity of a client's internal auditors, the CPA would be most likely to consider internal auditor: Organizational status within the company
In a financial statement audit performed following AICPA Professional Standards, how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely upon in the current year? At least every third audit.
After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform tests of controls. The auditor most likely decided that: It would be efficient to perform test of controls that would result in a reduction in planned substantive procedures
Which of the following is LEAST likely to be evidence of operating effectiveness of controls? A. Cancelled supporting documents B. Confirmations of accounts receivable C. Records documenting usage of computer programs D. Signatures on authorization forms
Which of the following is NOT ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? A) Checklist B) Flowchart C) Questionnaire D) Confirmation
Tests of controls do NOT ordinarily address: The cost effectiveness of the way a control was applied
Which is most likely when the assessed level of control risk increases? 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
Which of the following must the auditor communicate to the audit committee? A) Significant deficiencies and material weaknesses B) Only significant deficiencies C) Only material weaknesses D) Neither significant deficiencies nor material weaknesses
A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned assessed level of control risk is at what level? Maximum
Which of the following would be LEAST likely to be regarded as a test of control? A) Test of the additions to property by physical inspection B) Comparisons of the signatures on cancelled checks to the authorized check signer list C) Tests of signatures on POs D) Recalculation of payroll deductions
Which of the following is NOT considered one of the five major components of internal control? A) Risk assessment B) Segregation of duties C) Control activities D) Monitoring
Which of the following statements is correct concerning the understanding of internal control needed by auditors? 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.
The effectiveness of controls is not generally tested by: Performance of analytical procedures.
On financial statement audits, it is required that the auditors obtain an understanding of internal control, including: Whether it has been implemented (placed in operation).
A significant deficiency: Is less severe than a material weakness.
This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with laws and regulations: Committee of Sponsoring Organizations
Which of the following is most likely to be considered a risk assessment procedure relating to internal control? A) Confirm accounts receivable. B) Perform a test of a control relating to payroll. C) Take test counts of the year-end inventory. D) Trace a transaction through the information system relevant to financial reporting.
Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)? A) Its applicability is largely limited to internal auditing applications. B) It is recognized in the Statements on Auditing Standards. C) It emphasizes the effectiveness and efficiency of operations over the reliability of financial reporting. D) It suggests that it is important to view internal control as an end product as contrasted to a process or means to obtain an end
The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of financial reporting, the effectiveness and efficiency of operations, and: Compliance with applicable laws and regulations
Which statement is correct concerning the relevance of various types of controls to a financial statement audit? A) An auditor may ordinarily ignore the consideration of controls when a substantive audit approach is used. B) Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant. C) Controls over safeguarding assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant. D) All controls are ordinarily relevant to an audit.
Which of the following is not a component of the control environment? A) Integrity and ethical values. B) Risk assessment.
D) Preparing financial reports.
Which of the following is not a responsibility that should be assigned to a company's internal audit department? A) Evaluating internal control. B) Approving disbursements. C) Reporting on the effectiveness of operating segments. D) Investigating potential merger candidates.
Which of the following is true about the auditors' consideration of internal control in a financial statement audit? 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.
Which of the following is an advantage of describing internal control through the use of a standardized questionnaire? A) Questionnaires highlight weaknesses in the system. B) Questionnaires are more flexible than other methods of describing internal control. C) Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system. D) Questionnaires provide a clearer and more specific portrayal of a client's system than other methods of describing internal control.
Which of the following is least likely to be considered a risk assessment procedure relating to internal control? A) Counting marketable securities at year-end. B) Inquiries of client personnel. C) Inspecting documents and reports. D) Observing the application of specific controls.
Which of the following is least likely to be considered a risk assessment procedure? A) Analytical procedures. B) Inspection of documents. C) Observation of the counting of inventory. D) Observation of the performance of certain accounting procedures.
Which of the following is not a factor that is considered a part of the client's overall control environment? A) The organizational structure. B) The information system. C) Management philosophy and operating style. D) Board of directors.
Which of the following would be least likely to be considered a benefit of effective internal control? A) Eliminating all employee fraud. B) Restricting access to assets. C) Detecting ineffectiveness. D) Ensuring authorization of transactions.
After documenting the client's prescribed internal control, the auditors will often perform a walk-through of each transaction cycle. An objective of a walk-through is to: Verify that the controls have been implemented (placed in operation).
The major components of internal control include all of the following, except: Internal auditing.
Which of the following is correct with respect to control deficiencies discovered during an audit? A) Auditors must communicate and recommend corrections relating to all material weaknesses in internal control to management. B) All material weaknesses in internal control should be reported to the audit committee. C) All such matters must be communicated to the audit committee and regulatory agencies. D) All control deficiencies are also significant deficiencies.
After considering the client's internal control the auditors have concluded that it is well designed and is functioning as anticipated. Under these circumstances the auditors would most likely: Reduce substantive procedures in areas where the internal control was found to be effective.
The use of fidelity bonds protects a company from embezzlement loses and also: Minimizes the possibility of employing persons with dubious records in positions of trust.
The independent auditors might consider the procedures performed by the internal auditors because: They are employees whose work might affect the independent auditors' work.
In the consideration of internal control, the operating effectiveness of controls is tested by: Tests of controls.
The auditors who become aware of an internal control significant deficiency are required to communicate this to the: Audit committee.
A material weakness involves an amount that could result in a misstatement that is: Material.
At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness? Reasonable possibility.
A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect material misstatements on a timely basis is referred to as a: Control deficiency.
To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the: Audit committee.
Well-designed internal control that is functioning effectively is most likely to detect a fraud arising from: The fraudulent action of an individual employee.
The program flowcharting symbol representing a decision is a: Diamond.
Controls are not designed to provide assurance that: Fraud will be eliminated.
The scope of substantive procedures as compared to the scope of tests of controls generally vary: Inversely.
Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of misstatement requires special audit consideration? A) Complex calculations are involved. B) The rate of technological change is moderate in the industry. C) The potential for fraud seems high. D) Various subjective methods of application of a key accounting policy exist.
Which of the following audit tests would be regarded as a test of a control? 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.
If the independent auditors decide that the work performed by the internal auditors may have a bearing on their own procedures, they should consider the internal auditors': Competence and objectivity.
In the consideration of internal control, the auditor is basically concerned that it provides reasonable assurance that: Misstatements have been prevented or detected.
Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level? A) Assign more experienced staff. B) Incorporate additional elements of unpredictability in the selection of audit procedures.
When performing an internal control audit under PCAOB standards, one or more material weaknesses in internal control that exist at year-end may result in what type of report(s): Qualified Disclaimer A) Yes Yes B) Yes No C) No Yes D) No No
Internal Control
Course: Accountancy
University: STI College
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