CHAPTER 10 Multiple-Choice Questions 1. easy a
Which of of the fo following pa parties is is re responsible fo for es establishing an an en entity’s in internal co controls? a. Management. c. Auditors. b. Management and auditors. d. Comm Commit itte teee of po pons nsor oring ing !rga !rgani" ni"at ation ions. s.
#. easy d
Whic hich of of the following is not one of the thre hree primary ob$ecti%es of effecti%e inte interrnal nal co contr ntrol? a. &eliability of financial reporting b. 'fficiency and effecti%eness of operations c. Comp Compli lian ance ce with with laws laws and regu regula lati tions ons d. 'ach of the abo%e abo%e is a primary primary ob$e ob$ecti% cti%ee of effe effecti cti%e %e internal internal control. control.
(. )*ublic+ easy b
,he *CA! states that reasonable assurance allows assurance allows for a. a nominal lielihood of ineffecti%e internal controls. b. a remote lielihood that material misstatements will not be pre%ented or detected by internal control. c. a lie lieli liho hood od that that mate materi rial al miss missta tate teme ment ntss will will not not be pre% pre%en ente ted d or dete detect cted ed by internal control. d. a high high lie lieli liho hood od that that mate materi rial al miss missta tate teme ment ntss will will not be pre%e pre%ent nted ed or dete detect cted ed by internal control.
/. easy a
0nternal co controls can ne ne%er be considered as absolutely effecti%e because a. their effecti%eness is limited by the competency and dependability of employees. b. controls always ha%e inherent weanesses that can be eploited. c. contr controls ols are are designe designed d to pre%ent pre%ent and detec detectt only materia materiall misstat misstatem ements ents.. d. none one of the abo%e.
2.
A ma$or co control a% a%ailable in a small co company3 which mi might no not be be feasible in a large co company3 is a. a wider segregation of duties. b. a %oucher system. c. fewer ewer tra trans nsac acti tion onss to pro proce cess ss.. d. the ownerowner-manager’ manager’ss personal personal interest interest and close close relationship relationship with personnel. personnel.
easy d
4. easy a
An act of two or more employees to steal assets or misstate records is fre5uently referred to to as a. collusion. b. a material weaness. c. a con contr trol ol def deficienc iency y. d. Any of the abo%e.
6. easy c
When the auditor auditor attempts attempts to understand understand the operation operation of the accounting accounting system system by tracing a few transactions through the accounting system3 this is referred to as a. tracing. b. %ouching. c. a wal-through. d. tests of of co controls.
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8. )!9+ easy c
Which section of the arbanes-!ley Act re5uires management to issue an internal control report? a. #7# b. #7( c. /7/ d. /78
:. )!9+ easy a
arbanes-!ley re5uires management to issue an internal control report that includes two specific items. Which of the following is one of these two re5uirements? a. A statement that management is responsible for establishing and maintaining an ade5uate internal control structure and procedures for financial reporting. b. A statement that management and the board of directors are responsible for establishing and maintaining an ade5uate internal control structure and procedures for financial reporting. c. A statement that management3 the board of directors3 and the eternal auditors for establishing and maintaining an ade5uate internal control structure and procedures for financial reporting. d. ;one of the abo%e is correct.
17. )*ublic+ easy c
When management is e%aluating the design of internal control3 management e%aluates whether the control can do all but which of the following? a. *re%ent material misstatements. b.
11. )*ublic+ easy b
0nternal control reports issued by public companies must identify the framewor used to e%aluate the effecti%eness of internal control. Which of the following is the most common framewor in the =..? a. 'ffecti%e 0nternal Control >ramewor - A0C*A b. 0nternal Control - 0ntegrated >ramewor - C!! c. 'nterprise 0nternal Control - C!! d. ,here is no single common framewor used in the =..
1#. )*ublic+ easy d
Auditor’s tests of operating effecti%eness of internal controls might include which of the following types of procedures? a. 0nspection of rele%ant documentation b. 0n5uiries of personnel c. &eperformance of the application of controls d. All of the abo%e
1(. easy b
With which one of management’s concerns with respect to implementing internal controls is the auditor primarily concerned? a. 'fficiency of operations. b. &eliability of financial reporting. c. 'ffecti%eness of operations. d. Compliance with applicable laws and regulations.
1/. easy b
Which of the following acti%ities would be least liely to strengthen a company’s internal control? a. eparating accounting from other financial operations. b. Maintaining insurance for fire and theft. c. >iing responsibility for the performance of employee duties. d. Carefully selecting and training employees. Management must disclose material weanesses in internal control a. whene%er the weaness is deemed significant to a single class of transactions. b. whene%er the weaness is significant to o%erall financial reporting ob$ecti%es. c. e%en if $ust one weaness is found.
12. )*ublic+ easy c
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d.
only if the auditor identifies the weaness as significant.
14. easy b
When auditing a nonpublic company3 the auditor should obtain an understanding of internal control sufficient a. to pro%ide reasonable protection against client fraud and defalcations by client employees. b. to assess control ris. c. to pro%ide a basis for constructi%e suggestions to the client for impro%ing the accounting system. d. to pro%ide a method for safeguarding assets3 checing the accuracy and reliability of accounting data3 promoting operational efficiency3 and encouraging adherence to prescribed managerial policies.
16. easy c
Which of the following audit tests would be regarded as a test of a control? a. ,ests of the specific items maing up the balance in a gi%en general ledger account. b. ,ests of the in%entory pricing to %endors’ in%oices. c. ,ests of the signatures on canceled checs to management’s authori"ations. d. ,ests of the additions to property3 plant3 and e5uipment by physical inspections.
18. easy d
1:. easy c
,he consists of the actions3 policies3 and procedures that reflect the o%erall attitudes of top management. a. control acti%ities. b. management philosophy. c. control en%ironment. d. monitoring function.
#7. )*ublic+ medium b
An auditor’s primary emphasis is internal controls o%er a. material account balances b. classes of transactions c. account balances and classes of transactions d. immaterial and material account balances
#1. medium b
,he auditor’s study of a nonpublic client’s internal control is a. re5uired by @AA*. b. re5uired by @AA. c. re5uired by the 0&. d. recommended by the A0C*A.
##. medium d
0nternal controls can ne%er be regarded as completely effecti%e. '%en if company personnel could design an ideal system3 its effecti%eness depends on the a. ade5uacy 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.
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#(. medium c
'%en with the most effecti%ely designed internal control3 the auditor must obtain audit e%idence3 beyond testing the controls3 for e%ery a. transaction. b. financial statement account. c. material financial statement account. d. financial statement account that will be relied upon by third parties.
#/. )*ublic+ medium a
,o epress an opinion on internal controls3 an auditor obtains an understanding of and performs tests of controls related to all but which of the following? a. Account balances. b. ignificant account balances. c. Classes of transactions. d.
#2. medium d
,he essence of an effecti%ely controlled organi"ation lies in the a. effecti%eness of its independent auditor. b. effecti%eness of its internal auditor. c. attitude of its employees. d. attitude of its management.
#4. )*ublic+ medium c
,o issue a report on internal control o%er financial reporting for a public company3 an auditor must a. e%aluate management’s assessment process. b. independently assess the design and operating effecti%eness of internal control. c. e%aluate management’s assessment process and independently assess the design and operating effecti%eness of internal control. d. test controls o%er significant account balances.
#6. )*ublic+ medium d
Which of the stoc echanges re5uire listed companies to ha%e an audit committee composed entirely of independent directors? a. AM'9 and ;' b. ;A
#8. medium d
Which of the following factors may increase riss to an organi"ation? a. @eographic dispersion of company operations. b.
#:. medium b
Which of the following statements is correct with respect to separation of duties? a. 'mployees should not ha%e temporary and permanent custody of assets. b. 0t is desirable to pre%ent employees who authori"e transactions from ha%ing custody of related assets. c. 0t is permissible to allow an employee to open cash receipts and record those receipts. d. ;one of the abo%e is correct.
(7. medium b
Authori"ations can be either general or specific. Which of the following is not an eample of a general authori"ation? a. Automatic reorder points for raw materials in%entory. b. A sales manager’s authori"ation for a sales return. c. Credit limits for %arious classes of customers. d. A sales price list for merchandise. ,he most important type of protecti%e measure for safeguarding assets and records is a. ade5uate separation of duties among personnel. b. proper authori"ation of transactions. c. the use of physical precautions.
(1. medium c
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d.
ade5uate documentation.
(#. medium d
Which of the following statements is correct with respect to the design and use of business documents? a. !nly documents used for internal purposes must be prenumbered. b.
((. )*ublic+
,he 'C prohibits =.. stoc echanges from listing securities if a company’s audit committee is a. not comprised of solely independent directors. b. inade5uately funded. c. not solely responsible for hiring and firing the company’s auditors. d. All of the abo%e are correct.
medium d
(/. medium a
All of the following are substanti%e tests ecept a. tests of controls. b. tests of details of transactions. c. tests of details of balances. d. analytical procedures.
(2. medium b
Most audits of a company are done annually by the same C*A firm. 'cept for initial engagements3 the auditor begins the audit with a great deal of information about the internal controls de%eloped in prior years. ecause systems and controls usually do not change often3 a. the auditor can sip the e%aluation of this area on repeat engagements. b. this information can be updated and car ried forward to the current year’s audit. c. it eases the burden on the auditor’s re5uirement to do a complete study of the controls this year. d. it is sufficient for the auditor $ust to in5uire of client whether the controls ha%e been changed since last year.
(4. medium b
;arrati%es3 flowcharts3 and internal control 5uestionnaires are three common methods of a. testing the internal controls. b. documenting the auditor’s understandin g of internal controls. c. designing the audit manual and procedures. d. documenting the auditor’s understanding of a client’s organi"ational structure.
(6. medium d
Which of the following is not an element of a proper narrati%e of an accounting system and related controls? a. ,he origin of e%ery document and record in the system should be stated. b. All processing that taes place should be described. c. ,he disposition of e%ery document and record in the system should be stated. d. ,here should be an indication of all controls affecting the applicable process.
(8. medium c
Which of the following statements about the internal control 5uestionnaire is not correct? a. A 5uestionnaire can lead to a piecemeal %iew of a client’s control without pro%iding an o%erall %iew. b. ,he 5uestionnaire can be prepared reasonably 5uicly. c. A 5uestionnaire is usually applicable to a wide %ariety of companies3 especially smaller ones. d. 'ach of the abo%e statements is correct.
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(:. )*ublic+ medium c
pecific assessments must be made to arri%e at the preliminary assessment of control ris. Which of the following is not one of these assessments? a. 0s the entity auditable? b. What is the epectation that intern al controls will neither pre%ent material misstatements from occurring nor detect and correct them if they ha%e occurred? c. 0s management committed to internal control? d. 'ach of the abo%e is a re5uired assessment.
/7. medium a
Which of the following is not one of the le%els of an absence of internal controls? a. 0nternal control weaness. b. Material weaness. c. ignificant deficiency. d. ;one of the abo%e.
/1. medium a
Which of the following is the correct definition of Bcontrol deficiency? a. A control deficiency eists if the design or operation of controls does not permit company personnel to pre%ent or detect misstatements on a timely basis. b. A control deficiency eists if one or more deficiencies eist that ad%ersely affect a company’s ability to prepare eternal financial statements reliably. c. A control deficiency eists if the design or operation of controls results in a more than remote lielihood that controls will not pre%ent or detect misstatements. d. ;one of the abo%e is a correct definition.
/#. medium d
,he purpose of an entity’s accounting information and communication system is to . a. initiate transactions. b. record and process transactions. c. monitor transactions. d. a and b only.
/(. medium b
A procedure that would most liely be used by an auditor in performing tests of control procedures that in%ol%e segregation of functions and that lea%e no transaction trail is a. inspection. b. obser%ation. c. reperformance. d. reconciliation.
//. medium b
0nternal controls normally include procedures designed to pro%ide reasonable assurance that a. employees act with integrity when performing their assigned tass. b. transactions are eecuted in accordance with management’s general or specific authori"ation. c. decision processes leading to management’s authori"ation of transactions are sound. d. collusi%e acti%ities would be detected by segregation of employee duties.
/2. )*ublic+ medium d
Which of the following is not a common step used to identify internal control deficiencies? a.
/4. medium a
Which of the following is not a component of an entity’s internal control? a. Control ris. b. Control procedures. c. ,he accounting system. d. ,he control en%ironment. efore maing the final assessment of internal control at the end of an integrated audit3 the auditor must a. test controls. b. perform substanti%e tests of details.
/6. )*ublic+ medium d
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c. d.
a only. a and b.
/8. )*ublic+ medium c
ignificant deficiencies and material weanesses in internal control of a public company must be reported to which of the following? a. ,he *ublic Company Accounting !%ersight oard. b. Members of management who are responsible for the related area of the company. c. Audit committee of the company’s board of director. d. ;one of the abo%e.
/:. medium d
!f the following statements about intern al controls3 which one is not %alid? a. ;o one person should be responsible for the custodial responsibility and the recording responsibility for an asset. b. ,ransactions must be properly authori"ed before such transactions are processed. c. ecause of the cost benefit relationship3 a client may apply control procedures on a test basis. d. Control procedures reasonably ensure that collusion among employees cannot occur.
27. medium a
Which of the following best describes the inherent limitations that should be recogni"ed by an auditor when considering the potential effecti%eness of internal control? a. *rocedures whose effecti%eness depends on segregation of duties can be circum%ented by collusion. b. ,he competence and integrity of client personnel pro%ides an en%ironment conduci%e to accounting control and pro%ides assurance that effecti%e control will be achie%ed. c. *rocedures designed to assure the eecution and recording of transactions in accordance with proper authori"ations are effecti%e against irregularities perpetrated by management. d. ,he benefits epected to be deri%ed from effecti%e internal accounting control usually do not eceed the costs of such control.
21. medium c
Which of the following is not one of the subcomponents of the control en%ironment? a. Management’s philosophy and operating style. b. !rgani"ational structure. c. Ade5uate separation of duties. d. Commitment to competence.
2#. medium b
0t is important for the C*A to consider the competence of the audit clients’ employees because their competence bears directly and importantly upon t he a. costDbenefit relationship of the system of internal control. b. achie%ement of the ob$ecti%es of internal control. c. comparison of recorded accountability with assets. d. timing of the tests to be performed.
2(. medium b
'ffecti%e internal control in a small company that has an insufficient number of employees to permit proper di%ision of responsibilities can best be enhanced by a. employment of temporary personnel to aid in the separation of duties. b. direct participation by the owner of the business in the record-eeping acti%ities of the business. c. engaging a C*A to perform monthly Bwrite-up wor. d. delegation of full3 clear-cut responsibility to each employee for the functions assigned to each.
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2/. medium a
'%idential matter concerning proper segregation of duties ordinarily is best obtained by a. direct personal obser%ation of the employee who applies control procedures. b. maing in5uiries of co-worers about the employee who applies control procedures. c. preparation of a flowchart of duties performed and a%ailable personnel. d. inspection of third-party documents containing the initials of who applied control procedures.
22. medium b
*roper segregation of functional responsibilities calls for separation of the functions of a. authori"ation3 eecution3 and payment. b. authori"ation3 recording3 and custody. c. custody3 eecution3 and reporting. d. authori"ation3 payment3 and recording.
24. medium d
When considering the ob$ecti%ity of internal auditors3 an independent auditor should a. e%aluate the 5uality control program in effect for the internal auditors. b. eamine documentary e%idence of the wor performed by the internal auditors. c. test a sample of the transactions and balances that the internal auditors eamined. d. determine the organi"ational le%el to which the internal auditors report.
26. medium a
0nternal controls are not designed to pro%ide reasonable assurance that a. all frauds will be eliminated. b. transactions are eecuted in accordance with management’s authori"ation. c. access to assets is permitted only in accordance with management’s authori"ation. d. the recorded accountability for assets is compared with the eisting assets at reasonable inter%als.
28. medium d
Which of the following statements regarding auditor documentation of the client’s internal controls is correct? a.
2:. medium b
ignificant deficiencies are matters that come to an auditor’s attention3 which should be communicated to an entity’s audit committee because they represent a. material frauds perpetrated by high-le%el management. b. internal control deficiencies that could ad%ersely affect a company’s ability to initiate3 record3 process3 or report eternal financial statements reliably. c. flagrant %iolations of the entity’s documented conflict-of-interest policies. d. intentional attempts by client personnel to limit the scope of the auditor’s field wor.
47. challenging a
Which of the following statements3 if any3 is correct? a. ,he ;A
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41. challenging d
Which of the following is not typically one of management’s concerns in designing effecti%e internal controls? a. &eliability of financial reporting. b. 'fficiency and effecti%eness of operations. c. Compliance with applicable laws and regulations. d. !btaining the best internal control possible.
4#. )!9+ challenging a
,he arbanes-!ley Act re5uires a. all public companies to issue an internal control report. b. all public companies to define ade5uate internal controls. c. the auditor of public companies to design effecti%e internal controls o%er financial reporting. d. pro%ides for all three of the abo%e.
4(. challenging d
When considering internal control3 an auditor should be aware of the concept of reasonable assurance3 which recogni"es that the a. segregation of incompatible functions is necessary to ascertain that internal control is effecti%e. b. employment of competent personnel pro%ides assurance that the ob$ecti%es of internal control will be achie%ed. c. establishment and maintenance of internal control is an important responsibility of the management and not of the auditor. d. costs of internal control should not eceed the benefits epected to be deri%ed from internal control.
4/. challenging a
,o comply with the second standard of fieldwor3 the auditor need not be concerned with all fi%e areas of internal control that apply to management. ,he auditor’s primary concerns are with the internal control’s ability to a. ensure reliability of financial reporting for eternal purposes. b. pro%ide reliable data and promote efficiency. c. promote efficiency and encourage adherence to policy. d. pro%ide reliable data3 safeguard assets3 and comply with the arbanes-!ley Act of #77#.
42. challenging a
,he financial statements are not liely to correctly reflect generally accepted accounting principles if a. the controls affecting the reliability of financial reporting are inade5uate. b. the company’s controls do not promote efficiency. c. the company’s controls do not promote effecti%eness. d. all three of the abo%e are true.
44. challenging a
,he primary emphasis by auditors is on controls o%er a. classes of transactions. b. account balances. c. both a and b3 because they are e5ually important. d. both a and b3 because they %ary from client to client.
46. challenging c
,he most important difference in a nonpublic company in assessing control ris is the ability to assess control ris at for any or all control-related ob$ecti%es. a. low b. medium c. high d. none of the abo%e
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48. challenging c
Ea%ing an audit committee composed of outside directors is a re5uirement of a. all public and pri%ate companies. b. all pri%ate companies. c. all companies that are listed on the ;'3 AM'93 and ;A
4:. challenging c
An auditor should consider two ey issues when obtaining an understanding of a client’s internal controls. ,hese issues are a. the effecti%eness and efficiency of the controls. b. the fre5uency and effecti%eness of the controls. c. the design and utili"ation of the controls. d. none of the abo%e.
67. challenging c
,he independent auditor should ac5uire an understanding of the internal audit function as it relates to the independent auditor’s study and e%aluation of internal accounting control because a. the audit programs3 woring papers3 and reports of internal auditors can often be used as a substitute for the wor of the independent auditor’s staff. b. the procedures performed by the internal audit staff may eliminate the independent auditor’s need for an etensi%e study and e%aluation of internal control. c. the wor performed by internal auditors may be a factor in determining the nature3 timing3 and etent of the independent auditor’s procedures. d. the understanding of the internal audit function is an important substanti%e test to be performed by the independent auditor.
61. challenging d
,aylor ales Corp. maintains a large full-time internal audit staff that reports directly to the chief accountant. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. ,he independent auditor will probably a. eliminate tests of controls. b. increase the depth of the study and e%aluation of administrati%e controls. c. a%oid duplicating the wor performed by the internal audit staff. d. place limited reliance on the wor performed by the internal audit staff.
6#. challenging c
When planning an audit3 the auditor’s assessed le%el of control ris is a. determined by using actuarial tables. b. calculated by using the audit ris model. c. an economic issue3 trading off the costs of testing controls against the cost of testing balances. d. calculated by using the formulas pro%ided in the A0C*A’s auditing standards.
6(. challenging a
When a compensating control eists3 the absence of a ey control a. is no longer a concern because there is no longer a significant deficiency or material weaness. b. is a slight concern to the auditor. c. could cause a material loss3 so it must be tested using substanti%e procedures. d. is magnified and must be remo%ed from the sampling process and eamined in its entirety.
6/. challenging a
An internal control narrati%e indicates that an appro%ed %oucher is re5uired to support e%ery chec re5uest for payment of merchandise. Which of the following procedures pro%ides the greatest assurance that this control is operating effecti%ely? a. elect and eamine canceled checs and ascertain that the related %ouchers are dated no later than the checs. b. elect and eamine %ouchers and ascertain that the related canceled checs are dated no earlier than the %ouchers. c. elect and eamine canceled checs and ascertain that the related %ouchers are dated no earlier than the checs.
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d.
62. challenging a
elect and eamine %ouchers and ascertain that the related canceled checs are dated no later than the %ouchers.
When obtaining an understanding of an entity’s control en%ironment3 an auditor should concentrate on the substance of management’s policies and procedures rather than their form because a. management may establish appropriate policies and procedures but not act on them. b. the board of directors may not be aware of management’s attitude toward the control en%ironment. c. the auditor may belie%e that the policies and procedures are inappropriate for that particular entity. d. the policies and procedures may be so wea that no reliance is contemplated by the auditor.
'ssay Questions 64. easy
With which aspect of internal control are auditors primarily concerned? AnswerF ,he aspect of internal control that auditors are primarily concerned with is the reliability of financial reporting.
66. easy
An effecti%e accounting information and communication system must satisfy si transactionrelated ob$ecti%es. !ne of these ob$ecti%es is that transactions are recorded on the correct dates )timing+. 0dentify the fi%e remaining ob$ecti%es. AnswerF ,he fi%e remaining ob$ecti%es areF &ecorded transactions eist )eistence+. 'isting transactions are recorded )completeness+. &ecorded transactions are stated at the correct amounts )accuracy+. ,ransactions are properly classified )classification+. &ecorded transactions are properly included in the master files and correctly summari"ed )posting and summari"ation+. • • • • •
68. )*ublic+ medium
,here are four steps in the auditor’s process of understanding internal control and assessing control ris for a public company. tep one is obtain and document an understanding of internal control: design and operation. What are the remaining three steps? AnswerF ,he remaining three steps areF Assess control ris.
6:. medium
Management’s identification and analysis of ris is an ongoing process and is a critical component of effecti%e internal control. An important first step is for management to identify factors that may increase ris. 0dentify at least fi%e factors3 obser%able by management3 that may lead to increased ris in a typical business organi"ation. AnswerF ,here are many factors that may lead to increased ris in an organi"ation. ome eamples includeF failure to meet prior ob$ecti%es. decreasing 5uality of personnel. • •
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• • • •
87. medium
increasing geographic dispersion of company operations. increasing significance and compleity of core business processes. introduction of new information technologies. entrance of new competitors.
81. )*ublic+ medium
0n addition to understanding the design of internal control3 the auditor must also e%aluate whether the designed controls are actually placed in operation. Hist four common methods auditors use to fulfill this re5uirement during the audit of a public company. AnswerF ,here are fi%e common procedures listed below. tudents were ased to list four common methodsF =pdate and e%aluate auditors’ pre%ious eperience with the entity. Mae in5uiries of client personnel. 'amine documents and records. !bser%e entity acti%ities and operations. *erform walthroughs of the accounting system. &ead client’s policy and systems manual • • • • • •
8#. medium
A proper narrati%e of an accounting system and related controls should possess se%eral ey characteristics. What are three such characteristics? AnswerF ,he characteristics areF ,he origin of e%ery document and record in the system. All processing that taes place. ,he disposition of e%ery document and record in the system. An indication of the controls rele%ant to the assessment of control ris. • • • •
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8(. medium
8/. medium
,he internal control framewor de%eloped by C!! includes fi%e so-called Bcomponents of internal control. i%e components of internal control areF The control environment . ,he control en%ironment consists of the actions3 policies3 and procedures that reflect the o%erall attitudes of top management3 directors and owners3 about internal control and its importance to the company. Risk assessment . ,his is management’s identification and analysis of riss rele%ant to the preparation of financial statements in accordance with @AA*. Information and communication. ,his is the set of manual andDor computeri"ed procedures that identifies3 assembles3 classifies3 analy"es3 records3 and reports a company’s transactions and maintains accountability for the related assets. Control activities. ,hese are the policies and procedures that help ensure necessary actions are taen to address riss in the achie%ement of the company’s ob$ecti%es. Monitoring . ,his is management’s ongoing and periodic assessment of the 5uality of internal control performance to determine that controls are operating as intended and modified when needed. •
•
•
•
•
82. medium
84. medium
Control acti%ities3 one of the fi%e components of internal control3 are defined as Bthe policies and procedures3 in addition to those included in the other four components3 that help ensure necessary actions are taen to address riss in the achie%ement of the entity’s ob$ecti%es. ,here are fi%e categories of control acti%ities. *lease describe the fi%e categories of control acti%ities. AnswerF ,he fi%e categories of control acti%ities areF Ade5uate separation of duties. a. Custody of assets should be separated from accounting. b. Authori"ing transactions should be separated from custody of related assets. c. !perational responsibility should be separated from record-eeping. d.
•
*roper authori"ation of transactions and acti%ities.
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a. b. •
86. medium
@eneral authori"ation is gi%en for transactions meeting established criteria. pecific authori"ation is re5uired for indi%idual transactions that don’t confirm to the criteria. Ade5uate document and records. a.
•
*hysical control o%er assets and records. ,hese should include fireproof safes and limited access storerooms.
•
0ndependent checs on performance by internal %erification should be used.
Ade5uate documents and records are important for effecti%e internal control. ,here are fi%e principles that dictate the proper design and use of documents and records. !ne principle is that documents and records should be prenumbered consecuti%ely to facilitate control o%er missing documents3 and as an aid in locating documents when they are needed at a later date. *lease discuss each of the other four principles of ade5uate documents and records. AnswerF
•
88. medium
•
•
8:. )*ublic+ medium
Auditors of financial statements issued by a public company are re5uired to report on internal control o%er financial reporting. riefly describe the auditor’s responsibility. AnswerF ,he report on internal control o%er financial reporting must include the auditor’s opinion as to whether management’s assessment of the design and operating effecti%eness of internal control o%er financial reporting is fairly stated in all material respects. ,his in%ol%es an e%aluation of management’s assessment process to determine whether internal controls are effecti%e and the auditor’s independent assessment of the internal control’s design and operating effecti%eness.
:7. medium
What two specific assessments must be made to arri%e at the preliminary assessment of control ris during the audit of a public company? AnswerF ,he two specific assessments areF
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• •
:1. challenging
Assessment of whether the entity is audit able
Ade5uate separation of duties is an important control acti%ity. *lease discuss the four general guidelines for separation of duties to pre%ent both intentional and unintentional misstatements that are of significance to auditors. AnswerF ,he general guidelines areF Custody of assets should be separated from accounting. Authori"ing transactions should be separated from custody of related assets. !perational responsibility should be separated from record-eeping.
!ther !b$ecti%e Answer >ormat Questions :#. medium
Match se%en of the terms )a-i+ with the definitions pro%ided below )1-6+F a. Control en%ironment b. Control acti%ities c. 0ndependent checs on performance d. 0nternal control e. Monitoring f. eparation of duties g. @eneral authori"ation h. pecific authori"ation i. &is assessment
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1.
Management’s ongoing and periodic assessment of the 5uality of internal control performance to determine that controls are operating as intended and modified when needed.
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Company-wide policies for the appro%al of all transactions within stated limits.
A
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,he actions3 policies3 and procedures that reflect the o%erall attitudes of top management3 directors3 and owners of an entity about internal control and its importance to the entity.
>
/.
egregation of the following acti%ities in an organi"ationF custody of assets3 accounting3 authori"ation3 and operational responsibility.
0
2.
Management’s identification and analysis of riss rele%ant to the preparation of financial statements in accordance with generally accepted accounting principles.
4.
*olicies and procedures that help ensure necessary actions are taen to address riss in the achie%ement of the entity’s ob$ecti%es.
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6.
:(. easy b
A process designed to pro%ide reasonable assurance regarding the achie%ement of management’s ob$ecti%es in the following categoriesF )1+ reliability of financial reporting3 )#+ effecti%eness and efficiency of operations3 and )(+ compliance with applicable laws and regulations. 0f3 when obtaining an understanding of control acti%ities of a relati%ely small client3 the auditor identified no control acti%ities3 the auditor would probably set a low assessment of control ris. a. ,rue b. >alse
17-12
:/. easy b
When internal controls are not effecti%e3 then substanti%e audit tests are less reliableG thus3 the etent of substanti%e tests should be reduced. a. ,rue b. >alse
:2. easy a
0n an audit of a non-public company3 the less control ris there is3 the smaller the amount of planned substanti%e e%idence re5uired. a. ,rue b. >alse
:4. easy b
As a client’s information system becomes more comple3 it is liely that an auditor will decrease reliance on controls and increase substanti%e tests to support a control ris assessment. a. ,rue b. >alse
:6. easy b
When a company designs and implements internal controls3 cost of the controls is not a %alid consideration. a. ,rue b. >alse
:8. )*ublic+ easy a
*CA! tandard # re5uires auditors to perform walthroughs to assist in understanding internal control. a. ,rue b. >alse
::. easy b
Adequate documents and records is a subcomponent of the control environment . a. ,rue b. >alse
177. easy a
>or proper internal control3 there should be ade5uate separation of duties. Eowe%er3 the etent of separation of duties considered Bade5uate depends hea%ily on the si"e of the organi"ation. a. ,rue b. >alse
171. easy a
0n an audit of a non-public company3 the auditor’s assessment of control ris and the etent of tests of controls are in%ersely relatedG that is3 if the auditor’s assessment of control ris decreases3 more etensi%e tests of controls are applied. a. ,rue b. >alse
17#. medium b
maller companies usually ha%e more etensi%e internal controls than larger companies which result in fewer frauds being committed at small companies. a. ,rue b. >alse
17-14
17(. )!9+ medium b
,he arbanes-!ley Act of #77# re5uires that pri%ate and public companies issue an internal control report. a. ,rue b. >alse
17/. medium b
,he most important component of internal control is ris assessment. a. ,rue b. >alse
172. medium b
,he primary emphasis by auditors when e%aluating and testing internal control is on controls o%er account balances rather than controls o%er classes of transactions. a. ,rue b. >alse
174. medium b
When internal controls o%er a gi%en financial statement account are assessed by the auditor as highly effecti%e3 the auditor need not obtain audit e%idence for that account beyond testing the controls. a. ,rue b. >alse ,he chart of accounts is a control and is closely related to the controls related to ade5uate documents and records. a. ,rue b. >alse
176. medium a
178. medium b
>or proper internal control3 the custodianship of cash3 including receipts and disbursements3 should be the responsibility of the accounting department. a. ,rue b. >alse
17:. medium b
Auditing standards prohibit reliance on the wor of internal auditors due to the lac of independence of the internal auditors. a. ,rue b. >alse
117. medium a
*rocedures used to obtain an understanding of internal control are normally performed on fewer transactions than procedures used to test controls. a. ,rue b. >alse
111. medium a
>or most uses3 flowcharts are superior to narrati%es as a method of communicating the characteristics of internal control. a. ,rue b. >alse
11#. medium b
When documenting their understanding of a client’s internal controls3 auditors are re5uired to use narrati%es. a. ,rue b. >alse
11(. medium b
,he two primary determinants of an entity’s auditability are the integrity of management and the competency of personnel. a. ,rue b. >alse
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