Deck 11: Audit Procedures in Response to Assessed Risks: Tests of Controls

Question 1

Internal controls over the valuation and allocation assertion are similar to those for the existence and occurrence assertion.

Answer 1

True

Question 2

Which of the following statements is true about an auditor's responsibility to communicate with respect to a public company's internal controls?

A) The auditor will issue an adverse report on the effectiveness of internal controls if a material weakness in internal controls over financial reporting exists.
B) Auditors are required to communicate all significant deficiencies in internal control to management but not necessarily to the audit committee.
C) Auditors are required to communicate all significant deficiencies in internal control to the audit committee but not necessarily to management.
D) The difference between a material weakness and a significant deficiency is inconsequential.
E) The auditor's judgment is based on either the likelihood of the misstatement or on the potential magnitude of the misstatement.

Answer 2

A

Question 3

Which of the following tests of controls would be most effective in testing controls designed to prevent checks from being issued or recorded for the wrong amount?

A) Observation of bank reconciliations.
B) Observation of segregation of duties.
C) Computer assisted audit techniques such as test data to test computer application control.
D) Observe documents being marked or cancelled as "paid".
E) Documentation of general controls over access to computer programs and documentation.

Answer 3

C

Question 4

"A significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected" is the definition of:

A) a material weakness.
B) a significant deficiency.
C) a control deficiency.
D) a material misstatement.
E) an internal control deficiency.

Question 5

If control risk is assessed at the maximum, only this conclusion needs to be documented and not the basis for the assessment.

Question 6

If the auditor tests controls only at a particular point in time, then the auditor only obtains evidence that the control operated effectively at that point in time. When the auditor obtains evidence about the design or operation of controls during an interim period, he or she should determine what additional evidential matter should be obtained for the remaining period. List five factors the auditor should consider when considering the evidence that needs to be obtained during the remaining period.

Question 7

The use of prenumbered documents is a common control designed for the existence and occurrence assertion.

Question 8

Internal controls over the completeness assertion generally start by examining information recorded in the general ledger and tracing it backward through the systems of accounting and internal control.

Question 9

Which of the following necessary controls would address potential misstatement arising from a voucher being paid twice?

A) Periodic independent bank reconciliations.
B) Electronic cancellation of vouchers and supporting information when a check is issued.
C) Separate duties for approving payment vouchers and sighing checks.
D) The computer compares the sum of checks issued with the entry to cash disbursements.
E) Only authorized personnel are permitted to run the cash disbursements program and handle checks.

Question 10

Control risk assessments may be expressed in quantitative or qualitative terms.

Question 11

Which of the following is not one of the four basic functions of every transaction?

A) Consideration.
B) Recording.
C) Initiation.
D) Execution.
E) Delivery and/or receipt.

Question 12

Public company auditors must test controls related to all significant financial statement assertions.

Question 13

The nature of tests of controls relates to the type of evidence obtained. Which of the following is not an example of a type of evidence relevant to tests of controls?

A) Inquiries of entity personnel.
B) Inspection of documents.
C) Observation of application of the control.
D) Inspection of signatures indicating performance of the control.
E) Reperformance of the application of the control by entity personnel.

Question 14

To arrive at an assessment of control risk below the maximum, evidence must be obtained about the operating effectiveness of the necessary controls.

Question 15

Assessing control risk is the process of evaluating the effectiveness of an entity's internal control in preventing or detecting material misstatement in the financial statements.

Question 16

The auditor may base an assessment of control risk on the evidence collected while obtaining an understanding of internal controls.

Question 17

Internal control risk assertions are made for internal controls as a whole, not for individual assertions.

Question 18

An auditor will normally plan to perform tests of controls only if it has been determined that effective internal controls have been placed in operation.