Deck 3: Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors

Question 1

The quality of an organization's internal control will affect both the audit approach and the amount of testing needed for an engagement.

Answer 1

True

Question 2

An auditor needs to understand a company's internal controls in order to anticipate the types of material misstatements that may occur.

Answer 2

True

Question 3

The better the quality of the internal controls, the more an auditor can rely on the controls.

Answer 3

True

Question 4

The five major components of an organization's internal control are: the control environment, risk assessment, control activities, information and communication, and monitoring.

Question 5

An organization's control environment is established and maintained by the internal auditing department.

Question 6

Physical controls are necessary to protect and safeguard assets from accidental or intentional destruction and theft.

Question 7

An organization's commitment to integrity is demonstrated through the tone set by the board and management.

Question 8

A company's internal auditing function should not be considered when assessing the effectiveness of internal controls.

Question 9

Control activities are the component of internal control that includes control actions that have been established by policies and procedures

Question 10

A material weakness in internal control is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

Question 11

Preventive controls are designed to prevent the occurrence of a misstatement.

Question 12

In addition to controls being specific, they may be broad, such as policies regarding a code of ethics.

Question 13

Segregation of duties is a control activity that is designed to protect against the risk that an individual could both perpetrate and cover up a fraud.

Question 14

Generally, highly regulated entities have more complex control activities than less-regulated entities.

Question 15

Internal control is a process designed to guarantee the achievement of the objectives of reliable financial reporting, compliance with laws and regulations and ineffective and inefficient operations.

Question 16

Monitoring of the internal controls involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions.

Question 17

Effective control not only identifies risk but also responds to these risks appropriately.

Question 18

Control activities implemented to mitigate transaction processing risk that typically affect only certain processes, transactions, accounts, and assertions are referred as transaction or application controls.

Question 19

Controls to monitor results of operations are considered to be transaction controls.

Question 20

Internal control is a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.

Question 21

Preventive controls are generally more cost-efficient than detective controls.

Question 22

Segregation of duties is considered a part of the monitoring component of the COSO framework for internal control structure.

Question 23

Performing a walkthrough provides an understanding of the nature of processing in important accounting applications.

Question 24

Walkthroughs and inquiries are often used to obtain an understanding of internal controls.

Question 25

The payroll department should be responsible for signing payroll checks.

Question 26

A deficiency in design of internal controls exists when an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met.

Question 27

One of the advantages of a computerized accounting system is that the computerized system eliminates the need for internal controls.

Question 28

A well-controlled organization has an appropriate structure and clearly defined lines of responsibility and authority where everyone in the organization has equal responsibility for the effective operation of internal control.

Question 29

Management should test all internal controls for effectiveness when performing their annual evaluation of the internal control structure.

Question 30

Several significant deficiencies in internal controls may constitute a material weakness.

Question 31

A walkthrough involves following a transaction back from when it is reflected in the financial records to when it originated to determine if the controls are effectively designed and have been implemented.

Question 32

Transaction oriented controls are designed to ensure that transactions are properly valued.

Question 33

A transaction trail includes the documents and records that allow an auditor to trace a transaction from its origination through to its final disposition, or vice versA.

Question 34

Self-checking digit algorithms have been developed to test for transposition errors associated with identification numbers

Question 35

Physical controls to safeguard assets are not intended to include simple controls such as fences and locks.

Question 36

Corporate policies designed to attract, train, and evaluate competent employees are considered to be control activities in the COSO framework for internal controls.

Question 37

Management is obligated to report significant deficiencies in the control structure in their annual report on internal control effectiveness required by the Sarbanes-Oxley Act.

Question 38

Management's risk assessment process should be performed only by senior-level management.

Question 39

A strong control environment can reduce all the financial reporting risks to zero.

Question 40

Managers must use professional judgment to determine whether identified control deficiencies rise to the level of a significant deficiency or material weakness.

Question 41

Which of the following is not a reason that the auditor must gain an understanding of the client's internal control system?

A) Better understand the client, its risks, and how it manages those risks.
B) Assess control risk and identify the types of financial statement misstatements that are most likely to occur.
C) Plan direct tests of account balances to determine if misstatements have occurred.
D) All are reasons why auditors must gain an understanding of the client's internal control system.

Question 42

Which of the following is not part of the control environment?

A) Management philosophy and operating style.
B) Methods of assigning authority and responsibility.
C) Personnel policies and practices.
D) Control activities.

Question 43

Which of the following best describes the purpose of personnel policies and procedures?

A) Ensure the organization hires the right people.
B) Ensure the organization complies with federal and state laws in its hiring and retention decisions.
C) Ensure the organization has employees that are properly trained and supervised.
D) Ensure the organization performs all of the above.

Question 44

The information and communication component of internal control includes which of the following?

A) The organization deploys control activities through policies that establish what is expected and in procedures that put policies into action.
B) The organization obtains or generates and uses relevant, quality information to support the functioning of other components of internal control.
C) The organization identifies and assesses changes that could significantly impact the system of internal control.
D) All of the above.

Question 45

Which one of the following groups is interested in an organization's control structure?

A) Board members.
B) Lenders.
C) Auditors.
D) All of the above.

Question 46

What is the primary benefit of effective internal control in an organization?

A) Achievement of certain organizational goals.
B) Completion of a successful audit for the entity.
C) Shareholder involvement in the company's success.
D) Obtaining profitability and financial strength.

Question 47

Which of the following is a major component of an organization's internal control structure?

A) Major new financing.
B) The financial environment.
C) Risk assessment.
D) Telecommunication equipment.

Question 48

Which of the following services does the PCAOB require auditors of public companies to perform?

A) A financial statement audit and an attest audit.
B) A financial statement audit and an assurance audit.
C) A financial statement audit and agreed upon procedures.
D) A financial statement audit and an examination of the effectiveness of internal controls.

Question 49

Control activities may be implemented at the organizational level and at the transactional level.

Question 50

Preventive controls are designed to provide reasonable assurance that the correct program is used for processing, all transactions are processed, and the transactions update appropriate files.

Question 51

With whom does the tone of internal control typically originate?

A) Auditors.
B) Employees.
C) Management.
D) Stockholders.

Question 52

The quality of an organization's internal controls affect which of the following?

A) The reliability of financial data.
B) The ability of management to make good decisions.
C) The ability to remain in business.
D) All of the above.

Question 53

Which COSO component of internal control concerns the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization's objectives?

A) Control activities.
B) Information and communication.
C) Monitoring.
D) Control environment.

Question 54

One of the components of internal control, monitoring, refers to the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization's objectives.

Question 55

All organizations should evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

Question 56

Internal control is a process designed to achieve objectives in which one of the following categories?

A) Reliability of financial reporting.
B) Compliance with applicable laws.
C) Operational Effectiveness.
D) All of the above.

Question 57

Which one of the following COSO components of internal controls influences the tone for the organization?

A) Control risk assessment.
B) Control environment.
C) Information and communication.
D) Monitoring.

Question 58

Which of the following is not included as a components of an organization's internal control structure in the COSO framework?

A) Control risk.
B) The control environment.
C) Risk assessment.
D) Control activities.

Question 59

Which of the following is not one of the underlying principles of an effective control environment as developed by COSO?

A) The organization demonstrates a commitment to integrity and ethical values.
B) The board of directors demonstrates independence from management and exercises oversight for the development and performance of internal control.
C) Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in pursuit of objectives.
D) The organization considers the potential for fraud in assessing risks to the achievement of objectives.

Question 60

A material control weakness is a deficiency in internal control such that a reasonable probability exists that a material misstatement of the company's financial statements may not be prevented or detected on a timely basis.

Question 61

Which of the following is considered to be an entity-wide control?

A) Segregation of duties.
B) Controls over management override.
C) Authorization procedures for purchasing.
D) Adequately documented transaction trails.

Question 62

Which of the following is not a way management obtains evidence regarding the effectiveness of internal control over the accounting system?

A) Performing a walkthrough of the accounting system.
B) Making inquiries of banks and attorneys.
C) Reviewing system flowcharts.
D) Taking plant and operational tours.

Question 63

Which of the following best represents a walkthrough?

A) The controller reviews the bank reconciliation prepared by the accountant and its resulting journal entries.
B) The auditor walks the production line to find inefficiencies in the inventory process and reports them to management.
C) The controller takes a sample of recorded write-offs to ensure they have been properly approved.
D) The auditor traces three purchasing transactions from the purchase order to the financial statement for observation and understanding.

Question 64

In an Integrated Audit, what is the independent external auditor primary concerned with?

A) Detecting all errors.
B) Determining the effectiveness of operations.
C) Determining whether the internal controls are effective.
D) Determining whether the controls promote efficiency.

Question 65

The COSO principle that an organization should identify and assess changes that significantly impact the system of internal control is related to which COSO component?

A) Control Environment
B) Risk Assessment
C) Control Activities
D) Monitoring

Question 66

An edit test is considered to be which type of control?

A) An input control.
B) A processing control.
C) An output control
D) A supporting control.

Question 67

A control designed to ensure that the number of sales transactions recorded in the accounting records matches the number of sales invoices entered during processing is known as which type of control?

A) Input control.
B) Processing control.
C) Output control.
D) Edit control.

Question 68

Which of the following is an inherent limitation of internal controls?

A) Lack of auditor independence.
B) Collusion.
C) Separation of duties.
D) Employee peer review.

Question 69

Which of the following is considered to be a transaction control?

A) Controls to monitor other controls.
B) Policies that address significant business control practices.
C) Centralized processing controls.
D) Physical controls to safeguard assets.

Question 70

A control designed to ensure that sales transactions are generated using the company's most current prices would be considered to be which type of control?

A) An input control.
B) A processing control.
C) An output control.
D) A physical control.

Question 71

Which of the following is another name for transaction controls?:

A) Entity-wide controls.
B) Application controls.
C) Supporting controls.
D) Detail controls.

Question 72

Requiring the mail clerk to prepare a listing of all checks received, with copies of the list going to the cashier and to accounting, is an example of which type of control?

A) Preventive.
B) Corrective.
C) Detective.
D) Directive.

Question 73

Which one of the following represents a control deficiency?

A) A missing control that is required for achievement of objectives.
B) A control that operates as designed.
C) A control that ensures the reliability of financial reporting.
D) A control that does not prevent immaterial errors.

Question 74

Which of the following is not part of management's report on internal controls?

A) Management responsibility for control of financial reporting.
B) The framework used to evaluate internal control.
C) An assessment of the effectiveness of the company's internal control.
D) A statement indicating the extent of tests performed to assess controls.

Question 75

Which of the following is an example of a physical control to safeguard assets?

A) Hiring only trustworthy cashiers.
B) Separation of duties.
C) Locks on the warehouse doors.
D) Safety audits on the production-line.

Question 76

A control designed to ensure that no employee is paid for more than 80 hours of sick pay is an example of which type of control?

A) Entity-wide control.
B) Processing control.
C) Output control.
D) Input control.

Question 77

Which one of the following is not a control activity implemented in most accounting systems?

A) Segregation of duties.
B) Competent, trustworthy employees.
C) Authorization procedures.
D) All of these activities are normally implemented.

Question 78

Internal controls may be preventive or detective.Which of the following controls is preventive?

A) Requiring two persons to open mail containing payments.
B) Reconciling the accounts receivable subsidiary file with the control account.
C) Using batch totals.
D) Preparing bank reconciliations.

Question 79

Which one of the following is an example of an internal risk for an organization?

A) Changes in internal information technology.
B) Increases in substitute services or products.
C) Changes in the reliability of source goods.
D) Changes in regulation that make the business model unsustainable.

Question 80

Internal control is a process affected by the organization's board of directors, management, and other personnel to provide reasonable assurance of achieving certain objectives. Which of the following does not fit into one of these categories of objectives?

A) Reliability of financial reporting.
B) Compliance with laws and regulations.
C) Continuing existence.
D) Effectiveness and efficiency of operations.