Deck 11: Internal Control and Coso Framework

Question 1

The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on

A)the company's board of directors.
B)the audit committee of the board of directors.
C)management.
D)the CFO and the independent auditors.

Answer 1

C

Question 2

An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as

A)collusion.
B)a material weakness.
C)a control deficiency.
D)a significant deficiency.

Answer 2

A

Question 3

With which of management's assertions with respect to implementing internal controls is the auditor primarily concerned?

A)efficiency of operations
B)reliability of financial reporting
C)effectiveness of operations
D)compliance with applicable laws and regulations

Answer 3

B

Question 4

Who is responsible for establishing a private company's internal control?

A)senior management
B)internal auditors
C)FASB
D)audit committee

Question 5

Internal controls

A)are implemented by and are the responsibility of the auditors.
B)consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals.
C)guarantee that the company complies with all laws and regulations.
D)only apply to SEC companies.

Question 6

In performing the audit of internal control over financial reporting,the auditor emphasizes internal control over classes of transactions because

A)the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.
B)the class of transaction is where most fraud schemes occur.
C)account balances are less important to the auditor then the changes in the account balances.
D)classes of transactions tests are the most efficient manner to compensate for inherent risk.

Question 7

When considering internal controls,

A)auditors can ignore controls affecting internal management information.
B)auditors are concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements.
C)management is responsible for understanding and testing internal control over financial reporting.
D)companies must use the COSO framework to establish internal controls.

Question 8

When one material weakness is present at the end of the year,management of a public company must conclude that internal control over financial reporting is

A)insufficient.
B)inadequate.
C)ineffective.
D)inefficient.

Question 9

Section 404 of the Sarbanes-Oxley Act requires that both private and public companies issue an internal control report.

Question 10

Internal controls are not designed to provide reasonable assurance that

A)all frauds will be detected.
B)transactions are executed in accordance with management's authorization.
C)the company's resources are used efficiently and effectively.
D)company personnel comply with applicable rules and regulations.

Question 11

Which of the following is not one of the three primary objectives of effective internal control?

A)reliability of financial reporting
B)efficiency and effectiveness of operations
C)compliance with laws and regulations
D)assurance of elimination of business risk

Question 12

When management is evaluating the design of internal control,management evaluates whether the control can do which of the following?

A)
B)
C)
D)

Question 13

Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies?

A)
B)
C)
D)

Question 14

Describe each of the three broad objectives management typically has for internal control.With which of these objectives is the auditor primarily concerned?

Question 15

Internal controls can never be regarded as completely effective.Even if company personnel could design an ideal system,its effectiveness depends on the

A)adequacy 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.

Question 16

The auditors primary purpose in auditing the client's system of internal control over financial reporting is

A)to prevent fraudulent financial statements from being issued to the public.
B)to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements.
C)to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements.
D)to efficiently conduct the Audit of Financial Statements.

Question 17

The internal control framework used by most U.S.companies is the ________ framework.

A)FASB
B)PCAOB
C)COSO
D)SEC

Question 18

Sarbanes-Oxley requires management to issue an internal control report that includes two specific items.Which of the following is one of these two requirements?

A)a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
B)a statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
C)a statement that management,the board of directors,and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
D)a statement that the external auditors are solely responsible for establishing and maintaining an adequate system of internal control

Question 19

Two key concepts that underlie management's design and implementation of internal control are

A)costs and materiality.
B)absolute assurance and costs.
C)inherent limitations and reasonable assurance.
D)collusion and materiality.

Question 20

Management has a legal and professional responsibility to be sure that the financial statements are prepared in accordance with reporting requirements of applicable accounting frameworks.

Question 21

Which of the following statements is most correct with respect to separation of duties?

A)A person who has temporary or permanent custody of an asset should account for that asset.
B)Employees who authorize transactions should not have custody of related assets.
C)Employees who open cash receipts should record the amounts in the subsidiary ledgers.
D)Employees who authorize transactions should have recording responsibility for these transactions.

Question 22

Which of the following factors may increase risks to an organization?

A)
B)
C)
D)

Question 23

Which of the following is correct with respect to the design and use of business documents?

A)The documents should be in paper format.
B)Documents should be designed for a single purpose to avoid confusion in their use.
C)Documents should be designed to be understandable only by those who use them.
D)Documents should be prenumbered consecutively to facilitate control over missing documents.

Question 24

The primary emphasis by auditors is on controls over

A)classes of transactions.
B)account balances.
C)both A and B,because they are equally important.
D)both A and B,because they vary from client to client.

Question 25

Which of the following deals with ongoing or periodic assessment of the quality of internal control by management?

A)verifying activities
B)monitoring activities
C)oversight activities
D)management activities

Question 26

Under the Dodd-Frank federal financial reform legislation,all public companies are required to obtain an audit report on internal control over financial reporting.

Question 27

Which of the following best describes an entity's accounting information and communication system?

A)
B)
C)
D)

Question 28

When a company designs and implements internal controls,cost of the controls is not a valid consideration.

Question 29

Which of the following is an accurate statement regarding the auditor's responsibility for understanding internal control?

A)Transaction-related audit objectives typically have no impact on the rights and obligations objectives.
B)Transaction-related audit objectives typically have a significant impact on the balance-related audit objective of realizable value.
C)Auditors generally emphasize internal control over account balances rather than classes of transactions.
D)Auditors and management are both equally concerned about controls that affect the efficiency and effectiveness of company operations.

Question 30

Which of the following components of the control environment define the existing lines of responsibility and authority?

A)organizational structure
B)management philosophy and operating style
C)human resource policies and practices
D)management integrity and ethical values

Question 31

Which of the following is not an underlying principle related to risk assessment?

A)The organization should have clear objectives in order to be able to identify and assess the risks relating to the objectives.
B)The auditors should determine how the company's risks should be managed.
C)The organization should consider the potential for fraudulent behavior.
D)The organization should monitor changes that could impact internal controls.

Question 32

The Sarbanes-Oxley Act requires

A)all public companies to issue reports on internal controls.
B)all public companies to define adequate internal controls.
C)the auditor of public companies to design effective internal controls.
D)the auditor of public companies to withdraw from an engagement if internal controls are weak.

Question 33

Of the following statements about internal controls,which one is least likely to be correct?

A)No one person should be responsible for the custodial responsibility and the recording responsibility for an asset.
B)Transactions must be properly authorized before such transactions are processed.
C)Because of the cost-benefit relationship,a client may apply controls on a test basis.
D)Control procedures reasonably ensure that collusion among employees cannot occur.

Question 34

Which of the following is a risk assessment principle?

A)accountability
B)use relevant,quality information to support the functioning of internal controls
C)consider the potential for fraud
D)develop general controls over technology

Question 35

Which of the following best describes the purpose of control activities?

A)the actions,policies and procedures that reflect the overall attitudes of management
B)the identification and analysis of risks relevant to the preparation of financial statements
C)the policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity's objectives
D)activities that deal with the ongoing assessment of the quality of internal control by management

Question 36

Reasonable assurance allows for

A)low likelihood that material misstatements will not be prevented or detected by internal controls.
B)no likelihood that material misstatements will not be prevented or detected by internal control.
C)moderate likelihood that material misstatements will not be prevented or detected by internal control.
D)high likelihood that material misstatements will not be prevented or detected by internal control.

Question 37

Which of the following activities would be least likely to strengthen a company's internal control?

A)separating accounting from other financial operations
B)maintaining insurance for fire and theft
C)fixing responsibility for the performance of employee duties
D)carefully selecting and training employees

Question 38

Authorizations can be either general or specific.Which of the following is not an example of a general authorization?

A)automatic reorder points for raw materials inventory
B)a sales manager's authorization for a sales return
C)credit limits for various classes of customers
D)a sales price list for merchandise

Question 39

An auditor should consider two key issues when obtaining an understanding of a client's internal controls.These issues are

A)the effectiveness and efficiency of the controls.
B)the frequency and effectiveness of the controls.
C)the design and operating effectiveness of the controls.
D)the implementation and operating effectiveness of the controls.

Question 40

Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes-Oxley Act?

A)The audits of internal control and the financial statements provide reasonable assurance as to misstatements.
B)The audit of internal control provides absolute assurance of misstatement.
C)The audit of financial statements provides absolute assurance of misstatement.
D)The audits of internal control and the financial statements provide absolute assurance as to misstatements.

Question 41

Management's identification and analysis of risk is an ongoing process and is a critical component of effective internal control.An important first step is for management to identify factors that may increase risk.Identify at least five factors,observable by management,which may lead to increased risk in a typical business organization.

Question 42

Control activities help assure that the necessary actions are taken to address risks to the achievement of the company's objectives.List the five types of control activities.

Question 43

The internal control framework developed by COSO includes five so-called "components" of internal control.Discuss each of these five components.

Question 44

Without an effective ________,the other components of the COSO framework are unlikely to result in effective internal control,regardless of their quality.

A)risk assessment policy
B)monitoring policy
C)control environment
D)system of control activities

Question 45

Which of the following is not one of the subcomponents of the control environment?

A)management's philosophy and operating style
B)organizational structure
C)adequate separation of duties
D)commitment to competence

Question 46

To promote operational efficiency,the internal audit department would ideally report to

A)line management.
B)the PCAOB.
C)the Chief Accounting Officer.
D)the audit committee.

Question 47

External financial statement auditors must obtain evidence regarding what attributes of an internal audit (IA)department if the external auditors intend to rely on IA's work?

A)integrity
B)objectivity
C)competence
D)all of the above

Question 48

The ________ is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.

A)general ledger
B)general journal
C)trial balance
D)chart of accounts

Question 49

Control activities are a subcomponent of the information and communication component of internal control.

Question 50

Certain principles dictate the proper design and use of documents and records.Briefly describe several of these principles.

Question 51

Which of the following is an accurate statement regarding control activities?

A)As the level of complexity of IT systems increases,the separation of duties often becomes blurred.
B)Segregation of duties would be violated if the same person authorizes the payment of a vendor's invoice and also approves the disbursement of funds to pay the bill.
C)The most important type of protective measure for safeguarding assets and records is the us of physical precautions.
D)all of the above

Question 52

Separation of duties is essential in preventing errors and intentional misstatements on the financial statements.List below the four general guidelines.

Question 53

List the four underlying principles of risk assessment per the COSO framework

Question 54

Adequate documents and records is a subcomponent of the control environment.

Question 55

Hanlon Corp.maintains a large internal audit staff that reports directly to the accounting department.Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable.An independent auditor will probably

A)eliminate tests of controls.
B)increase the depth of the study and evaluation of administrative controls.
C)avoid duplicating the work performed by the internal audit staff.
D)place limited reliance on the work performed by the internal audit staff.

Question 56

Proper segregation of functional responsibilities calls for separation of

A)authorization,execution,and payment.
B)authorization,recording,and custody.
C)custody,execution,and reporting.
D)authorization,payment,and recording.

Question 57

Discuss what is meant by the term "control environment" and identify four control environment subcomponents that the auditor should consider.

Question 58

It is important for the CPA to consider the competence of the clients' personnel because their competence has a direct impact upon the

A)cost/benefit relationship of the system of internal control.
B)achievement of the objectives of internal control.
C)comparison of recorded accountability with assets.
D)timing of the tests to be performed.

Question 59

To obtain an understanding of an entity's control environment,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 environment.
C)the auditor may believe that the policies and procedures are inappropriate for that particular entity.
D)the policies and procedures may be so weak that no reliance is contemplated by the auditor.

Question 60

If a company has an effective internal audit department,

A)the internal auditors can express an opinion on the fairness of the financial statements.
B)their work cannot be used by the external auditors per PCAOB Standard 5.
C)it can reduce external audit costs by providing direct assistance to the external auditors.
D)the internal auditors must be CPAs in order for the external auditors to rely on their work.

Question 61

Old and new systems operating simultaneously in all locations is a test approach known as

A)pilot testing.
B)horizontal testing.
C)integrative testing.
D)parallel testing.

Question 62

Auditing standards prohibit reliance on the work of internal auditors due to the lack of independence of the internal auditors.

Question 63

Which of the following statements related to application controls is correct?

A)Application controls relate to various aspects of the IT function including software acquisition and the processing of transactions.
B)Application controls relate to various aspects of the IT function including physical security and the processing of transactions in various cycles.
C)Application controls relate to all aspects of the IT function.
D)Application controls relate to the processing of individual transactions.

Question 64

If an auditor wishes to rely on the work of internal auditors (IA),the auditor must obtain satisfactory evidence related to the IA's competence,integrity,and objectivity.

Question 65

Which of the following controls prevent and detect errors while transaction data are processed?

A)software
B)application
C)processing
D)transaction

Question 66

Which of the following is not an example of an applications control?

A)Back-up of data is made to a remote site for data security.
B)There is a preprocessing authorization of the sales transactions.
C)There are reasonableness tests for the unit selling price of a sale.
D)After processing,all sales transactions are reviewed by the sales department.

Question 67

A ________ is responsible for controlling the use of computer programs,transaction files and other computer records and documentation and releases them to the operators only when authorized.

A)software engineer
B)chief computer operator
C)librarian
D)data control operator

Question 68

General controls include all of the following except

A)systems development.
B)online security.
C)processing controls.
D)hardware controls.

Question 69

The chart of accounts is helpful in preventing classification errors if it accurately describes which type of transaction should be in each account.

Question 70

Security controls should require that users enter a(n)________ before being allowed access to software and other related data files.

A)echo check
B)parity check
C)self-diagnosis test
D)authorized password

Question 71

Personnel responsible for performing internal verification procedures must be independent of those originally responsible for preparing the data.

Question 72

Controls that are designed for each software application and are intended to help a company satisfy the transaction-related audit objectives are

A)user controls.
B)general controls.
C)audit controls.
D)application controls.

Question 73

Which of the following is a component of general controls?

A)processing controls
B)output controls
C)back-up and contingency planning
D)input controls

Question 74

An example of a specific authorization is management setting a policy authorizing the ordering of inventory when less than a one-week supply is on hand.

Question 75

Typical controls developed for manual systems which are still important in IT systems include

A)management's authorization of transactions.
B)competent personnel.
C)adequate preparation of input source documents.
D)all of the above.

Question 76

When purchasing software or developing in-house software,

A)cost should be the only factor.
B)extensive testing of the software is generally not required.
C)a team of both IT and non-IT personnel should be involved in the decision process.
D)the librarian and the IT manager should be the only ones involved in the decision process.

Question 77

Output controls need to be designed for which of the following data integrity objectives?

A)detecting errors after the processing is completed
B)preventing errors before the processing is completed
C)detecting errors in the general ledger adjustment process
D)preventing errors in separation of duties for IT personnel

Question 78

Which of the following describes the process of implementing a new system in one part of the organization,while other locations continue to use the current system?

A)parallel testing
B)online testing
C)pilot testing
D)control testing

Question 79

Which of the following is not a general control?

A)Computer performed validation tests of input accuracy.
B)Equipment failure causes error messages on monitor.
C)There is a separation of duties between programmer and operators.
D)There are adequate program run instructions for operating the computer.

Question 80

A control that relates to all parts of the IT system is called a(n)

A)general control.
B)systems control.
C)universal control.
D)applications control.