Question 1

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

Accepted Answer

Internal controls over the valuation and allocation assertion are similar to those for the existence and occurrence assertion because they both involve verifying the accuracy and completeness of the recorded amounts.

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.

Accepted Answer

If a material weakness in internal controls over financial reporting exists, the auditor must issue an adverse report on the effectiveness of internal controls.

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.

Accepted Answer

Computer assisted audit techniques, such as test data to test computer application controls, are most effective in testing controls designed to prevent checks from being issued or recorded for the wrong amount because they can simulate various scenarios and directly test the software's ability to correctly handle transactions.

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.

Accepted Answer

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

Question 5

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

Accepted Answer

When control risk is assessed at the maximum, it means that the auditor believes that the controls are not effective in preventing or detecting material misstatements. In this case, the auditor only needs to document this conclusion and not the basis for the assessment. This is because the basis for the assessment is not relevant when the control risk is assessed at the maximum.

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.

Accepted Answer

The answer of If the auditor tests controls only at...

Question 7

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

Accepted Answer

The answer of The use of prenumbered documents is a...

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.

Accepted Answer

Internal controls over the completeness assertion typically start with unrecorded items or transactions and trace them forward to ensure they have been captured in the general ledger, not the other way around.

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.

Accepted Answer

Electronic cancellation of vouchers and supporting information when a check is issued helps prevent the same voucher from being paid twice by ensuring that once a payment is made, the system recognizes the voucher as settled and does not allow for a duplicate payment.

Question 10

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

Accepted Answer

Control risk assessments can be expressed either quantitatively, using numerical values or percentages, or qualitatively, using descriptive terms to indicate the level of risk, such as low, medium, or high.

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.

Accepted Answer

The answer of Which of the following is not one...

Question 12

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

Accepted Answer

Public company auditors are required to test controls related to all significant financial statement assertions to ensure the reliability of the financial statements, as part of their audit procedures under standards such as those set by the PCAOB (Public Company Accounting Oversight Board) in the United States.

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.

Accepted Answer

Reperformance of the application of the control by entity personnel is not a type of evidence for tests of controls because it involves entity personnel reperforming the control, rather than the auditor obtaining evidence through their own procedures such as inquiries, inspections, observations, or their own reperformance of controls.

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.

Accepted Answer

To assess control risk below the maximum level, auditors must obtain evidence that the controls in question are operating effectively, as this indicates that the risk of material misstatement due to control failure is reduced.

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.

Accepted Answer

Assessing control risk involves evaluating the design and operation of an entity's internal control system to determine its effectiveness in preventing or detecting material misstatements 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.

Accepted Answer

The auditor can assess control risk based on evidence gathered during the process of understanding the entity's internal control system, as this understanding helps in evaluating the effectiveness of the controls in preventing or detecting material misstatements.

Question 17

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

Accepted Answer

Internal control risk assertions are made for individual assertions related to specific financial statement elements, not for internal controls as a whole. Each assertion addresses a different aspect of what the controls are intended to achieve, such as completeness, accuracy, and validity of transactions and balances.

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.

Accepted Answer

An auditor performs tests of controls to assess the effectiveness of a company's internal controls. If it is determined that effective internal controls are in operation, the auditor may rely on these controls and plan to perform tests of controls to evaluate their effectiveness further.

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

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

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

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 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: