Question 1

Incompatible duties exist when an employee is in a position to perpetrate and conceal errors or fraud.

Accepted Answer

Incompatible duties refer to situations where an employee's job responsibilities allow them to carry out and conceal wrongful acts such as errors or fraud. This can occur when an employee has access to sensitive information or controls multiple systems or procedures that can be used to perpetrate and cover up misconduct. Such duties are incompatible because they create conflicts of interest and put the organization at risk of financial and reputational damage.

Question 2

Well-designed internal control can be circumvented by collusion.

Accepted Answer

Collusion occurs when two or more individuals work together to deceive or manipulate a company's internal controls. Despite the presence of well-designed internal controls, collusion can still occur, making option A correct.

Question 3

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? A)Checklist. B)Flowchart. C)Questionnaire. D)Confirmation.

Accepted Answer

Confirmation is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes. Checklists, flowcharts, and questionnaires are commonly used for this purpose. Confirmation is usually performed during the audit to obtain evidence about the accuracy and completeness of information obtained during the planning phase.

Question 4

In assessing the objectivity of a client's internal auditors,the CPA would be most likely to consider internal auditor's:
A)Education levels.
B)Experience.
C)Organizational status within the company.
D)Training and supervisory skills.

Accepted Answer

The organizational status of internal auditors within a company affects their ability to perform work objectively. If they are positioned high enough in the organization, they are more likely to be able to act independently of the activities they audit.

Question 5

The relatively low number of types of transactions incurred by small firms makes the segregation of duties impossible.

Accepted Answer

Even small firms can implement segregation of duties to some extent; it involves assigning different people to manage different tasks to reduce the risk of errors or fraud, even with a limited number of transactions.

Question 6

Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee?
A)Management's failure to renegotiate unfavorable long-term purchase commitments.
B)Recurring operating losses that may indicate going concern problems.
C)Evidence of a lack of objectivity by those responsible for accounting decisions.
D)Management's current plans to reduce its ownership equity in the entity.

Accepted Answer

Evidence of a lack of objectivity by those responsible for accounting decisions is a significant deficiency because it can directly impact the integrity of financial reporting and the effectiveness of the entity's internal control over financial reporting.

Question 7

The Foreign Corrupt Practices Act prohibits American companies to make payments to foreign officials to obtain business.

Accepted Answer

The Foreign Corrupt Practices Act (FCPA) indeed prohibits American companies from making payments to foreign officials to obtain or retain business.

Question 8

In a financial statement audit,CPAs are required to assess the operating effectiveness of most significant accounting oriented controls.

Accepted Answer

The answer of In a financial statement audit,CPAs are required...

Question 9

CPA firms may use written narratives to describe internal control in their audit working papers.

Accepted Answer

CPA firms may use written narratives to describe internal control in their audit working papers. This is a common practice in auditing to document the understanding of control processes that are designed to mitigate risks and evaluate their efficiency.

Question 10

After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk,an auditor decided to perform tests of controls.The auditor most likely decided that:
A)Additional evidence to support a reduction in the assessed level of control risk is not available.
B)An increase in the assessed level of control risk is justified for certain financial statement assertions.
C)It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures.
D)There were many internal control deficiencies that would allow misstatements to enter the accounting system.

Accepted Answer

If the preliminary assessed level of control risk is high, performing tests of controls is an efficient way to gather evidence to support a reduction in control risk. This, in turn, would result in a reduction in the planned substantive procedures, which would save time and resources. Therefore, the auditor most likely decided that it would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures. Option A is incorrect because additional evidence may be obtained through tests of controls. Option B is incorrect because an increase in the assessed level of control risk is not the goal of tests of controls. Option D is incorrect because the presence of internal control deficiencies does not necessarily mean that misstatements would be allowed to enter the accounting system.

Question 11

Tests of controls do not ordinarily address: A)By whom a control was applied. B)How a control was applied. C)The consistency with which a control was applied. D)The cost effectiveness of the way a control was applied.

Accepted Answer

Tests of controls are meant to assess the effectiveness of controls in preventing or detecting material misstatements, and are focused on evaluating the design and implementation of controls. Cost-effectiveness is not a relevant aspect of tests of controls. The other options listed (A, B, C) are all pertinent factors that may be considered in tests of controls.

Question 12

Which of the following is least likely to be evidence of operating effectiveness of controls? A)Cancelled supporting documents. B)Confirmations of accounts receivable. C)Records documenting usage of computer programs. D)Signatures on authorization forms.

Accepted Answer

Confirmations of accounts receivable are primarily used as substantive tests to verify the existence and accuracy of recorded receivables, rather than to assess the operating effectiveness of internal controls. The other options (A, C, D) are more directly related to evaluating the operation of controls.

Question 13

Which of the following must the auditor communicate to the audit committee?
A)Significant deficiencies and material weaknesses.
B)Only significant deficiencies.
C)Only material weaknesses.
D)Neither significant deficiencies nor material weaknesses.

Accepted Answer

According to auditing standards, the auditor is required to communicate significant deficiencies and material weaknesses to the audit committee. Therefore, choice A is the correct answer. Choices B, C, and D are incorrect because they do not reflect the full extent of the auditor's communication requirements.

Question 14

Which is most likely when the assessed level of control risk increases?
A)Change from performing substantive procedures at year-end to an interim date.
B)Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity.
C)Use the maximum number of dual purpose tests.
D)Use larger sample sizes for substantive procedures.

Accepted Answer

When the assessed level of control risk increases, auditors are likely to use larger sample sizes for substantive procedures to gain more assurance that the financial statements are free of material misstatement. This is because a higher control risk implies that the entity's internal controls are less effective, necessitating more extensive substantive testing.

Question 15

Internal auditors should preferably report to the chief accounting officer of the company.

Accepted Answer

Internal auditors should ideally report to someone who is independent of the operations they are auditing, such as the board of directors, the CEO, or a chief risk officer. Reporting to the chief accounting officer could create a conflict of interest or give the appearance of impropriety.

Question 16

A client's internal control appears strong,but the CPA has elected not to perform any tests of controls.The planned assessed level of control risk is at what level?
A)Zero.
B)Low.
C)Moderate.
D)Maximum.

Accepted Answer

When a CPA decides not to perform any tests of controls, despite the appearance of strong internal controls, they default to assuming that the controls may not be effective. This leads to planning the assessed level of control risk at the maximum level, as they are not relying on the internal controls to prevent or detect material misstatements.

Question 17

If the auditors' assessment of the design of internal control reveals that it cannot be relied upon,the auditors are not required to prepare any documentation of internal control for their working papers.

Accepted Answer

If the auditors' assessment reveals that the design of internal control cannot be relied upon, they are still required to prepare documentation of internal control for their working papers. This documentation should include the nature, timing, and extent of the tests of controls performed by the auditors.

Question 18

In a financial statement audit performed following AICPA Professional Standards,how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely upon in the current year?
A)Monthly.
B)Each audit.
C)At least every second audit.
D)At least every third audit.

Accepted Answer

The answer of In a financial statement audit performed following...

Question 19

Internal control is a process that provides reasonable assurance concerning reliability of financial information.

Accepted Answer

This statement is true. Internal control is designed to provide reasonable assurance that financial information is accurate, reliable, and timely. It helps to ensure the compliance of laws and regulations, and prevent fraud and errors.

Question 20

The auditors' communication of internal control significant deficiencies should be addressed only to senior management of the company.

Accepted Answer

The auditors' communication of internal control significant deficiencies should be addressed to both senior management and the audit committee, according to auditing standards.

Quiz 7: Internal Control

Incompatible duties exist when an employee is in a position to perpetrate and conceal errors or fraud.

Well-designed internal control can be circumvented by collusion.

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes?

In assessing the objectivity of a client's internal auditors,the CPA would be most likely to consider internal auditor's:

The relatively low number of types of transactions incurred by small firms makes the segregation of duties impossible.

Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee?

The Foreign Corrupt Practices Act prohibits American companies to make payments to foreign officials to obtain business.

In a financial statement audit,CPAs are required to assess the operating effectiveness of most significant accounting oriented controls.

CPA firms may use written narratives to describe internal control in their audit working papers.

After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk,an auditor decided to perform tests of controls.The auditor most likely decided that:

Tests of controls do not ordinarily address:

Which of the following is least likely to be evidence of operating effectiveness of controls?

Which of the following must the auditor communicate to the audit committee?

Which is most likely when the assessed level of control risk increases?

Internal auditors should preferably report to the chief accounting officer of the company.

A client's internal control appears strong,but the CPA has elected not to perform any tests of controls.The planned assessed level of control risk is at what level?

If the auditors' assessment of the design of internal control reveals that it cannot be relied upon,the auditors are not required to prepare any documentation of internal control for their working papers.

In a financial statement audit performed following AICPA Professional Standards,how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely upon in the current year?

Internal control is a process that provides reasonable assurance concerning reliability of financial information.

The auditors' communication of internal control significant deficiencies should be addressed only to senior management of the company.