Question 1

In performing the audit of internal control over financial reporting the auditor emphasizes internal control over class 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.

Accepted Answer

Internal control over class of transactions is emphasized because the accuracy of accounting system outputs heavily depends on the accuracy of inputs and processing. Therefore, testing controls over classes of transactions helps the auditor ensure the accuracy and completeness of financial information that is reported.

Question 2

Management must disclose material weaknesses in internal control in its audit report:
A)whenever the weakness is deemed significant to a single class of transactions.
B)whenever the weakness is significant to overall financial reporting objectives.
C)if the weakness exists at the end of the year.
D)only if the auditor identifies the weakness as significant.

Accepted Answer

Management is required to disclose material weaknesses in internal control if they exist at the end of the year, as this affects the reliability of financial reporting.

Question 3

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.

Accepted Answer

"Effective" means that internal control is operating as intended and achieving its objectives. Therefore, if there is a material weakness at the end of the year, management must conclude that internal control over financial reporting is ineffective. Choices A, B, and D may also describe the situation to some extent, but "ineffective" best captures the meaning of a material weakness.

Question 4

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

Accepted Answer

The auditor is primarily concerned with the reliability of financial reporting, as it is important to ensure that the financial statements prepared by management are accurate and truthful. This includes ensuring that internal controls are implemented effectively to identify and prevent any misstatements or errors in the financial statements. While efficiency, effectiveness, and compliance are also important, they are not the primary focus of the auditor's concern.

Question 5

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.

Accepted Answer

The two key concepts that underlie management's design and implementation of internal control are inherent limitations and reasonable assurance. Inherent limitations recognize that no system of internal control can provide absolute assurance that all errors or irregularities will be detected, while reasonable assurance means that the benefit of the control procedures should exceed the cost of applying them. Therefore, choice C is the best answer. Choices A, B, and D are incorrect because they do not accurately reflect the key concepts underlying management's design and implementation of internal control.

Question 6

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.

Accepted Answer

Internal controls are implemented by management and are designed to provide reasonable assurance that the company achieves its objectives and goals, including financial reporting objectives, effective and efficient operations, and compliance with laws and regulations. Auditors may assess and test the effectiveness of the company's internal controls but are not responsible for implementing them. Internal controls apply to all companies, not just SEC companies, and while they can contribute to compliance with laws and regulations, they do not guarantee it.

Question 7

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

Accepted Answer

The answer of Describe each of the three broad objectives...

Question 8

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

Accepted Answer

Sarbanes-Oxley requires management to issue an internal control report that includes a statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting, as well as an assessment of the effectiveness of this internal control structure and procedures.

Question 9

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.

Accepted Answer

The effectiveness of internal controls depends on the people using it. The controls can be well-designed, properly implemented, and maintained by an internal audit staff, but if the people using them are not competent and dependable, then the controls may fail. Therefore, option D is the best choice. The adequacy of the computer system can affect the effectiveness of internal controls, but it is not the most critical factor. The proper implementation by management and ability of the internal audit staff to maintain it are necessary but not sufficient conditions for internal control effectiveness.

Question 10

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.

Accepted Answer

The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on management. This includes the design and implementation of controls, as well as their effectiveness. While the board of directors and audit committee also have oversight responsibilities, the primary responsibility for internal controls rests with management.

Question 11

Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies?
A) 
B) 
C) 
D)

Accepted Answer

The Public Company Accounting Oversight Board (PCAOB) provides an assessment of the effectiveness of internal control over financial reporting for public companies.

Question 12

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.

Accepted Answer

Management is legally and professionally responsible for ensuring that the financial statements are prepared in accordance with the reporting requirements of applicable accounting frameworks, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Failing to do so can result in legal consequences and damage to the company's reputation.

Question 13

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

Accepted Answer

Assurance of elimination of business risk is not one of the three primary objectives of effective internal control. The three primary objectives are reliability of financial reporting, efficiency and effectiveness of operations, and compliance with laws and regulations. The assurance of elimination of business risk is a desirable outcome of strong internal control, but it is not one of the primary objectives.

Question 14

Which of the following is responsible for establishing a private company's internal control?
A)Senior Management
B)Internal Auditors
C)FASB
D)Audit committee

Accepted Answer

Senior management is responsible for designing, implementing, and maintaining effective internal control over financial reporting (ICFR) within a private company. They have the ultimate responsibility to ensure that the company's financial statements are accurate and reliable. Internal auditors and the audit committee can provide oversight and assurance on the effectiveness of the internal control system, but the responsibility for establishing it rests with senior management. FASB, on the other hand, sets accounting standards but does not have a direct role in establishing internal control.

Question 15

When management is evaluating the design of internal control, management evaluates whether the control can do which of the following?
A) 
B) 
C) 
D)

Accepted Answer

The answer of When management is evaluating the design of...

Question 16

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

Accepted Answer

Section 404 of the Sarbanes-Oxley Act requires public companies to issue an internal control report to assess the effectiveness of their financial reporting processes and to disclose any material weaknesses that could impact the accuracy of their financial statements.

Question 17

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.

Accepted Answer

Collusion refers to two or more individuals working together to commit fraud or theft. In this scenario, the employees are working together to steal assets and cover it up by misstating the accounting records, which constitutes collusion. The other answer choices refer to deficiencies in internal controls, but do not fully capture the nature of the scenario described.

Question 18

When considering internal controls, an important point to consider is that:
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.

Accepted Answer

Auditors are primarily concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements. Management is responsible for understanding and testing internal control over financial reporting, and while COSO framework is a commonly used framework for establishing internal controls, it is not necessarily required for all companies. It is important for auditors to ensure that internal controls are in place to provide reasonable assurance that the financial statements are free from material misstatement.

Question 19

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.

Accepted Answer

Internal controls provide reasonable assurance, not absolute assurance, that transactions are executed in accordance with management's authorization, the company's resources are used efficiently and effectively, and company personnel comply with applicable rules and regulations. However, internal controls cannot ensure that all frauds will be detected. Fraud is often intentionally hidden or disguised, making it difficult to detect even with a well-designed system of internal controls.

Question 20

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.

Accepted Answer

The primary purpose of auditing the client's system of internal control over financial reporting is to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements. This allows auditors to provide an opinion on the fairness of the financial statements and to identify any material misstatements. While preventing fraudulent financial statements is a desirable outcome, it is not the primary purpose of the audit. Additionally, auditors do not report that the internal controls are effective in preventing misstatements, as they cannot provide absolute assurance that no misstatements exist. Finally, efficiently conducting the audit is not the primary purpose of auditing the system of internal control over financial reporting, although it is a desirable outcome.

Quiz 10: Internal Control, Control Risk, and Section 404 Audits

In performing the audit of internal control over financial reporting the auditor emphasizes internal control over class of transactions because:

Management must disclose material weaknesses in internal control in its audit report:

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:

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

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

Internal controls:

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

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?

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

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

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

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.

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

Which of the following is responsible for establishing a private company's internal control?

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

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

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

When considering internal controls, an important point to consider is that:

Internal controls are not designed to provide reasonable assurance that:

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