Question 1

In a properly designed internal control system, the same employee may be permitted to
A) Receive and deposit checks and also approve write-offs of customer accounts.
B) Approve vouchers for payment and also sign checks.
C) Reconcile the bank statements and also receive and deposit cash.
D) Sign checks and also cancel supporting documents.

Accepted Answer

The answer of In a properly designed internal control system,...

Question 2

During consideration of internal control in a financial statement audit of a nonpublic company, an auditor is not obligated to
A) Search for significant deficiencies in the operation of internal control.
B) Understand the internal control environment and the information system.
C) Determine whether the controls relevant to audit planning have been placed in operation.
D) Perform procedures to understand the design of internal control.

Accepted Answer

While an auditor should consider internal control in their financial statement audit of a nonpublic company, they are not obligated to search for significant deficiencies in the operation of internal control. However, if any significant deficiencies or material weaknesses are identified during the audit, the auditor is required to communicate them to management and those charged with governance.

Question 3

Internal control has become a very important focus for publicly traded and privately-held companies alike. Internal control is intended to accomplish at least three objectives and consists of five components of internal control. List the three objectives and five components of internal control.
Objectives of internal control include:
1. reliability, timeliness, and transparency of internal and external, nonfinancial and financial reporting,
2. effectiveness and efficiency of operations, including safeguarding of assets, and
3. compliance with applicable laws and regulations.

Accepted Answer

The answer of Internal control has become a very important...

Question 4

When communicating internal control-related matters noted in an audit of a nonpublic company, an auditor's report issued on significant deficiencies should indicate that
A) Errors or fraud may occur and not be detected because there are inherent limitations in any internal control system.
B) The issuance of an unqualified opinion on the financial statements may depend on corrective follow-up action.
C) The deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions.
D) The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

Accepted Answer

The answer of When communicating internal control-related matters noted in...

Question 5

After the auditor has prepared a flowchart of the internal controls surrounding sales and evaluated the design of the system, the auditor would perform tests of controls on all control activities
A) Documented in the flowchart.
B) Considered to be weaknesses that might allow errors to enter the accounting system.
C) That the auditor plans to rely on.
D) That would aid in preventing fraud.

Accepted Answer

The purpose of performing tests of controls is to evaluate the operating effectiveness of the design of the internal controls in place. These tests are performed on those control activities that the auditor plans to rely on in forming an opinion on whether the financial statements are free from material misstatement. Therefore, the correct answer is (C) - control activities that the auditor plans to rely on. Control activities that are documented in the flowchart (A) may or may not be tested. Weaknesses in the system (B) may be noted for further evaluation, but they are not the focus of testing controls. Preventing fraud (D) is a consideration for the overall audit, but not specifically for testing controls surrounding sales.

Question 6

What are some typical types of evidence that may be collected in testing an entity's internal controls?

Accepted Answer

The answer of What are some typical types of evidence...

Question 7

Before applying substantive procedures to the details of asset and liability accounts at an interim date, the auditor should
A) Assess the difficulty in controlling achieved audit risk for the remainder of the period.
B) Investigate significant fluctuations that have occurred in the asset and liability accounts since the previous balance sheet date.
C) Select only those accounts which can effectively be sampled during year-end audit work.
D) Consider the compliance tests that must be applied at the balance sheet date to extend the audit conclusions reached at the interim date.

Accepted Answer

Before applying substantive procedures to the details of asset and liability accounts at an interim date, the auditor should first assess the difficulty in controlling achieved audit risk for the remainder of the period. This is because the risk of material misstatement may increase or decrease over time, which can affect the auditor's planned procedures and the evaluation of the results obtained. Therefore, the auditor needs to consider the overall audit strategy and adjust it as necessary to ensure that the audit risk is kept within an acceptable level throughout the engagement. Choices B and C are too specific and do not address the overall audit risk. Choice D is partly correct, but compliance tests are only one type of substantive procedures, and there may be other procedures that are more appropriate or necessary, depending on the circumstances.

Question 8

Why might an auditor decide to test controls at an interim date?

Accepted Answer

The answer of Why might an auditor decide to test...

Question 9

A customer intended to order 100 units of product Z96014, but incorrectly ordered 100 units of a nonexistent product Z96015. Which of the following controls most likely would detect this error?
A) Check digit verification.
B) Record count.
C) Hash total.
D) Redundant data check.

Accepted Answer

Check digit verification would ensure that the number entered is valid and matches with the expected value. If the customer had tried to enter product Z96015, which does not exist, the check digit verification would have flagged it as an incorrect value.

Question 10

What are four potential tools available to the auditor for documenting her understanding of an entity's system of internal control?

Accepted Answer

The answer of What are four potential tools available to...

Question 11

What are two potential benefits and two potential risks of using IT for an entity's internal control?

Accepted Answer

The answer of What are two potential benefits and two...

Question 12

A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions but which leave no transaction trail is
A) Inspection.
B) Observation.
C) Reperformance.
D) Reconciliation.

Accepted Answer

Observation is the best choice for tests of control activities that involve segregation of functions but which leave no transaction trail. This approach involves physically watching the individuals and processes involved to ensure that proper segregation of duties is occurring. Inspection and reperformance are better suited for tests that leave a paper trail, and reconciliation is generally not applicable for tests of control activities.

Question 13

Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If an IT application control which performs a limit check for each check request is to be subjected to the auditor's test data approach, the sample should include
A) Approximately 1,000 test items.
B) A number of test items determined by the auditor to be sufficient under the circumstances.
C) A number of test items determined by the auditor's reference to the appropriate sampling tables.
D) One transaction.

Accepted Answer

The answer of Assume that an auditor estimates that 10,000...

Question 14

In terms of an audit, define substantive strategy and reliance strategy. Include in your definition how the different strategies relate to internal control. Which strategy would best relate to a lower control risk?

Accepted Answer

The answer of In terms of an audit, define substantive...

Question 15

While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because
A) Substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested.
B) The records may be accurate even though they are maintained by persons having incompatible functions.
C) Substantive procedures relate to the entire period under audit, but compliance tests ordinarily are confined to the period during which the auditor is on the entity's premises.
D) Many computerized procedures leave no audit trail of who performed them, so substantive procedures may necessarily be limited to inquiries and observation of office personnel.

Accepted Answer

Substantive procedures may support the accuracy of underlying records, but they may not provide affirmative evidence of segregation of duties. This is because the records may still be accurate even if they are maintained by persons with incompatible functions. Substantive procedures rarely guarantee the accuracy of the records if only a sample of transactions has been tested, and compliance tests are usually limited to the period during which the auditor is on the entity's premises. While computerized procedures may leave no audit trail of who performed them, this is not the reason why substantive procedures may not provide affirmative evidence of segregation of duties.

Question 16

Describe the limitations of internal control. Why do limitations on internal control exist?

Accepted Answer

The answer of Describe the limitations of internal control. Why...

Question 17

Audit evidence concerning proper segregation of duties ordinarily is best obtained by
A) Preparation of a flowchart of duties performed by available personnel.
B) Inquiring whether control activities operated consistently throughout the period.
C) Reviewing job descriptions prepared by the Personnel Department.
D) Direct personal observation of the employees who apply the control activities.

Accepted Answer

Direct personal observation of employees who apply control activities provides the auditor with the most reliable audit evidence about the proper segregation of duties. This is because it allows the auditor to observe firsthand how the control activities are applied and to identify any deficiencies or weaknesses in the segregation of duties. The other options - preparation of a flowchart, inquiring about consistent operation of control activities, and reviewing job descriptions - may provide some evidence, but they are not as reliable as direct observation.

Question 18

As the acceptable level of detection risk increases, an auditor may change the
A) Assessed level of control risk from a lower level to a higher level.
B) Assurance provided by tests of controls by using a larger sample size than planned.
C) Timing of substantive procedures from year-end to an interim date.
D) Nature of substantive procedures from less effective to more effective procedures.

Accepted Answer

The answer of As the acceptable level of detection risk...

Question 19

After obtaining an understanding of internal controls and assessing control risk of an entity, an auditor decided not to perform tests of controls for purposes of the audit. The auditor most likely decided that
A) The available evidential matter obtained through tests of controls would not support an increased level of control risk.
B) A reduction in the assessed level of control risk is justified for certain financial statement assertions.
C) It would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures.
D) The assessed level of inherent risk exceeded the assessed level of control risk.

Accepted Answer

The answer of After obtaining an understanding of internal controls...

Question 20

The program flowcharting symbol representing a decision is a
A) Triangle.
B) Circle.
C) Rectangle.
D) Diamond.
Short Answer Questions

Accepted Answer

The diamond shape is used in flowcharts to represent decision points where a yes/no question is asked or a condition is evaluated.

Quiz 6: Internal Control in a Financial Statement Audit

In a properly designed internal control system, the same employee may be permitted to

During consideration of internal control in a financial statement audit of a nonpublic company, an auditor is not obligated to

When communicating internal control-related matters noted in an audit of a nonpublic company, an auditor's report issued on significant deficiencies should indicate that

After the auditor has prepared a flowchart of the internal controls surrounding sales and evaluated the design of the system, the auditor would perform tests of controls on all control activities

What are some typical types of evidence that may be collected in testing an entity's internal controls?

Before applying substantive procedures to the details of asset and liability accounts at an interim date, the auditor should

Why might an auditor decide to test controls at an interim date?

A customer intended to order 100 units of product Z96014, but incorrectly ordered 100 units of a nonexistent product Z96015. Which of the following controls most likely would detect this error?

What are four potential tools available to the auditor for documenting her understanding of an entity's system of internal control?

What are two potential benefits and two potential risks of using IT for an entity's internal control?

A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions but which leave no transaction trail is

Assume that an auditor estimates that 10,000 checks were issued during the accounting period. If an IT application control which performs a limit check for each check request is to be subjected to the auditor's test data approach, the sample should include

In terms of an audit, define substantive strategy and reliance strategy. Include in your definition how the different strategies relate to internal control. Which strategy would best relate to a lower control risk?

While substantive procedures may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties because

Describe the limitations of internal control. Why do limitations on internal control exist?

Audit evidence concerning proper segregation of duties ordinarily is best obtained by

As the acceptable level of detection risk increases, an auditor may change the

After obtaining an understanding of internal controls and assessing control risk of an entity, an auditor decided not to perform tests of controls for purposes of the audit. The auditor most likely decided that

The program flowcharting symbol representing a decision is a