Question 1

Which of the following is not an objective of internal controls over financial reporting as defined by the Sarbanes-Oxley Act?
A)Policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant.
B)Policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,and receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant.
C)Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations.
D)Policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of the registrant's assets that could have a material effect on the financial statements.

Accepted Answer

Explanation: The Sarbanes-Oxley Act focuses on the accuracy and reliability of financial reporting and the prevention of fraudulent activities within corporations. While it does emphasize compliance with laws and regulations as part of its broader objectives, the specific objective of ensuring compliance with all applicable laws and regulations is not directly stated as an objective of internal controls over financial reporting. The primary focus is on the accuracy of financial records, authorization of transactions, and safeguarding of assets.

Question 2

As part of understanding the internal control,an auditor is not required to
A)consider factors that affect the risk of material misstatement.
B)ascertain whether internal control policies and activities have been placed in operation.
C)identify the types of potential misstatements that can occur.
D)obtain knowledge about the operating effectiveness of the client's internal control activities.

Accepted Answer

Understanding the internal control system as part of an audit involves considering factors that affect the risk of material misstatement, ascertaining whether internal control policies and activities have been implemented, and identifying the types of potential misstatements. However, obtaining knowledge about the operating effectiveness of the client's internal control activities goes beyond understanding the system and involves testing the controls, which is not required for all audits.

Question 3

A report on internal control effectiveness by the management team of public companies is required by
A)the Sarbanes-Oxley Act of 2002.
B)the PCAOB.
C)the AICPA.
D)the auditors.

Accepted Answer

The Sarbanes-Oxley Act of 2002 requires public companies to issue a report on internal control effectiveness, specifically in Section 404. This is a key component of the Act's efforts to improve the reliability and transparency of financial reporting. The PCAOB and AICPA are both involved in auditing and accounting standards, but it is the management team of public companies that is responsible for the internal control effectiveness report. While auditors are involved in reviewing and testing the effectiveness of internal controls, their role is separate from the management team's obligation to report on their own control environment.

Question 4

Assessing control risk at below the maximum level most likely would involve
A)performing more extensive substantive tests with larger sample sizes than originally planned.
B)reducing inherent risk for most of the assertions relevant to significant account balances.
C)changing the timing of substantive tests by omitting interim-date testing and performing the tests at year end.
D)identifying specific internal control activities that are relevant to specific financial statement assertions.

Accepted Answer

Assessing control risk at below the maximum level involves identifying specific internal control activities that are relevant to specific financial statement assertions. By doing this, the auditor can focus their testing on those areas where control risk is still present and assess the effectiveness of the internal controls in those areas. This approach allows the auditor to reduce their substantive testing and sample sizes, as they can place greater reliance on the internal controls that have been identified as effective. Reducing inherent risk or changing the timing of substantive tests would not necessarily reduce control risk.

Question 5

Generally accepted auditing standards (GAAS)give auditors considerable discretion to decide the amount of work required to satisfy auditing standards guiding internal control evaluation and related audit planning.Which of the descriptions below best expresses the minimum amount of work permitted by GAAS for nonpublic companies?
A)Do not obtain an understanding of client environment,accounting,or control activities.Do not document the decision to assess control risk at maximum.Perform 100% substantive audit on all financial statement transactions and balances.
B)Obtain an understanding of client environment,accounting,and control activities.Document the decision to assess control risk at maximum.Perform an extensive but not 100% substantive audit on financial statement transactions and balances.
C)Obtain an understanding of client environment,accounting,and control activities,and perform detail tests of controls.Document the decision to assess control risk below the maximum.Perform restricted substantive audit on financial statement transactions and balances,considering the control risk assessment.
D)Obtain an understanding of client environment,accounting,and control activities,and perform detail tests of controls.Document the decision to assess control risk at zero.Perform no substantive audit on financial statement transactions and balances,since zero control risk means that no errors or fraud can reach the accounts.

Accepted Answer

GAAS requires auditors to obtain an understanding of the client's environment, accounting, and control activities. This understanding is crucial for assessing control risk and planning the audit. While auditors can decide to assess control risk at the maximum and still comply with GAAS, they must document this decision. This approach allows for a more extensive substantive audit, though not necessarily 100%, to ensure financial statement transactions and balances are accurately stated.

Question 6

In testing control activities,an auditor ordinarily selects from a variety of techniques,including
A)inquiry and analytical procedures.
B)reperformance and observation.
C)comparison and confirmation.
D)inspection and verification.

Accepted Answer

While all the techniques listed may be used in testing control activities, reperformance and observation are the most effective as they involve the auditor physically testing the control activity and observing it in action. Inquiry and analytical procedures may not provide sufficient evidence of the effectiveness of the control activity, while comparison and confirmation may not be applicable to all control activities. Inspection and verification may be useful in some cases, but do not provide the same level of direct evidence as reperformance and observation.

Question 7

In an audit of financial statements,an auditor's primary consideration regarding an internal control policy or activity is whether the policy or activity
A)reflects management's philosophy and operating style.
B)affects management's financial statement assertions.
C)provides adequate safeguards over access to assets.
D)enhances management's decision making processes.

Accepted Answer

The primary consideration of an auditor regarding internal control policy or activity is whether it affects management's financial statement assertions, as it directly impacts the accuracy and reliability of the financial statements. While management's philosophy and operating style, safeguards over asset access, and decision-making processes are also important factors, they are secondary considerations.

Question 8

When auditing financial statements of a private company,the minimum work an auditor must perform in connection with a company's internal control is best described by which of the following statements.
A)Perform exhaustive tests of accounting controls and evaluate the company's control system effectiveness.
B)Determine whether the company's control policies are designed well enough to prevent material misstatements.
C)Prepare auditing working papers that document the auditor's understanding of the company's internal control.
D)Design procedures to search for significant deficiencies in the actual operation of the company's internal control.

Accepted Answer

The minimum work required by an auditor in connection with a company's internal control is to prepare auditing working papers that document the auditor's understanding of the company's internal control. This includes obtaining an understanding of the design of the control policies and procedures relevant to financial reporting, but the auditor is not required to perform exhaustive tests of accounting controls or design procedures to search for significant deficiencies in the actual operation of the company's internal control. The auditor is also not required to evaluate the company's control system effectiveness or determine whether the control policies are designed well enough to prevent material misstatements as these go beyond the minimum work required.

Question 9

Management's report on internal controls must include each of the following except
A)a statement that management is responsible for establishing and maintaining adequate internal control over financial reporting.
B)a statement identifying the framework management uses to evaluate the effectiveness of the company's internal control.
C)a statement providing management's assessment of the effectiveness of the company's internal control.
D)a statement providing management's evaluation of the company's control environment.

Accepted Answer

The management's report on internal controls must include statements A, B, and C. However, statement D is not required to be included in the report.

Question 10

Proper separation of duties reduces the opportunities to allow persons to be in positions to both
A)journalize entries and prepare financial statements.
B)record cash receipts and cash disbursements.
C)establish internal controls and authorize transactions.
D)perpetrate a fraud and then conceal it in the books.

Accepted Answer

Proper separation of duties is a key internal control that helps prevent fraud by ensuring no single individual has control over all aspects of a financial transaction. This makes it harder for someone to commit and then conceal fraudulent activities, as it would require collusion between multiple parties. Options A, B, and C describe functions that can be separated to enhance controls, but they do not directly address the dual aspects of committing and concealing fraud as effectively as option D does.

Question 11

Which of the following would most likely be classified as a material weakness?
A)Absence of appropriate separation of duties
B)Absence of appropriate reviews and approvals of transactions
C)Evidence of failure of control activities
D)Ineffective oversight of the financial reporting process by the company's audit committee

Accepted Answer

The answer of Which of the following would most likely...

Question 12

If a control total were to be computed on each of the following data items,which would best be identified as a hash total for a payroll IT application?
A)Hours worked
B)Total debits and total credits
C)Net pay
D)Department numbers

Accepted Answer

A hash total is a control total that does not have a direct financial meaning but is used to ensure data integrity. Department numbers work well for this purpose as they can be added together to create a non-financial total that can be used to check that all data has been processed correctly, unlike hours worked, total debits and credits, or net pay, which are financial figures.

Question 13

Below are several of the ASB management assertions.
A.Occurrence
B.Completeness
C.Rights and obligations
D.Allocation or valuation
E.Classification

Accepted Answer

The answer of Below are several of the ASB management...

Question 14

Which of the following areas can external auditors rely on internal auditors' work in auditing internal controls?
A)Evaluation of the auditing environment
B)Testing of low risk internal control activities
C)All testing of the operating effectiveness of internal control activities
D)As providing the principle evidence for the external auditors' opinion

Accepted Answer

External auditors may rely on internal auditors' work in the testing of low risk internal control activities. However, they cannot rely on internal auditors' work as a principle evidence for their opinion as they have their own independent responsibility to perform an audit of the financial statements. Additionally, external auditors cannot rely on internal auditors' work for the evaluation of the auditing environment or for all testing of the operating effectiveness of internal control activities.

Question 15

Which of the following is a step in an auditor's decision to assess control risk at below the maximum?
A)Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls.
B)Perform tests of details of transactions and account balances to identify potential errors and fraud.
C)Identify specific internal control policies and activities that are likely to detect or prevent material misstatements.
D)Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

Accepted Answer

In order for an auditor to assess control risk at below the maximum, they must first identify specific internal control policies and activities that are likely to detect or prevent material misstatements. This is because the auditor must have confidence in the effectiveness of the company's internal controls before they can reduce the amount of substantive testing they perform. Analytical procedures (choice A) and tests of details (choice B) are used to identify potential errors and fraud, but are not directly related to the decision to assess control risk at below the maximum. Choice D is also a consideration, but is not a step in the decision-making process.

Question 16

The primary objective of procedures performed to obtain an understanding of the entity's internal control is to provide an auditor with
A)knowledge necessary for audit planning.
B)evidential matter to use in assessing inherent risk.
C)a basis for modifying tests of controls.
D)an evaluation of the consistency of application of management's policies.

Accepted Answer

The primary objective of procedures performed to obtain an understanding of the entity's internal control is to provide an auditor with knowledge necessary for audit planning. This includes identifying areas of potential risk, assessing the risk of material misstatement, and designing audit procedures to address those risks. While these procedures may also provide evidential matter and a basis for modifying tests of controls and evaluating the consistency of management's policies, their primary objective is to inform audit planning.

Question 17

After obtaining an understanding of internal controls and assessing control risk on the audit of a non-public company,an auditor decided to perform tests of controls.The auditor most likely decided that
A)it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.
B)additional evidence to support a further reduction in control risk is not available.
C)an increase in the assessed level of control risk is justified for certain financial statement assertions.
D)there were many internal control weaknesses that could allow errors to enter the accounting system.

Accepted Answer

By performing tests of controls, the auditor can obtain evidence about the effectiveness of the client's internal controls. If the tests of controls are successful, the auditor can rely on the internal controls and perform fewer substantive tests, which can result in efficiency. Therefore, Option A is correct. Option B is incorrect because the auditor can use the evidence obtained from tests of controls to support a reduction in control risk. Option C is incorrect because successful tests of controls can result in a reduction, not an increase, in the assessed level of control risk. Option D is also incorrect because the question does not provide any information about weaknesses in the internal control system.

Question 18

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?
A)Incompatible duties
B)Management override
C)Mistakes in judgment
D)Collusion among employees

Accepted Answer

Incompatible duties are not an inherent limitation of internal controls; rather, they represent a flaw in the design of the control environment. Inherent limitations, such as management override, mistakes in judgment, and collusion among employees, acknowledge that even well-designed internal controls can fail or be circumvented.

Question 19

The overall attitude and awareness of an entity's board of directors concerning the importance of the client's internal control usually is reflected in its
A)computer-based control activities.
B)system of separation of duties.
C)control environment.
D)safeguards over access to assets.

Accepted Answer

The control environment encompasses the overall attitude and awareness of an entity's board of directors concerning the importance of internal control.

Question 20

In an audit of financial statements of a non-public company in accordance with generally accepted auditing standards,an auditor is required to
A)document the auditor's understanding of the entity's internal control.
B)search for significant deficiencies in the operation of the internal controls.
C)perform tests of controls to evaluate the effectiveness of the entity's accounting system.
D)determine whether control activities are operating effectively to prevent or detect material misstatements.

Accepted Answer

Documenting the auditor's understanding of the entity's internal control is a requirement in an audit of financial statements according to generally accepted auditing standards. This helps the auditor plan the audit and assess risks of material misstatement.

Quiz 5: Risk Assessment: Internal Control Evaluation

Which of the following is not an objective of internal controls over financial reporting as defined by the Sarbanes-Oxley Act?

As part of understanding the internal control,an auditor is not required to

A report on internal control effectiveness by the management team of public companies is required by

Assessing control risk at below the maximum level most likely would involve

In testing control activities,an auditor ordinarily selects from a variety of techniques,including

In an audit of financial statements,an auditor's primary consideration regarding an internal control policy or activity is whether the policy or activity

When auditing financial statements of a private company,the minimum work an auditor must perform in connection with a company's internal control is best described by which of the following statements.

Management's report on internal controls must include each of the following except

Proper separation of duties reduces the opportunities to allow persons to be in positions to both

Which of the following would most likely be classified as a material weakness?

If a control total were to be computed on each of the following data items,which would best be identified as a hash total for a payroll IT application?

Below are several of the ASB management assertions. A.Occurrence B.Completeness C.Rights and obligations D.Allocation or valuation E.Classification

Which of the following areas can external auditors rely on internal auditors' work in auditing internal controls?

Which of the following is a step in an auditor's decision to assess control risk at below the maximum?

The primary objective of procedures performed to obtain an understanding of the entity's internal control is to provide an auditor with

After obtaining an understanding of internal controls and assessing control risk on the audit of a non-public company,an auditor decided to perform tests of controls.The auditor most likely decided that

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?

The overall attitude and awareness of an entity's board of directors concerning the importance of the client's internal control usually is reflected in its

In an audit of financial statements of a non-public company in accordance with generally accepted auditing standards,an auditor is required to