Question 1

One of the elements of an entity's control environment is management's philosophy and operating style.

Accepted Answer

Management's philosophy and operating style are a key component of an entity's control environment. This includes the values, beliefs, and attitudes of management towards important business aspects such as integrity, ethical behavior, risk management, and financial reporting. These factors shape the organization's culture and set the tone for how employees behave and make decisions. Therefore, it is important for auditors to assess the management's philosophy and operating style as part of their overall evaluation of the control environment.

Question 2

All of the following are components of internal control,except for:
A)the information system
B)audit committees
C)monitoring of controls
D)the control environment

Accepted Answer

Audit committees are not a component of internal control. Audit committees are a separate oversight group that is responsible for monitoring the effectiveness of the company's internal controls and financial reporting processes. However, they are not a component of internal control themselves. The other choices listed (information system, monitoring of controls, and control environment) are all components of internal control.

Question 3

Which of the following statements about internal control is in?
A)Internal control encompasses all of the elements of an organisation
B)Internal control provides reasonable assurance about the achievement of the entity's objectives
C)Internal control eliminates the possibility of fraud and error
D)Internal control is a very broad concept

Accepted Answer

C

Question 4

Internal control is intended to provide reasonable assurance about the achievement of an entity's objectives.

Accepted Answer

Internal control is designed to provide reasonable assurance about the achievement of an entity's objectives, which can include operational, financial reporting, and compliance objectives.

Question 5

The inherent limitations of internal control include the possibility of collusion by two or more individuals to circumvent a control.

Accepted Answer

Collusion among employees can allow them to work together to bypass internal controls, which is a limitation of these controls.

Question 6

The internal control objective of 'classified' means there are controls in place to ensure that:
A)amounts are assigned to transactions
B)transactions are recorded in the accounting period
C)transactions are charged and allocated to the general ledger account
D)fictitious or duplicate transactions are not included in the books of an organisation

Accepted Answer

The term 'classified' in the context of internal controls refers to ensuring that transactions are correctly charged and allocated to the appropriate general ledger account. This helps in maintaining accurate financial records and facilitates financial reporting and analysis.

Question 7

When internal controls are effective:
A)the organisation is more likely to achieve its strategic and operating objectives
B)there will be an increased reliance on substantive tests of transactions and account balances
C)control risk will also be high
D)the organisation is less likely to achieve its strategic and operating objectives

Accepted Answer

When internal controls are effective, the organisation is more likely to achieve its strategic and operating objectives because effective internal controls provide assurance that the organisation's operations are in compliance with policies and regulations, and that financial reporting is accurate and reliable. This reduces the risk of errors, fraud, and non-compliance, and enhances the quality and timeliness of decision-making. As a result, stakeholders have greater confidence in the organisation's ability to achieve its goals and objectives. The other choices are incorrect as they contradict this explanation.

Question 8

If controls are in place to ensure that transactions are recorded in the accounting period,this satisfies which internal control objective?
A)Real
B)Valued
C)Posted
D)Timely

Accepted Answer

The objective of timely internal controls is to ensure that transactions are recorded promptly and accurately within the accounting period. By having controls in place to ensure that transactions are recorded in the appropriate accounting period, this objective is being satisfied. The other choices (Real, Valued, and Posted) are not relevant in this context.

Question 9

Narratives involve the auditor describing in words each step of the flow of transactions from start to finish.

Accepted Answer

Narratives involve the auditor describing the flow of transactions from the start to the finish. This may include the identification of the origin and the end of the transaction, the accounting systems involved, the movement of documents, and the people or departments involved in the flow.

Question 10

The concept that no one employee should be in a position both to perpetrate and hide errors or fraud in the normal course of their duties is known as segregation of incompatible duties.

Accepted Answer

The concept of segregation of incompatible duties is exactly as described in the statement. It is meant to ensure that no one employee has too much control over a particular aspect of a company's operations, which would provide them with the opportunity to both commit and hide errors or fraudulent activity. By separating incompatible duties among different employees, companies can reduce the risk of such activities occurring undetected.

Question 11

Internal control weaknesses decrease the risk of material misstatements being undetected by management's processes and controls.

Accepted Answer

Internal control weaknesses increase the risk of material misstatements being undetected by management's processes and controls, therefore the statement is false.

Question 12

In larger entities,there are often limitations surrounding the entity's ability to put effective internal controls in place.

Accepted Answer

The answer of In larger entities,there are often limitations surrounding...

Question 13

The internal control objective of 'real' refers to controls in place to ensure that fictitious or duplicate transactions are not included in the books and records of the organisation.

Accepted Answer

The internal control objective of 'real' does indeed refer to controls in place to ensure that only valid transactions are recorded in the books and records of the organisation, and that fictitious or duplicate transactions are not included.

Question 14

The internal control objective of 'valued' refers to controls in place to ensure that transactions are recorded in the accounting period.

Accepted Answer

The internal control objective of 'valued' refers to controls in place to ensure that transactions are recorded accurately and at the correct amount in the accounting records, not necessarily in the correct accounting period. Internal controls related to the timing of transactions are covered under the objective of 'timing'.

Question 15

An internal control exception is an observed condition that provides evidence that the control being tested did not operate as intended.

Accepted Answer

An internal control exception is indeed an observed condition that indicates that the control being tested did not operate as intended. Exceptions can be caused by errors, fraud, or other issues, and they may require remedial action to be taken to strengthen the control environment.

Question 16

Audit risk is the risk that an entity's internal control system will not prevent or detect material misstatements.

Accepted Answer

Audit risk is the risk that an auditor may issue an unqualified opinion on financial statements that contain a material misstatement, not specifically related to the entity's internal control system's ability to prevent or detect such misstatements.

Question 17

The purpose of an auditor's management letter is to inform the client of the auditor's recommendations for improving its internal controls.

Accepted Answer

The purpose of an auditor's management letter is to communicate to the client any weaknesses or deficiencies identified in the client's internal controls, and to provide recommendations for improving those controls in order to enhance the company's operations and financial reporting.

Question 18

Checklists and preformatted questionnaires are particularly helpful in industries that the auditor may not personally be familiar with auditing.

Accepted Answer

Checklists and preformatted questionnaires provide a structured approach and ensure that all necessary information is obtained during the audit, making them helpful in industries that the auditor may not have extensive experience or knowledge in. They also help to promote consistency and completeness in the audit process.

Question 19

Control risk refers to the risk that the auditor's testing procedures will not be effective in detecting a material misstatement.

Accepted Answer

Control risk refers to the risk that a company's internal controls will not prevent or detect a material misstatement in its financial statements.

Question 20

Significant professional judgement is never required to decide whether an identified internal control weakness is significant enough to warrant communicating to management.

Accepted Answer

Significant professional judgement is necessary to determine the significance of an internal control weakness and whether it should be communicated to management.

Quiz 6: Gaining an Understanding of the Clients System of Internal Controls