Question 1

The most important component of internal control is risk assessment.

Accepted Answer

The most important component of internal control is often considered to be the control environment, as it sets the tone for the organization and influences the control consciousness of its people.

Question 2

Describe the auditor's responsibilities related to required communications between the auditor and those charged with governance (remove auditor committee) regarding internal control.

Accepted Answer

The answer of Describe the auditor's responsibilities related to required...

Question 3

When a compensating control exists, the absence of a key control:
A) is no longer a concern because there is no longer a significant deficiency or material weakness.
B) is still a major concern to the auditor.
C) could cause a material loss, so it must be tested using substantive procedures.
D) is magnified and must be removed from the sampling process and examined in its entirety.

Accepted Answer

When a compensating control exists, it is designed to mitigate the risks associated with the absence of a key control. Therefore, if the compensating control is effective, the absence of the key control is no longer a significant deficiency or material weakness. As a result, the auditor no longer needs to test the key control and can rely on the effectiveness of the compensating control. Therefore, choice A is the best answer.

Question 4

Before making the final assessment of internal control at the end of an integrated audit, the auditor must:
A) 
B) 
C) 
D)

Accepted Answer

Before making the final assessment of internal control, the auditor must evaluate the design and implementation of controls, perform tests of controls, evaluate any identified deficiencies, and assess the overall risk of material misstatement. Choice A (evaluate the design and implementation of controls) is the necessary step that comes before considering the other aspects mentioned.

Question 5

An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls. Which of the following would generally NOT be used?
A) make inquiries of appropriate client personnel
B) examine documents, records, and reports
C) reperform client procedures
D) inspect design documents

Accepted Answer

Inspecting design documents may help the auditor understand the design of internal controls, but it would not provide evidence about their operating effectiveness. Therefore, it is generally not used to support the operating effectiveness of internal controls. The other options (making inquiries, examining documents, and reperforming client procedures) are commonly used procedures to support the operating effectiveness of internal controls.

Question 6

In evaluating the operational effectiveness of internal controls the auditor is likely to use four types of audit procedures. List the procedures below.

Accepted Answer

The answer of In evaluating the operational effectiveness of internal...

Question 7

After considering a client's internal controls, an auditor has concluded that it is well designed and is functioning as intended. Under these circumstances the auditor would most likely:
A) perform tests of controls to the extent outlined in the audit program.
B) determine the control procedures that should prevent or detect errors and irregularities.
C) not increase the extent of predetermined substantive tests.
D) determine whether transactions are recorded to permit preparation of financial statements in conformity with generally accepted accounting principles.

Accepted Answer

If the auditor has determined that the internal controls are well designed and functioning as intended, there is no need to increase the extent of predetermined substantive tests. The auditor can rely on the internal controls to effectively prevent and detect errors and irregularities, and can perform tests of controls as outlined in the audit program without increasing their extent. Options A and B are not the best choices in this scenario as they focus on determining control procedures and performing tests of controls, which have already been done and established to be effective. Option D is not relevant to the auditor's conclusion about the internal controls.

Question 8

When planning an audit, the auditor's assessed level of control risk is:
A) determined by using actuarial tables.
B) calculated by using the audit risk model.
C) a judgment issue, based on auditor knowledge.
D) calculated by using the formulas provided in the AICPA's auditing standards.

Accepted Answer

The auditor's assessed level of control risk is a judgment issue based on the auditor's knowledge and understanding of the client's internal controls and the environment in which they operate.

Question 9

How must significant deficiencies and material weaknesses be communicated to those charged with governance?
A) Either oral or written communication is acceptable.
B) Oral communication is required.
C) Written communication is required.
D) Written communication is required for material weaknesses, but oral communication is allowed for significant deficiencies.

Accepted Answer

Material weaknesses and significant deficiencies must be communicated in writing to those charged with governance according to auditing standards. This is to ensure clear documentation and a record of the communication.

Question 10

Significant deficiencies need to be communicated to the company's audit committee because:
A) they represent material weaknesses that allow fraud to be perpetrated.
B) they represent significant design flaws in internal controls.
C) they represent falsification of accounting records.
D) they represent disclosure of information related to issuance of a "going-concern" opinion.

Accepted Answer

Significant deficiencies represent significant design flaws in internal controls that could result in material misstatements in the financial statements. Therefore, it is important to communicate these deficiencies to the company's audit committee so that they can take appropriate action to address these flaws and improve the effectiveness of the company's internal controls. While fraudulent activities and falsification of accounting records may be a possibility with significant deficiencies, they are not the primary reason for communication. Likewise, the disclosure of information related to the issuance of a "going-concern" opinion may be significant, but not the primary reason for communicating significant deficiencies to the audit committee.

Question 11

When internal controls are highly effective in processing accounting transactions, the extent of substantive tests should be reduced.

Accepted Answer

If internal controls are highly effective, it provides a greater level of assurance that financial transactions are accurate and complete. This means that less testing is needed to verify the accuracy of the financial statements, allowing for a reduced extent of substantive tests.

Question 12

Significant deficiencies and material weaknesses in internal control of a public company must be reported in writing to which of the following?
A) the Public Company Accounting Oversight Board
B) members of management who are responsible for the related area of the company
C) audit committee of the company's board of directors
D) the AICPA

Accepted Answer

Significant deficiencies and material weaknesses in internal control of a public company must be reported in writing to the audit committee of the company's board of directors, as per the Sarbanes-Oxley Act of 2002. While the other options may also be informed, the audit committee must be notified first.

Question 13

In performing an audit of internal control over financial reporting which of the following is the auditor required to do?
A) Test routine and nonroutine transactions equally.
B) Form an opinion on the effectiveness of internal for financial reporting.
C) Rely on the work on internal auditors in order to promote audit efficiency.
D) Use the audit conclusions before starting the audit of financial statements.

Accepted Answer

The auditor is required to form an opinion on the effectiveness of internal control over financial reporting in order to provide assurance to stakeholders regarding the reliability of financial statements. Choices A, C and D are not required actions for the auditor in performing an audit of internal control over financial reporting.

Question 14

When internal controls over a given financial statement account are assessed as highly effective, the auditor need not obtain audit evidence for that account beyond testing the controls.

Accepted Answer

Even if internal controls over a given financial statement account are assessed as highly effective, the auditor still needs to obtain audit evidence for that account beyond testing the controls to provide reasonable assurance that the financial statements are free from material misstatement. This may include substantive procedures such as analytical procedures or tests of details. Therefore, the statement given in the question is false.

Question 15

If the results of tests of controls support the design and operations of controls as expected, the auditor uses ________ control risk as the preliminary assessment.
A) a lower
B) the same
C) a higher
D) either a lower or higher

Accepted Answer

The answer of If the results of tests of controls...

Question 16

Define the following terms: control deficiency, significant deficiency, and material weakness.

Accepted Answer

The answer of Define the following terms: control deficiency, significant...

Question 17

You are the audit manager for a new audit client. Your staff auditors are unsure of what constitutes a control deficiency. Discuss the definition of control deficiency. In your response include at least two examples of control deficiencies.

Accepted Answer

The answer of You are the audit manager for a...

Question 18

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the:
A) segregation of incompatible functions is necessary to ascertain that internal control is effective.
B) employment of competent personnel provides assurance that the objectives of internal control will be achieved.
C) establishment and maintenance of internal control is an important responsibility of the management and not of the auditor.
D) concept allows for only a remote likelihood that material misstatements will not be prevented or detected on a timely basis.

Accepted Answer

Reasonable assurance recognizes that internal control can provide only a reasonable, not an absolute, assurance that material misstatements will be prevented or detected on a timely basis. It means that there is room for some level of error or risk in any internal control system. Choices A and B may contribute to the effectiveness of internal control, but they do not directly relate to the concept of reasonable assurance. Choice C is incorrect as the auditor also has a responsibility to evaluate the effectiveness of internal control.

Question 19

The text suggested a five-step approach to identify deficiencies, significant deficiencies, and material weaknesses. Describe this approach.

Accepted Answer

The answer of The text suggested a five-step approach to...

Question 20

Significant deficiencies are matters that come to an auditor's attention and should be communicated to an entity's audit committee because they represent:
A) material frauds perpetrated by high-level management.
B) internal control deficiencies that could adversely affect a company's ability to initiate, record, process, or report external financial statements reliably.
C) flagrant violations of the entity's documented conflict-of-interest policies.
D) intentional attempts by client personnel to limit the scope of the auditor's field work.

Accepted Answer

Significant deficiencies are internal control deficiencies that could adversely affect a company's ability to initiate, record, process, or report external financial statements reliably. It is important that the audit committee is informed of these deficiencies so that they can take appropriate action to address them. The other options (A, C, and D) are not necessarily the only reasons for significant deficiencies and do not accurately describe their nature.

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

The most important component of internal control is risk assessment.

Describe the auditor's responsibilities related to required communications between the auditor and those charged with governance (remove auditor committee) regarding internal control.

When a compensating control exists, the absence of a key control:

Before making the final assessment of internal control at the end of an integrated audit, the auditor must:

An auditor is likely to use four types of procedures to support the operating effectiveness of internal controls. Which of the following would generally NOT be used?

In evaluating the operational effectiveness of internal controls the auditor is likely to use four types of audit procedures. List the procedures below.

After considering a client's internal controls, an auditor has concluded that it is well designed and is functioning as intended. Under these circumstances the auditor would most likely:

When planning an audit, the auditor's assessed level of control risk is:

How must significant deficiencies and material weaknesses be communicated to those charged with governance?

Significant deficiencies need to be communicated to the company's audit committee because:

When internal controls are highly effective in processing accounting transactions, the extent of substantive tests should be reduced.

Significant deficiencies and material weaknesses in internal control of a public company must be reported in writing to which of the following?

In performing an audit of internal control over financial reporting which of the following is the auditor required to do?

When internal controls over a given financial statement account are assessed as highly effective, the auditor need not obtain audit evidence for that account beyond testing the controls.

If the results of tests of controls support the design and operations of controls as expected, the auditor uses ________ control risk as the preliminary assessment.

Define the following terms: control deficiency, significant deficiency, and material weakness.

You are the audit manager for a new audit client. Your staff auditors are unsure of what constitutes a control deficiency. Discuss the definition of control deficiency. In your response include at least two examples of control deficiencies.

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the:

The text suggested a five-step approach to identify deficiencies, significant deficiencies, and material weaknesses. Describe this approach.

Significant deficiencies are matters that come to an auditor's attention and should be communicated to an entity's audit committee because they represent: