Deck 3: Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditor

Question 1

Management's risk identification and analysis should include both internal and external risk factors.

Answer 1

True

Question 2

A company's internal auditing function should not be considered when assessing the effectiveness of internal controls.

Answer 2

False

Question 3

Effective internal control requires an organization to establish an appropriate structure and clearly defined lines of responsibility and authority where everyone in the organization has equal responsibility for the effective operation of internal control.

Answer 3

False

Question 4

Control activities implemented to mitigate transaction processing risks that typically affect only certain processes,transactions,accounts,and assertions are referred to as transaction or application controls.

Question 5

An organization's control environment is established and maintained by the internal auditing department.

Question 6

Internal control is a process,effected by an entity's board of directors,management,and other personnel,designed to provide reasonable assurance regarding the achievement of objectives relating to operations,reporting,and compliance.

Question 7

Generally,highly regulated entities have more complex control activities than less-regulated entities.

Question 8

The five major components of an organization's internal control are: the control environment,risk assessment,control activities,information and communication,and monitoring.

Question 9

Control activities are the component of internal control that includes control actions that have been established by policies and procedures.

Question 10

A strong control environment can reduce all the financial reporting risks to zero.

Question 11

After identifying the risks of not achieving reliable financial reporting,management implements controls to provide reasonable assurance that material misstatements do not occur in the financial statements.

Question 12

Corporate policies designed to attract,train,and evaluate competent employees are considered part of the control environment in the COSO framework for internal controls.

Question 13

The organization's risk assessment process is an example of an entity-wide control.

Question 14

Controls to monitor results of operations are considered to be transaction controls.

Question 15

An organization's risk assessment process should be performed only by senior-level management.

Question 16

Preventive controls are designed to prevent the occurrence of a misstatement.

Question 17

In addition to controls being specific,they may be broad,such as policies regarding a code of ethics.

Question 18

Internal control is a process designed to guarantee the achievement of the objectives of reliable financial reporting,compliance with laws and regulations,and operating efficiency.

Question 19

Physical controls are necessary to protect and safeguard assets from accidental or intentional destruction and theft.

Question 20

Internal control helps an organization eliminate the risk of failing to provide users with reliable financial information.

Question 21

Transaction controls are designed to ensure that transactions are properly valued.

Question 22

Preventive controls are designed to provide reasonable assurance that the correct program is used for processing,all transactions are processed,and the transactions update appropriate files.

Question 23

Within the COSO framework,external communication includes only information sent by the organization to external parties,such as stockholders,customers,and regulators.

Question 24

Preventive controls are generally more cost-efficient than detective controls.

Question 25

Segregation of duties is a control activity that is designed to protect against the risk that an individual could both perpetrate and cover up a fraud.

Question 26

Physical controls to safeguard assets are not intended to include simple controls such as fences and locks.

Question 27

One of the components of internal control,monitoring,refers to the process of identifying,capturing,and exchanging information in a timely fashion to enable accomplishment of the organization's objectives.

Question 28

Segregation of duties is considered a part of the monitoring component of the COSO framework for internal control structure.

Question 29

A transaction trail includes the documents and records that allow an auditor to trace a transaction from its origination through to its final disposition,or vice versa.

Question 30

One of the advantages of a computerized accounting system is that the computerized system eliminates the need for internal controls.

Question 31

Self-checking digit algorithms have been developed to test for transposition errors associated with identification numbers.

Question 32

A walkthrough involves following a transaction back from when it is reflected in the financial records to when it originated to determine if the controls are effectively designed and have been implemented.

Question 33

Control activities may be implemented at the organizational level and at the transactional level.

Question 34

All organizations should evaluate and communicate internal control deficiencies in a timely manner to those parties responsible for taking corrective action,including senior management and the board of directors,as appropriate.

Question 35

Effective monitoring of internal controls not only identifies risks but also responds to these risks appropriately.

Question 36

The payroll department should be responsible for signing payroll checks.

Question 37

A whistleblower function within an organization should include a process for bringing important ethical and financial issues to the audit committee.

Question 38

Monitoring internal controls involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions.

Question 39

Performing a walkthrough provides an understanding of the nature of processing in important accounting applications.

Question 40

Management is obligated to report significant deficiencies in the control structure in their annual report on internal control effectiveness required by the Sarbanes-Oxley Act.

Question 41

Which of the following is not true of the concepts that are embodied in the COSO framework of internal controls?

A)Internal controls relate to the organization's objectives.
B)The six components of internal control are logically and operationally intertwined.
C)Internal controls apply across all activities of the organization.
D)All of the above are true.

Question 42

Several significant deficiencies in internal controls may constitute a material weakness.

Question 43

Which of the following is not part of the control environment of an organization?

A)Management's philosophy and operating style.
B)Organizational structure.
C)Organization's commitment to ethical values.
D)All of the above are part of the control environment.

Question 44

Which of the following is considered to be a transaction control?

A)Controls to monitor other controls.
B)Policies that address significant business control practices.
C)Centralized processing controls.
D)Physical controls to safeguard assets.

Question 45

Internal control is a process designed to achieve objectives in which one of the following categories?

A)Reliability of financial reporting.
B)Compliance with applicable laws.
C)Operational effectiveness.
D)All of the above.

Question 46

A significant deficiency should be reported to the audit committee and to external users of an organization's financial statements.

Question 47

A material weakness in internal control is a deficiency,or a combination of deficiencies,in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.

Question 48

The quality of an organization's internal control affects which of the following?

A)The reliability of financial data.
B)The ability of management to make good decisions.
C)The ability to remain in business.
D)All of the above.

Question 49

Which of the following is not included as a component of an organization's internal control structure in the COSO framework?

A)Control risk.
B)The control environment.
C)Risk assessment.
D)Control activities.

Question 50

Internal control is a process effected by the organization's board of directors,management,and other personnel to provide reasonable assurance of achieving certain objectives.Which of the following does not fit into one of these categories of objectives?

A)Reliability of financial reporting.
B)Compliance with laws and regulations.
C)Continuing existence.
D)Effectiveness and efficiency of operations.

Question 51

Managers must use professional judgment to determine whether identified control deficiencies rise to the level of a significant deficiency or material weakness.

Question 52

What is the primary benefit of effective internal control in an organization?

A)Achieving certain organizational goals.
B)Completing a successful audit for the entity.
C)Maximizing value for shareholders.
D)Obtaining profitability and financial strength.

Question 53

An auditor needs to understand a company's internal controls in order to anticipate the types of material misstatements that may occur.

Question 54

The quality of an organization's internal control does not affect either the audit approach or the amount of testing required for an engagement.

Question 55

Management should test all internal controls for effectiveness when performing their annual evaluation of the internal control structure.

Question 56

A deficiency in design of internal controls exists when an existing control is not properly designed so that,even if the control operates as designed,the control objective would not be met.

Question 57

Walkthroughs and inquiries are often used to obtain an understanding of internal controls.

Question 58

When auditing the financial statements of a public company,the auditor is required to express an opinion on the company's internal controls whenever a material weakness in control is identified.

Question 59

Which of the following is not true of internal control as defined by COSO?

A)It is narrower than internal control over financial reporting.
B)It is a process that includes all elements of internal control working together.
C)It includes all the people in the organization.
D)It starts at the top of the organization in setting a tone.

Question 60

Which of the following is considered to be an entity-wide control?

A)Segregation of duties.
B)Controls over management override.
C)Authorization procedures for purchasing.
D)Adequately documented transaction trails.

Question 61

Which of the following is not one of the underlying principles of an effective control environment as developed by COSO?

A)The organization demonstrates a commitment to integrity and ethical values.
B)The board of directors demonstrates independence from management and exercises oversight for the development and performance of internal control.
C)Management establishes,with board oversight,structures,reporting lines,and appropriate authorities and responsibilities in pursuit of objectives.
D)The organization considers the potential for fraud in assessing risks to the achievement of objectives.

Question 62

Which of the following is another name for transaction controls?

A)Entity-wide controls.
B)Application controls.
C)Supporting controls.
D)Detail controls.

Question 63

Internal controls may be preventive or detective.Which of the following controls is preventive?

A)Requiring two persons to open mail containing payments.
B)Reconciling the accounts receivable subsidiary file with the control account.
C)Using batch totals.
D)Preparing bank reconciliations.

Question 64

Requiring the mail clerk to prepare a listing of all checks received,with copies of the list going to the cashier and to accounting,is an example of which type of control?

A)Preventive.
B)Corrective.
C)Detective.
D)Directive.

Question 65

The COSO principle that an organization should identify and assess changes that significantly impact the system of internal control is related to which COSO component?

A)Control environment
B)Risk assessment
C)Control activities
D)Monitoring

Question 66

Which of the following is a major component of an organization's internal control structure?

A)Major new financing.
B)The financial environment.
C)Risk assessment.
D)Telecommunication equipment.

Question 67

With whom does the tone of internal control typically originate?

A)Auditors.
B)Employees.
C)Management.
D)Stockholders.

Question 68

Which of the following is an example of a control environment deficiency?

A)A low level of control consciousness within the organization.
B)An audit committee that does not have independent members.
C)An audit committee that is not viewed as the client of the external auditor.
D)All of the above.

Question 69

Which of the following COSO components is the foundation for all other components of internal control?

A)Control risk assessment.
B)Control environment.
C)Information and communication.
D)Monitoring.

Question 70

Which one of the following is not a control activity implemented in most accounting systems?

A)Segregation of duties.
B)Competent,trustworthy employees.
C)Authorization procedures.
D)All of these activities are normally implemented.

Question 71

Which of the following best describes the purpose of personnel policies and procedures?

A)Ensure the organization hires the right people.
B)Ensure the organization complies with federal and state laws in its hiring and retention decisions.
C)Ensure the organization has employees that are properly trained and supervised.
D)Ensure the organization performs all of the above.

Question 72

Which of the following is not part of the control environment?

A)Management philosophy and operating style.
B)Methods of assigning authority and responsibility.
C)Personnel policies and practices.
D)Control activities.

Question 73

Which of the following is an inherent limitation of internal controls?

A)Lack of auditor independence.
B)Collusion.
C)Separation of duties.
D)Employee peer review.

Question 74

A control designed to ensure that no employee is paid for more than 80 hours of sick pay is an example of which type of control?

A)Entity-wide control.
B)Processing control.
C)Output control.
D)Input control.

Question 75

Requiring two signatures on any check in excess of $10,000 is an example of which type of control?

A)Input control.
B)Preventive control.
C)Detective control.
D)Processing control.

Question 76

Which one of the following is an example of an internal risk for an organization?

A)Changes in internal information technology.
B)Increases in substitute services or products.
C)Changes in the reliability of source goods.
D)Changes in regulation that make the business model unsustainable.

Question 77

A control designed to ensure that the number of sales transactions recorded in the accounting records matches the number of sales invoices entered during processing is known as which type of control?

A)Input control.
B)Processing control.
C)Output control.
D)Edit control.

Question 78

A control designed to ensure that sales transactions are generated using the company's most current prices would be considered to be which type of control?

A)An input control.
B)A processing control.
C)An output control.
D)A physical control.

Question 79

An edit test is considered to be which type of control?

A)An input control.
B)A processing control.
C)An output control.
D)A supporting control.

Question 80

Which of the following is an example of a physical control to safeguard assets?

A)Hiring only trustworthy cashiers.
B)Separation of duties.
C)Locks on the warehouse doors.
D)Safety audits on the production line.