Deck 5: Internal Control Over Financial Reporting

Question 1

Investors do not place much value on the internal control of the companies in which they invest.

Answer 1

False

Question 2

The PCAOB,in Auditing Standard No.5,indicates that auditors should use a "bottom-up approach" that begins at the financial statement level.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

Good control means that risks are identified and dealt with effectively.

Question 5

A company's internal auditing practices should not be considered when assessing control risk.

Question 6

Internal control is applied across all activities of the organization.

Question 7

Computer controls that are pervasive and affect every computerized system are referred as application controls.

Question 8

Weakness in the tone at the top have been associated with most financial frauds during the past decade.

Question 9

Control activities are the policies and procedures that are established to assist in accomplishing objectives and to mitigate risks.

Question 10

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

Question 11

If internal controls are not enforced they are useless and can lead to waste and fraud.

Question 12

The more effective the quality of internal control,the lower the control risk.

Question 13

The quality of an organization's internal control will affect both the audit approach and the amount of testing needed for an engagement.

Question 14

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

Question 15

Control is considered to be part of corporate governance.

Question 16

Authorization Procedures include that all senior members of the accounting department have the authority to record any transaction.

Question 17

If an organization is too lenient in its treatment of employees who committed fraud,the control environment will be seen as stronger than if the treatment were harsher.

Question 18

Virtually all major financial frauds from the past decade were associated with organizations that had weaknesses in the control environment

Question 19

Auditing standards require that the auditor exercise professional judgment and maintain professional skepticism throughout the planning and performance of the audit.

Question 20

Internal control is a process designed to provide reasonable assurance regarding the achievement of the objectives of reliable financial reporting,compliance with laws and regulations and effective and efficient operations,and safeguarding of the assets.

Question 21

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

Question 22

Performing a walk-through provides an auditor an understanding of the nature of processing in important accounting applications.

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

When control risk is assessed at a maximum level,the auditor assumes that the internal controls are reliable in preventing or detecting material misstatements.

Question 29

When control risk is assessed at less than maximum,the auditor must gain assurance that the control procedures are effective.

Question 30

Segregation of duties refers to the duties of authorizing a transaction,recording the transaction,and taking physical custody of assets related to the transaction.

Question 31

When control risk is assessed at a minimum level,the auditor assumes that the internal controls are reliable in preventing or detecting material misstatements.

Question 32

Testing internal control for effectiveness is done in every audit.

Question 33

The auditor is obligated to report significant deficiencies in the control structure discovered during an audit to the audit committee or its equivalent.

Question 34

The auditor's preliminary assessment of control risk is based on an understanding of the control system as it has operated in the past and is designed to operate.

Question 35

An auditor is not required to obtain evidence about the design and operation of the internal controls to reduce the assessment of control risk below maximum.

Question 36

Transaction-oriented controls should be tested using the guidelines developed for attribute testing utilizing statistical sampling techniques.

Question 37

Control risk can be evaluated on a scale from high to low.

Question 38

The payroll department should be responsible for signing payroll checks.

Question 39

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

Question 40

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

Question 41

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 42

Which of the following is not a reason that the auditor must gain an understanding of the client's internal control system?

A)to better understand the client,its risks,and how it manages those risks.
B)to assess control risk and identify the types of financial statement misstatements that are most likely to occur.
C)to plan direct tests of account balances to determine if misstatements have occurred.
D)all are reasons why auditors must gain an understanding of the client's internal control system.

Question 43

The PCAOB's requirement is that documentation must be able to be interpreted by an auditor not connected to the engagement.

Question 44

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

Question 45

When the auditor believes the design of controls of a non-public company is effective but does not test the controls,the auditor can assess control risk as moderate in some circumstances but otherwise it should be assessed as high.

Question 46

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)ineffectiveness of operations
D)both A and B

Question 47

Internal control objectives are designed to assist the organization in assuring which of the following:

A)the organization has effective and efficient operations related to its overall strategy
B)the activities of the organization are in compliance with applicable laws and regulations
C)the assets of the organization are safeguarded from theft and fraud
D)all of the above.

Question 48

Which one of the following components of the system of internal controls sets the tone for the organization?

A)control risk assessment
B)control environment
C)information and communication
D)monitoring

Question 49

One of the components of internal control,the control environment,is considered pervasive and the auditor should start the evaluation of controls at this level.

Question 50

The major components of an organization's internal control structure consist of all of the following except

A)control risk.
B)the control environment.
C)risk assessment.
D)control activities.

Question 51

Which one of the following groups is interested in an organization's control structure?

A)board members
B)lenders
C)auditors
D)all of the above

Question 52

The quality of an organization's internal controls affects

A)the reliability of financial data.
B)the ability of management to make good decisions.
C)the ability to sustain an effective business.
D)all of the above.

Question 53

There is a high risk,as well as a history,that fraud is instituted through which of the following:

A)adjusting entries.
B)closing entries.
C)unusual journal entries.
D)all of the above.

Question 54

An external auditor provides a separate opinion on the effectiveness of internal control for large publicly traded companies.

Question 55

The control environment includes all of the following except

A)management philosophy and operating style.
B)methods of assigning authority and responsibility.
C)personnel policies and practices.
D)control activities.

Question 56

Transaction oriented controls are designed to operate on every transaction throughout the year.

Question 57

The tone of internal control typically originates internally with:

A)auditors.
B)employees.
C)management.
D)stockholders.

Question 58

What is management's primary purpose of effective internal control in an organization?

A)Obtaining high-quality data for making good business decisions.
B)Completion of a successful audit for the entity.
C)Shareholder involvement in the company's success.
D)Obtaining profitability and financial strength.

Question 59

The auditor should obtain an understanding of whether the client's controls sufficiently address the risk of material misstatement due to fraud.

Question 60

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

A)integrity and ethical values.
B)management's philosophy and operating style.
C)authority and responsibility.
D)information and communication.

Question 61

To support an assessment that control risk is low,the auditor of financial statements must:

A)achieve the same conclusion after appropriately testing internal control.
B)achieve the same conclusion after appropriately performing substantive procedures.
C)perform increased substantive procedures in order to compensate for the lower rating.
D)perform limited substantive procedures as the assessment is justified.

Question 62

Which of the following best represents a walk-through?

A)The controller reviews the bank reconciliation prepared by the accountant and its resulting journal entries.
B)The auditor walks the production line to find inefficiencies in the inventory process and reports them to management.
C)The controller takes a sample of write-offs to ensure they have been adequately documented and recorded.
D)The auditor traces three purchasing transactions from the purchase order to the financial statement for observation and understanding.

Question 63

A component of COSO's internal control system concerns the process of identifying,capturing,and exchanging information in a timely fashion to enable accomplishment of the organization's objective.This component is called

A)control activities.
B)information and communication.
C)monitoring.
D)control environment.

Question 64

The auditor uses a variety of procedures to test whether controls effectively.These procedures may all of the following except:

A)Take a sample of purchase orders and trace them through the system to determine whether (a)there was proper review of credit,and (b)credit authorization or denial was proper.
B)Take a sample of recorded items (accounts payable)and send a positive confirmation to the related vendors to determine whether the balance is properly stated.
C)Take a sample of recorded items (accounts receivable)and trace back to the credit approval process to determine that it was performed appropriately.
D)Use a computer audit program to read all accounts receivable and develop a print- out of all account balances that exceed their credit authorization.

Question 65

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 66

Which one of the following represents a classification of control deficiency by the PCAOB?

A)A missing control that is required for achievement of objectives.
B)A control that operates as designed.
C)A control that ensures the reliability of financial reporting.
D)An immaterial individual misstatement in internal control.

Question 67

A graphic representation of an accounting application that normally identifies key controls that are effective in achieving specific control policies and procedures is:

A)an internal control questionnaire.
B)a flowchart.
C)an internal control narrative.
D)a walk-through.

Question 68

If the auditor of financial statements understands internal control and assesses control risk as low,it is assumed that internal control:

A)will be tested to support the assessment.
B)is not required to be tested as it is considered strong.
C)is considered relatively weak and will not be tested.
D)has been assessed erroneously by the auditor.

Question 69

The PCAOB requires auditors of public companies to perform

A)a financial statement audit and an attest audit.
B)a financial statement audit and an assurance audit.
C)a financial statement audit and agreed upon procedures.
D)a financial statement audit and an audit of internal control.

Question 70

Physical controls to safeguard assets would include:

A)hiring only trustworthy cashiers
B)segregation of duties
C)locks on the warehouse doors
D)safety audits on the production-line

Question 71

Which of the following is an example of a type of control that may be tested?

A)Interest accrued on notes payable.
B)Cash surrender value of life insurance classified as long-term asset.
C)A spreadsheet used to create a pivot table for the summarization of accounts receivable.
D)Reconciliations performed monthly on accounts.

Question 72

Which one of the following will an audit of a company's internal control include?

A)Reliance on client's internal controls testing.
B)Sampling of key controls and related testing.
C)Concluding on the accuracy of income statement balances.
D)Design of the internal control system by the auditor.

Question 73

All of the following are pervasive computer controls except:

A)Planning and controlling the data processing function.
B)Controlling access to equipment,data,and programs.
C)Ensuring data is accessible to management on a timely basis.
D)Controlling applications development and changes to programs.

Question 74

Personnel policies and procedures are designed to ensure that the organization

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

Question 75

Management of large public companies is required to report on its internal controls with its financial statements.This report is required to include all of the following except:

A)its responsibility for control of financial reporting.
B)the framework used for internal control.
C)an assessment of the effectiveness of the company's internal control
D)the statement that the company is not required to have an audit on internal control.

Question 76

The control environment includes which of the following?

A)Control activities.
B)Management philosophy and operating style.
C)Assessing activity level risks.
D)Application level controls.

Question 77

Which of the following would result in an adverse report issued by an auditor on an audit of internal control?

A)The control risk is assessed at a lower level.
B)The tests of controls support the documented understanding of controls.
C)There is a material weakness in the design or operation of controls.
D)A confirmation is not returned by a customer in a timely manner.

Question 78

A financial statement auditor concludes that internal controls over cash are not functioning as designed.She believes that material misstatements to the cash accounts are possible because of the deficiencies.What is the course of action that the auditor will most likely take?

A)Report the audit to the regulatory agencies of the IRS and SEC.
B)Develop specific tests for cash balances to determine the extent of misstatement.
C)Explain to the client that the audit firm will not be able to complete the audit.
D)Test the internal control over cash.

Question 79

The personnel department should be responsible for:

A)authorization of new employees.
B)generation of payroll checks.
C)timekeeping.
D)all of the above.

Question 80

One of the major components of an organization's internal control structure includes:

A)major new financing.
B)the financial environment.
C)risk assessment.
D)telecommunication equipment.