Deck 9: Control Assessment and Testing

Question 1

The objective of control procedures is to process transactions correctly.

Answer 1

True

Question 2

Internal controls are put in place to keep the company on course toward achieving its goals.

Answer 2

True

Question 3

Validity refers to:

A)Ensuring that transactions are not omitted from accounting records.
B)Ensuring that recorded transactions should have been recorded.
C)Ensuring that all recorded transactions have been approved before recording.
D)Ensuring that all recorded transactions have been recorded at the right dollar amount.

Answer 3

B

Question 4

All audit engagements require some minimal reliance on internal controls.

Question 5

Control activities are often designed to speed processing of transactions.

Question 6

An advantage of using a pre-printed audit questionnaire is that the auditor is less likely to forget to ask some important question.

Question 7

Controls such as those to protect inventory should be put in place no matter what the cost.

Question 8

Control tests and substantive tests of balances are easily distinguishable.

Question 9

Which of the following is true regarding the financial assertions?

A)All assertions can be proved using only substantive procedures, but it would be too costly.
B)Some assertions are virtually impossible to prove without some evaluation of control effectiveness.
C)Some assertions can be proved using only an evaluation of control effectiveness.
D)The evaluation of control effectiveness is only used because it is more efficient than using only substantive procedures.

Question 10

Classification refers to ensuring that the accounting for transactions is in the period they occur.

Question 11

The COSO definition of internal control says that internal control is a process to achieve objectives in which of the following categories?

A)Compliance with applicable laws and regulations, usefulness of financial information for making decisions, and the ability of the company to continue in operation.
B)Usefulness of financial information for making decisions, reliability of financial reporting, and the ability of the company to continue in operation.
C)Reliability of financial reporting, the usefulness of financial information for making decisions, and compliance with applicable laws and regulations.
D)Effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.

Question 12

General controls like environmental controls are primarily preventive in nature.

Question 13

The most important feature of control is the documentation of the policies and procedures.

Question 14

The auditor's primary purpose for evaluating internal control is to

A)Help design of the final audit plan.
B)Help management design internal control systems
C)Help judge how much control is necessary.
D)Help determine much business risk is acceptable.

Question 15

The auditor's control risk assessment will affect the procedures to be included in the audit.

Question 16

The internal control objective of ensuring that all sales on credit are recorded in accordance with GAAP is:

A)Accuracy
B)Classification
C)Accounting
D)Proper period

Question 17

A clean audit is normally associated with weak controls.

Question 18

Intent is something that the auditor can observe and use in deciding whether a misstatement is an error or a fraud.

Question 19

The primary reason to evaluate internal control is to formulate constructive suggestions for improvement.

Question 20

One of the auditor's primary concerns with regard to internal controls is:

A)The degree to which the internal controls are working as designed.
B)The possibility of an inherent risk which has to be controlled.
C)The impact the controls have on the accuracy of the accounting records.
D)The amount of substantive work to be saved by testing controls instead.

Question 21

Key controls are those:

A)Over significant risks.
B)Over physical access.
C)On which the auditor intends to rely.
D)Designed by the audit committee to prevent management fraud.

Question 22

An auditor has uncovered suspicious expense reimbursements paid to the Chief Executive
Officer of its audit client.The auditor should:

A)Discuss the matter with the Chief Executive Officer.
B)Report the matter in writing to the Chief Financial Officer.
C)Report the matter in writing to the Audit Committee.
D)Report the matter in writing to the Federal Government.

Question 23

The most cost effective types of controls over data are:

A)Design controls.
B)Batch controls.
C)Input controls.
D)Monitoring controls.

Question 24

Identify three general categories of misstatements and give an example of each.

Question 25

An auditor is required to obtain a sufficient understanding of internal control ---to plan the audit.This requirement encompasses obtaining an understanding of the control environment, the accounting system, and the control policies and procedures.
Required:

A) What are some of the reasons for obtaining an understanding of an audit client's internal control?
B) What audit work is required for an auditor to be able to assess control risk below maximum?
C) Should an auditor always try to obtain enough evidence to be able to assess control risk below maximum? Explain.

Question 26

Process alignment refers to:

A)The way that various IT systems are integrated to operate effectively as one system.
B)Control activities to ensure records are properly retained and secured.
C)Ensuring all network devices are at the current patch level.
D)Ensuring that firewalls are in place, backed up by password protection over data access.

Question 27

Before concluding on the effectiveness of a control, an auditor must determine:

A)The required degree of company compliance with control procedures.
B)The maximum possible dollar amount that would not affect a user's decision based on the financial statements.
C)The actual degree of company compliance with control procedures.
D)The nature, extent and timing of planned substantive procedures.

Question 28

An auditor does not need to test:

A)Control strengths because they are known to be strengths.
B)Control weaknesses because they are known to be weak.
C)Control strengths because they offset weaknesses.
D)Control weaknesses because they are offset by strengths.

Question 29

The Handbook Section "Communication with Management of Matters Identified During the Financial Statement Audit" requires that:

A)All nontrivial misstatements are communicated to management in writing.
B)All nontrivial misstatements and possible illegal acts are communicated to management.
C)All serious control risks uncovered are communicated to management in writing.
D)Only frauds and illegal acts are communicated to management.

Question 30

At the planning stage, the auditor's goal is to:

A)Select the most effective set of evidence gathering techniques.
B)Maximize audit fees.
C)Select the most cost effective set of evidence gathering techniques.
D)Minimize field work at remote locations.

Question 31

Anyone who designs a processing system should:

A)Not do the documentation.
B)Be independent of management.
C)Have access to the data so they can make the system more efficient.
D)Not do the technical programming work.

Question 32

One control benefit of an IT system is that it:

A)Is efficient at processing large, unusual or non-recurring transactions.
B)Can monitor the effectiveness of automated controls.
C)Adjusts rapidly to changing business processes.
D)Reduces the risk of controls being overridden.

Question 33

Which of the following statements is true?

A)Testing of controls is the most cost efficient way of designing each audit.
B)Substantive testing is the most cost efficient way of designing each audit.
C)As the work of testing of controls increases, the cost of substantive work increases.
D)There is a point where further testing of controls becomes more expensive than performing substantive test.

Question 34

Control tests should be applied to samples of transactions and control procedures:

A)Which occurred during the interim audit so that they provide direct auditor's knowledge.
B)Selected by management as being representative of all transactions processed.
C)Throughout the period being audited.
D)Which occur primarily close to reporting period ends such as year end or quarter end.

Question 35

If there have been no changes to a control which a previous audit has found to be working effectively:

A)An auditor must still test the controls and not place reliance on the prior year's testing.
B)An auditor must still test the controls but not to the same extent as the prior year's testing.
C)An auditor can rely on the prior year's work and not test controls in the current year.
D)An auditor can rely on the prior year's work but should test the controls every few years.

Question 36

What internal control objective is affected by cut off errors? Why are they of such concern to auditors?

Question 37

A "walk through" test is:

A)A means of ensuring that transactions are processed as described in the control system flowchart.
B)A test of physical security over access to computer rooms.
C)A computer assisted technique for processing client data on a different system.
D)An audit procedure carried out at the planning stage of an audit.

Question 38

The internal control objective of accuracy is related to the financial statement assertion of:

A)Occurrence
B)Completeness
C)Valuation
D)Presentation