Question 1

Which one of the following represents a control deficiency?

Accepted Answer

A control deficiency is a condition in which a necessary control is missing or not properly designed, making it difficult to achieve objectives. Option A represents a missing control which is not designed which can lead to a control deficiency. Option B represents a control that operates properly, not a deficiency. Option C represents a control that ensures the reliability of financial reporting, not a deficiency. Option D represents an immaterial error which does not necessarily lead to a control deficiency.

Question 2

The PCAOB's AS No.5 states that internal controls may be preventive or detective. Which of the following controls is preventive?

Accepted Answer

Requiring two persons to open mail containing payments is a preventive control because it is designed to prevent errors or fraud from occurring in the first place, by ensuring that no single person has control over opening payments. The other options are detective controls, which are designed to detect errors or fraud that have already occurred.

Question 3

What is the typical outcome when an auditor discovers a material weakness in the design or operation of controls?

Accepted Answer

If the auditor discovers a material weakness in the design or operation of controls, they will issue an adverse opinion unless management corrects the defect before year-end.

Question 4

Which one of the following is considered effective documentation of an internal control system?

Accepted Answer

Electronically pre-numbered records provide a clear audit trail and help in identifying any missing or duplicate transactions, thereby documenting the effectiveness of internal control system. Cathode ray screen used in input, verbal authorization or financial statements alone do not provide sufficient evidence of an effective internal control system.

Question 5

Which of the following documents will an auditor use to demonstrate an understanding of internal control?

Accepted Answer

Questionnaires, narratives and flowcharts are tools commonly used by auditors to document their understanding of internal control. Checklists, disclosures and procedures are often used to document control testing procedures, but do not necessarily provide evidence of the auditor's understanding. The audit report, internal control opinions and confirmations are not used to demonstrate the auditor's understanding, but are the final output of the audit process. Workpapers, engagement letters and management representation letters are also important documentation for the audit process, but do not primarily demonstrate the auditor's understanding of internal control.

Question 6

Which of the following is an example of a test of controls?

Accepted Answer

Reviewing management's monthly bank reconciliations is an example of a test of controls because it involves testing the operating effectiveness of a control (bank reconciliations) to ensure that they are being performed accurately and timely.

Question 7

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 course of action is the auditor most likely to take?

Accepted Answer

The auditor will develop specific tests for cash balances to determine the extent of any misstatements due to the deficiencies in internal controls.

Question 8

Which of the following procedures will an auditor use to better understand a client's internal control over accounting systems?

Accepted Answer

The auditor will review previous year working papers to understand the client's internal control over accounting systems. This will provide the auditor with insight into how the client has addressed any previously identified control weaknesses and give them a basis for evaluating the current year's controls. Options A, C, and D are not relevant procedures for understanding internal controls.

Question 9

Which of the following is not a way an auditor obtains evidence regarding the effectiveness of internal control over the accounting system?

Accepted Answer

Making inquiries of banks and attorneys is typically related to obtaining evidence about financial statement assertions, not specifically about the effectiveness of internal controls over the accounting system.

Question 10

Which of the following facts would result in an auditor issuing an adverse report over internal control?

Accepted Answer

An adverse report is issued when there is a material weakness in the design or operation of internal controls. Choice A and B both suggest that the controls are effective and working properly, thus an adverse report would not be necessary. Choice D is also unrelated to the effectiveness of internal controls.

Question 11

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?

Accepted Answer

This is an example of a preventive control because it aims to prevent errors or fraud by ensuring that there is a record of all checks received, which can be cross-referenced by the cashier and accounting department.

Question 12

When obtaining an understanding of internal controls,what is the independent external auditor primary concerned with?

Accepted Answer

The independent external auditor is primarily concerned with determining whether the internal controls can be relied upon. The auditor wants to ensure that the internal controls are effective in preventing material misstatements in the financial statements. While detecting errors and promoting efficiency are important, they are not the primary focus of the auditor when evaluating internal controls.

Question 13

Which of the following best represents a walkthrough?

Accepted Answer

A walkthrough involves tracing a few transactions through the entire process to understand the system and controls, which is what option D describes.

Question 14

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

Accepted Answer

Collusion refers to two or more individuals working together to circumvent internal controls, which is an inherent limitation that cannot be completely eliminated through the design and implementation of controls. The other options (A, C, and D) are all examples of internal controls meant to prevent fraud, error, and abuse, but they may also have their own limitations and weaknesses.

Question 15

What is the auditor's responsibility for testing internal controls when the auditor believes that the internal controls are effective and intends to rely upon them?

Accepted Answer

When an auditor believes that internal controls are effective and intends to rely on them, they are required to test those controls to confirm their effectiveness and support their audit opinion.

Question 16

To support an assessment that controls are effective,what must an auditor do?

Accepted Answer

To support an assessment that controls are effective, an auditor must achieve the same conclusion after appropriately testing internal control. This means that the auditor has reviewed and tested the controls in place and determined that they are operating effectively to mitigate risks. If the auditor were to achieve the opposite conclusion or perform increased substantive procedures, it would indicate that the controls in place are not effective and may require additional attention. Limited substantive procedures may be appropriate if the assessment is justified, but the key is to have sufficient evidence to support the conclusion that controls are effective.

Question 17

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

Accepted Answer

All the options listed (A: Segregation of duties, B: Competent, trustworthy employees, and C: Authorization procedures) are indeed control activities commonly implemented in accounting systems to ensure accuracy, prevent fraud, and maintain financial integrity.

Question 18

Internal control is a process affected 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?

Accepted Answer

The three categories of objectives mentioned in the statement are reliability of financial reporting, compliance with laws and regulations, and effectiveness and efficiency of operations. Continuing existence does not fit into any of these categories and is therefore the answer.

Question 19

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

Accepted Answer

Locks on the warehouse doors are a physical control to restrict access to assets and prevent unauthorized entry. Hiring trustworthy cashiers and separation of duties are examples of administrative controls, while safety audits on the production-line are examples of operational controls.

Question 20

Which of the following is clearly a test of controls?

Accepted Answer

Examining a sample of purchase order records for electronic, authenticated authorization is clearly a test of controls as it is designed to test whether the control procedures in place relating to purchase orders are operating effectively. The other options are not tests of controls as they do not relate to assessing the effectiveness of control procedures.

Quiz 3: Internal Control Over Financial Reporting: Managements Responsibilities and Importance to the External Auditors