Question 1

Transaction-level controls are those controls that ________.

Accepted Answer

Transaction-level controls are specifically designed to respond to things that can go wrong during the processing of an individual transaction, such as errors, fraud or other irregularities. They are preventive in nature and are implemented to ensure the accuracy, completeness, validity, and authorization of individual transactions.

Question 2

In an audit, the purpose of risk assessment is to ________.

Accepted Answer

The purpose of risk assessment in an audit is to assess the combined inherent, control, and detection risks to evaluate the likelihood that material misstatements could occur in the financial statements. This helps the auditor to plan the audit procedures and determine the appropriate level of substantive testing required. Options A, C, and D are not correct as they are not the primary purpose of risk assessment.

Question 3

Risks related to the prelisting of cash receipts and remittance advices relate to ________.

Accepted Answer

Prelisting of cash receipts and remittance advices may not always be accurate, and there is a risk that checks received may not agree with the prelist of cash. This can cause discrepancies in accounting records and mismanagement of cash. However, cash sales not being recorded, errors in journalizing cash receipts, and receipts being posted to the wrong customer account are all risks unrelated to prelisting of cash receipts and remittance advices.

Question 4

If an employee who has access to the custody of assets steals a cash remittance and covers the theft by recording a bad-debt write off, there was likely a failure in the category of __________.

Accepted Answer

The theft that was covered up with a bad-debt write off suggests that the employee was in a position to record transactions and had access to the custody of assets. This indicates a failure in segregation of duties, as the same person was responsible for both recording transactions and handling the assets.

Question 5

An example of an entity level control would be ________.

Accepted Answer

Entity level controls are the foundation for the overall control environment of an organization. These controls are established at the entity level and affect the entire organization. Examples of entity level controls include management philosophy and operating style, the tone at the top, risk assessment processes, and governance practices. The other options are examples of specific controls that are implemented at a transactional or process level within the organization.

Question 6

As per the COSO Framework, one of the reporting objectives of internal control pertains to ________.

Accepted Answer

According to the COSO Framework, one of the reporting objectives of internal control is to ensure the reliability and transparency of financial reporting. This objective aims to provide users of financial statements with accurate and complete information that is free from material errors, omissions, or misstatements.

Question 7

In a top-down approach to understanding internal control over financial reporting and selecting the specific internal controls to test, the auditor focuses on _______-level controls.

Accepted Answer

In a top-down approach, the auditor begins by identifying entity-level controls, which have a pervasive effect on the company's ability to detect and prevent material misstatements in the financial statements. Entity-level controls include tone at the top, management's risk assessment, the control environment, and monitoring activities. The auditor will then test these controls to determine their effectiveness before moving on to other lower-level controls. Therefore, the auditor focuses on entity-level controls in a top-down approach.

Question 8

A top-down approach begins by _____.

Accepted Answer

A top-down approach in auditing starts by examining the overall financial statements and identifying potential risks or areas where errors or fraud could occur, before moving into more detailed testing and analysis.

Question 9

An entity's risk assessment process ________.

Accepted Answer

An entity's risk assessment process is its process for identifying and responding to risks that an organization will not achieve its objectives. It is not necessary to reevaluate it every five years or for it to only be crafted by top management. While an auditor's consideration of risk may be related to the entity's risk assessment process, it is not the same thing.

Question 10

Establishing an appropriate level of professional skepticism is achieved by ________.

Accepted Answer

Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. One way to establish an appropriate level of professional skepticism is to gain an understanding of the entity-level (or entity-wide) internal control components, which helps the auditor identify areas where the client's controls may be weak or where they may have failed. While talking to the internal audit function and the client's attorney may provide useful information, they are not directly related to establishing professional skepticism. A directive from the audit partner in charge may not always be necessary, and the attitude of professional skepticism should be ingrained in the auditor's mindset regardless of any specific directive.

Question 11

A control ensuring that sales are recorded in the sales ledger is a/an _______-level control.

Accepted Answer

The control ensuring that sales are recorded in the sales ledger is related to transaction-level controls. The other options (entity, division, and function) are related to higher-level controls.

Question 12

Physical controls are concerned with limiting ________.

Accepted Answer

Physical controls are designed to restrict access to certain assets or resources to only authorized personnel. These controls can include locks, security cameras, and access cards. The goal is to prevent unauthorized individuals from gaining physical access to sensitive information or valuable assets. The other options listed are not related to physical controls.

Question 13

Reports that summarize the detail of account balances such as an aged trial balance of accounts receivable are an example of which category of control activities?

Accepted Answer

The answer of Reports that summarize the detail of account...

Question 14

Policies and procedures enacted by the entity which help ensure that management's directives are carried out are generally referred to as ________.

Accepted Answer

Control activities are policies and procedures put in place by an entity to ensure that management's directives are being carried out effectively. Management activities are a broader term and include planning, organizing, directing, and controlling all the activities of an entity. Legislative activities refer to the process of making laws and regulations, which is outside the jurisdiction of most entities. Company procedures are a general term and do not specifically refer to the policies and procedures related to ensuring the implementation of management's directives.

Question 15

As per the COSO Framework, the operations objectives of internal control include ________.

Accepted Answer

The operations objectives of internal control, as per the COSO Framework, include the safeguarding of assets against loss, which is aimed at preventing or minimizing the risk of unexpected loss or damage to the organization's assets.

Question 16

Which of the following is comprised of the attitudes, awareness and actions of management and those charged with governance concerning the entity's internal control and its importance in the entity?

Accepted Answer

Control environment includes the attitudes, awareness, and actions of management and those charged with governance concerning the entity's internal control and its importance in the entity. Choices B, C, and D refer to specific components of internal control.

Question 17

Which of the following principles is within the control environment component of the seventeen COSO principles of internal control?

Accepted Answer

The principle that "the organization demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives" is within the control environment component of the COSO principles of internal control. This principle relates to creating a culture of ethical behavior and ensuring that personnel have the appropriate skills and abilities to carry out their responsibilities effectively.

Question 18

Which process involves assessing the design and operation of controls on a timely basis and taking necessary corrective actions?

Accepted Answer

The process described in the question is monitoring, which involves ongoing assessments of the design and operation of control activities to ensure their effectiveness in mitigating risks. If deficiencies are identified, corrective actions must be taken in a timely manner. Risk assessment is a separate component of a comprehensive internal control system, which involves identifying and analyzing potential risks to the organization. Control activities involve establishing policies, procedures, and other mechanisms to ensure that risks are managed effectively, while information and communication involve collecting, analyzing, and disseminating information throughout the organization about risks and controls.

Question 19

Integrity and ethical behavior ________.

Accepted Answer

Integrity and ethical behavior are not just the responsibility of auditors or limited to certain levels of the organization. They are driven by the overall ethical and behavioral standards of the organization and should be upheld by all employees. The organization's leaders need to set a strong ethical tone to foster a culture of integrity and ethical behavior from the top down.

Question 20

Compared to other types of entity-level controls, the auditor finds _______the easiest to test because their operation is readily verifiable.

Accepted Answer

Control activities are the specific policies and procedures implemented by management to achieve specific objectives and mitigate risks. They are often easily testable and verifiable because they involve physical, documentary, or technological evidence. Control environment, risk assessment, and information and communication controls are more subjective and may require more judgment and interpretation by the auditor, making them more difficult to test.

Quiz 6: Understanding of the Clients System of Internal Controls