Question 1

Which of these is not an inherent limitation of an internal control structure?

Accepted Answer

"Accounting override" is not a recognized inherent limitation of internal control structures. The inherent limitations typically include human errors (mistakes in judgment), collusion, and management override.

Question 2

Which of the following is an example of how an auditor might document the understanding of internal control?

Accepted Answer

Auditors use various methods to document their understanding of an entity's internal control system, including internal control questionnaires and flowcharts along with narrative memoranda. These tools help in assessing the design and implementation of internal controls.

Question 3

Which factor concerning boards of directors and audit committees would be considered least influential in its impact on the control environment?

Accepted Answer

The sex of directors is considered least influential in its impact on the control environment because the effectiveness of boards of directors and audit committees is more significantly influenced by factors such as experience, involvement, and independence from management rather than the gender of the directors.

Question 4

Management is responsible for implementing effective controls to control risks identified in a risk assessment. Which of these would not be considered to impact on management's risk assessment?

Accepted Answer

Changing the external auditor does not impact management's risk assessment directly. Risk assessments focus on internal and external factors that could affect the organization's ability to achieve its objectives. Changing the external auditor is more related to the audit process rather than the organization's internal risk management processes.

Question 5

The importance of internal control to management and auditors has been recognised for many years. Which of the following is likely to be cited as a major factor contributing to this importance?

Accepted Answer

It is impractical for auditors to audit most companies within economic fee limitations without relying on the client's system of internal controls.

Question 6

The least likely procedure to obtain an understanding of the internal control structure would be:

Accepted Answer

Confirming transactions is more related to the substantive testing of transactions rather than understanding the internal control structure. The other options directly involve gathering information about how controls are designed and implemented.

Question 7

Incompatible duties are those that allow an irregularity to be perpetrated:

Accepted Answer

Incompatible duties allow an irregularity to be both perpetrated and concealed by a single employee, as there is no separation of duties to prevent or detect the irregularity.

Question 8

Which of these would be considered a limitation of internal controls?

Accepted Answer

Internal controls are primarily designed to handle routine transactions effectively. They might not be as effective in dealing with non-routine or unusual transactions, which is considered a limitation. Management's participation in operations (B) and comparing actual to budgeted performance (C) are actually functions or benefits of internal controls, not limitations.

Question 9

A characteristic of management's philosophy and operating style is:

Accepted Answer

Management's philosophy and operating style include how they approach and manage business risks, which reflects their overall attitude and approach to running the organization.

Question 10

Why is it important to obtain an understanding of the internal control system?

Accepted Answer

Understanding the internal control system is crucial because weak internal controls can increase the risk of material misstatement in financial reporting. This understanding helps auditors assess the risk of material misstatement and plan their audit procedures accordingly.

Question 11

Which of these is not a major advantage of the internal control questionnaire?

Accepted Answer

The major disadvantage of the internal control questionnaire is that it may be completed in a mechanical fashion, which can lead to a lack of deep understanding or analysis of the control environment. The other options (B, C, D) are considered advantages.

Question 12

Which of these is not a category of application controls?

Accepted Answer

General controls are not a category of application controls; they relate to the environment within which computer-based application systems are developed, maintained, and operated, and that are designed for the support of individual applications. Application controls, on the other hand, are specifically related to particular computer applications and include input, processing, and output controls.

Question 13

Which of the following is not generally considered one of the factors that make up the control environment?

Accepted Answer

The control environment, as part of an organization's internal control framework, typically includes factors such as the audit committee, organizational structure, and board of directors, which influence the overall attitude, awareness, and actions related to the internal control and financial reporting processes. The accounting package used, while important for financial transactions and records, is more of a tool or system choice rather than a fundamental aspect of the control environment itself.

Question 14

A transaction walk-through review is most commonly associated with:

Accepted Answer

A transaction walk-through review is primarily associated with procedures to obtain an understanding of the processes and controls in place within an organization.

Question 15

Essential to both management and auditors is a chain of evidence in the accounting system provided by coding, cross references, and documentation connecting account balances and other summary results with original data. This chain of evidence is referred to as the:

Accepted Answer

The term "audit trail" refers to the systematic record of a sequence of events or processes that provides a documented history of transactions. It enables the tracing of financial data from the general ledger to the source documents, facilitating the verification of the accuracy and integrity of financial records and transactions by both management and auditors.

Question 16

Which of these is not one of the fundamental concepts in the COSO report's definition of internal control?

Accepted Answer

Internal control, as defined by the COSO framework, is not a guarantee of achieving an entity's objectives; rather, it is a means of providing reasonable assurance that the objectives will be achieved. The other options (B, C, D) are fundamental concepts of the COSO report's definition of internal control.

Question 17

Smaller entities are best able to overcome their absence of safeguards by:

Accepted Answer

Smaller entities often lack the resources for extensive controls like segregation of duties. Developing a culture of integrity, ethical values, and competence helps mitigate risks by promoting ethical behavior and accountability.

Question 18

Which of the following is incorrect concerning the segregation of duties within an organisation?

Accepted Answer

The statement in option A is incorrect because it suggests that all accounting records can be kept by the same person, which contradicts the principle of segregation of duties. Segregation of duties is a key internal control that helps prevent fraud and errors by ensuring that no single individual has control over all aspects of a financial transaction.

Question 19

A way to prevent unauthorised access to computer systems is:

Accepted Answer

All of the options listed are methods to prevent unauthorized access to computer systems. Good access controls ensure that only authorized users can access certain data or systems. Strong firewalls protect against external threats by blocking unauthorized access from the internet. Controls to detect attempts at unauthorized access help in identifying and mitigating potential breaches early.

Question 20

Restricting the use of the information system to particular authorised personnel by use of passwords is an example of:

Accepted Answer

Restricting the use of the information system to particular authorized personnel by use of passwords is a direct example of access controls. Access controls are security features that control how users and systems communicate and interact with other systems and resources.

Quiz 9: Audit Risk Assessment