Question 1

The auditor's primary purpose in auditing the client's system of internal control over financial reporting is

Accepted Answer

The auditor's primary purpose in auditing the client's system of internal control over financial reporting is to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements. This helps the auditor determine the level of reliance that can be placed on the company's internal control system to obtain audit evidence about the accuracy and completeness of the financial statements. Preventing fraudulent financial statements from being issued to the public is a secondary objective, while reporting to management that internal controls are effective is not the primary purpose. Efficiency is also not the primary purpose, but rather an important consideration.

Question 2

The internal control framework used by most U.S. companies is the ________ framework.

Accepted Answer

The most commonly used internal control framework in the U.S. is the COSO (Committee of Sponsoring Organizations) framework, which was developed by a private sector group and provides guidance on best practices for internal control. The FASB (Financial Accounting Standards Board), PCAOB (Public Company Accounting Oversight Board), and SEC (Securities and Exchange Commission) are regulatory bodies involved in financial reporting and oversight, but they do not provide a comprehensive framework for internal control.

Question 3

Management's report on internal controls must identify the framework used to evaluate the effectiveness of internal controls, and this framework may include other internal control frameworks which exist around the world.

Accepted Answer

The report on internal controls should identify the framework used to evaluate the effectiveness of internal controls, and it is possible to include other internal control frameworks from around the world.

Question 4

An auditor should consider two key issues when obtaining an understanding of a client's internal controls. These issues are

Accepted Answer

The two key issues that an auditor should consider when obtaining an understanding of a client's internal controls are the design and operating effectiveness of the controls. Design refers to whether the controls have been appropriately designed to prevent or detect material misstatements in the financial statements, while operating effectiveness refers to whether the controls are functioning as intended. The other choices, A, B, and D, are not accurate descriptions of the key issues that auditors consider when evaluating internal controls.

Question 5

Which of the following is most correct regarding the requirements under Section 404 of the Sarbanes-Oxley Act?

Accepted Answer

Section 404 of the Sarbanes-Oxley Act requires companies to provide a report on internal control over financial reporting. The audits of internal control and financial statements provide reasonable assurance as to the accuracy and completeness of financial statements and internal controls but not absolute assurance.

Question 6

Which of the following is an accurate statement regarding the auditor's responsibility for understanding internal control?

Accepted Answer

The answer of Which of the following is an accurate...

Question 7

Under the Dodd-Frank federal financial reform legislation, all public companies are required to obtain an audit report on internal control over financial reporting.

Accepted Answer

The Dodd-Frank Act exempts non-accelerated filers (smaller reporting companies) from the requirement to obtain an external audit on internal control over financial reporting, which is mandated by Section 404(b) of the Sarbanes-Oxley Act for larger public companies.

Question 8

Of the following statements about internal controls, which one is least likely to be correct?

Accepted Answer

Control procedures cannot entirely prevent collusion among employees, but they can mitigate the risk of collusion. Therefore, it is least likely to be correct that control procedures "reasonably ensure" that collusion among employees cannot occur.

Question 9

In performing the audit of internal control over financial reporting, the auditor emphasizes internal control over classes of transactions because

Accepted Answer

Internal control over classes of transactions is emphasized in the audit because the accuracy of accounting system outputs is heavily dependent on the accuracy of inputs and processing. Therefore, the auditor focuses on testing the controls in place for key classes of transactions to ensure that the accounting system is producing accurate financial statements. This is because errors or misstatements in transactions can have a significant impact on the overall financial statements.

Question 10

When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is

Accepted Answer

"Effective" means that internal control is operating as intended and achieving its objectives. Therefore, if there is a material weakness at the end of the year, management must conclude that internal control over financial reporting is ineffective. Choices A, B, and D may also describe the situation to some extent, but "ineffective" best captures the meaning of a material weakness.

Question 11

It is possible for management to design an ideal and effective system of internal controls for example over the counting of the physical inventory.

Accepted Answer

While management can design a robust and effective system of internal controls to improve the accuracy of physical inventory counts, no system can be absolutely ideal or completely effective in eliminating all risks of error or fraud due to inherent limitations.

Question 12

Reasonable assurance allows for

Accepted Answer

Reasonable assurance in the context of internal controls means that there is a low likelihood that material misstatements will not be prevented or detected. It acknowledges that while internal controls are designed to manage risk, they cannot guarantee absolute assurance against material misstatements.

Question 13

The auditor's responsibilities for internal control include understanding and testing the audit client's internal controls over financial reporting.

Accepted Answer

The auditor is responsible for understanding and testing the effectiveness of the client's internal controls over financial reporting in order to provide reasonable assurance that the financial statements are free from material misstatement.

Question 14

When a company designs and implements internal controls, the cost of the controls is not a valid consideration.

Accepted Answer

The cost of internal controls is a valid consideration that companies must take into account when designing and implementing them. This is because the cost of the internal controls must be proportionate to the level of risk that the company is trying to mitigate. Furthermore, if the cost of internal controls exceeds the potential benefits, it may not be feasible for the company to implement them.

Question 15

Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the

Accepted Answer

The effectiveness of internal controls depends on the people using it. The controls can be well-designed, properly implemented, and maintained by an internal audit staff, but if the people using them are not competent and dependable, then the controls may fail. Therefore, option D is the best choice. The adequacy of the computer system can affect the effectiveness of internal controls, but it is not the most critical factor. The proper implementation by management and ability of the internal audit staff to maintain it are necessary but not sufficient conditions for internal control effectiveness.

Question 16

The primary emphasis by auditors is on controls over

Accepted Answer

Auditors primarily focus on controls over classes of transactions, as these are the processes through which transactions are initiated, authorized, recorded, and processed. Controls over account balances are also important, but they are a result of effective controls over transactions. However, the emphasis may vary depending on the client and their specific risks and areas of concern.

Question 17

Two key concepts underlie management's design and implementation of internal controls are absolute assurance and inherent limitations.

Accepted Answer

The two key concepts underlie management's design and implementation of internal controls are reasonable assurance and inherent limitations, not absolute assurance.

Question 18

When considering internal controls,

Accepted Answer

Auditors are primarily concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements. While auditors may consider internal controls related to management information, their main focus is on those that impact financial reporting. Management is responsible for understanding and testing internal control over financial reporting, but there is no requirement for companies to use the COSO framework; it is just a widely accepted model for establishing internal controls.

Question 19

If required under special circumstances, an auditor must step in at an audit client and establish and maintain the audit client's system of internal controls to ensure reliable financial reporting.

Accepted Answer

An auditor's role is to independently assess the effectiveness of an audit client's internal controls, not to establish or maintain these systems, as doing so would compromise their independence and objectivity.

Question 20

The Sarbanes-Oxley Act requires

Accepted Answer

The Sarbanes-Oxley Act mandates that all public companies must issue reports on the effectiveness of their internal controls over financial reporting.

Quiz 11: Internal Control and Coso Framework