Question 1

In a public company, management's report on internal control must be signed by the members of the audit committee.

Accepted Answer

Management's report on internal control over financial reporting is typically signed by the CEO and CFO, not the members of the audit committee. The audit committee oversees the process but does not sign the report.

Question 2

According to the PCAOB, who is responsible for the reliability of the internal controls over financial reporting process of an entity?

Accepted Answer

According to the PCAOB (Public Company Accounting Oversight Board), management is responsible for establishing and maintaining effective internal controls over financial reporting. This includes the CEO and/or CFO, as they are the top-tier executives responsible for overseeing financial reporting and internal control processes within the company. While the board of directors and external auditors have oversight roles in ensuring the effectiveness of the internal controls, ultimate responsibility lies with management.

Question 3

Management documentation of the ICFR assessment should include all of the following except:

Accepted Answer

While documentation regarding the controls in a process should be included in the ICFR assessment, it is not necessary to document every control in the process. The focus should be on the controls that address significant financial reporting risks.

Question 4

An "integrated audit" as stated in Section 404 of the Sarbanes-Oxley Act means:

Accepted Answer

An integrated audit, as defined in Section 404 of the Sarbanes-Oxley Act, requires the auditor to conduct two audits, one on the effectiveness of internal control and the other on the financial statements, in an integrated way. This means that the auditor must consider the relationship between internal control and financial reporting, so that the auditor can obtain sufficient and appropriate evidence to form an opinion on the financial statements as a whole. Therefore, choice (B) is the correct answer. Choice (A) is incorrect because the integrated audit does not require the auditor to consider the integrated thoughts and ideas of everyone on the audit staff. Choice (C) is incorrect because the integrated audit may have different objectives for auditing internal control and auditing the financial statements, but these objectives need to be integrated to obtain an overall opinion on the financial statements as a whole. Choice (D) is incorrect because the Sarbanes-Oxley Act does not require two independent CPA firms to work together on the audit.

Question 5

The PCAOB makes it clear that the CEO and CFO are responsible for the internal control over financial reporting and the preparation of the statements.

Accepted Answer

According to the PCAOB, the CEO and CFO are responsible for the internal control over financial reporting and the preparation of the statements. This is stated in Auditing Standard No. 5: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements.

Question 6

The person in charge of authorizing credit to customers does not properly understand what constitutes a credit risk. This is an example of:

Accepted Answer

This is a deficiency in operation because there is a failure to implement internal controls effectively. The person in charge of credit authorization may not have been properly trained or supervised, resulting in a misunderstanding of credit risk.

Question 7

Based on PCAOB guidelines, the audit of ICFR and financial statements audit should be conducted as an "integrated audit."

Accepted Answer

PCAOB guidelines require the audit of ICFR and financial statements to be conducted as an integrated audit, meaning the auditor should obtain an understanding of both the company's internal control over financial reporting and the financial statements in order to assess the risk of material misstatement and design appropriate audit procedures. Additionally, the auditor should provide an opinion on both the effectiveness of the company's internal control over financial reporting and the fairness of the financial statements.

Question 8

Most public companies must follow Sarbanes-Oxley requirements.

Accepted Answer

The Sarbanes-Oxley Act of 2002 established new or enhanced standards for all U.S. public company boards, management, and public accounting firms. This legislation is mandatory for all publicly-traded companies and regulates various aspects of their operations and financial reporting.

Question 9

In determining the extent to which the auditor may use the work of others in the audit of ICFR, the auditor should do all of the following except:

Accepted Answer

All of these are required. The auditor must be ready to document the extent to which he or she relied on the work of others, evaluate the risks associated with the controls subjected to the work of others, and evaluate the competence and objectivity of the individuals who performed the work. These are all necessary steps to ensure the reliability of the audit of ICFR.

Question 10

Which of the following is not a primary objective of internal control as established by COSO?

Accepted Answer

While effective purchasing systems may be a component or sub-objective of internal control, it is not specifically listed as a primary objective by COSO. The three primary objectives listed by COSO are: (1) reliability of financial reporting, (2) compliance with laws and regulations, and (3) efficiency and effectiveness of operations.

Question 11

The likelihood of an event is "more than remote" when it is "reasonably possible."

Accepted Answer

The answer of The likelihood of an event is "more...

Question 12

In a public company, management must assess and report on internal control over financial reporting.

Accepted Answer

This is mandated by the Sarbanes-Oxley Act of 2002 for public companies in the United States. Management must assess the effectiveness of internal controls and report on any identified weaknesses. This assessment is reviewed by external auditors as part of the audit process.

Question 13

Which of the following is least likely to represent a material weakness in internal control for Flynt Corporation?

Accepted Answer

A temporary issue with computer systems that lasts for only two days and requires manual reconciliation does not necessarily indicate a material weakness in internal control. Material weaknesses are more systemic issues that indicate a significant deficiency in the ability to record, process, summarize, and report financial data.

Question 14

A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is:

Accepted Answer

A significant deficiency is a deficiency in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting. It implies that there is a reasonable possibility that a misstatement could occur in the financial statements that is significant but not material.

Question 15

When auditing a public company, the auditor must form an opinion on the effectiveness of internal control over financial reporting, or issue a disclaimer in the event of a scope limitation.

Accepted Answer

This is true. As per the requirements of the Sarbanes-Oxley Act (SOX), auditors of public companies are required to form an opinion on the effectiveness of internal control over financial reporting. In case of a scope limitation, the auditor may issue a disclaimer stating that they were unable to obtain sufficient evidence to form an opinion on the effectiveness of internal control.

Question 16

All companies must follow the Sarbanes-Oxley Act requirements.

Accepted Answer

The Sarbanes-Oxley Act applies only to public companies registered with the Securities and Exchange Commission (SEC), not to private companies.

Question 17

The PCAOB Auditing Standards require the auditor to provide which of the following?

Accepted Answer

The PCAOB (Public Company Accounting Oversight Board) Auditing Standards require the auditor to provide reasonable assurance on both the financial statements and internal control. Reasonable assurance means that the auditor obtains sufficient and appropriate audit evidence to reduce the audit risk to an acceptably low level. The auditor is not required to provide absolute assurance, which is impossible to achieve in practice.

Question 18

Which of the following is not a topic that requires special consideration by management during management's internal control assessment process and by the auditor during the audit of internal control?

Accepted Answer

The role of the auditor in internal control is not a topic that requires special consideration by management or the auditor during the assessment or audit of internal control. The other choices, multiple locations and business units, service organizations, and safeguarding assets, all have unique elements that require specific attention in order to properly assess and test their internal controls.

Question 19

An auditor performing an audit of internal control over financial reporting would be required to:

Accepted Answer

The auditor performing an audit of internal control over financial reporting is required to form an opinion on the effectiveness of internal control. This opinion is based on the testing of internal controls, but the auditor would not necessarily test all of the entity's internal controls. The auditor is not required to rely on the work of internal auditors or randomly identify accounts for an audit of internal control.

Question 20

In order for an external auditor to complete an audit of a public company, the entity's management must comply with all of the following except:

Accepted Answer

The management is required to present a written assessment of the effectiveness of the entity's internal control over financial reporting as of the end of the entity's most recent fiscal year, rather than an oral assessment.

Quiz 7: Auditing Internal Control Over Financial Reporting