Question 1

Which of the following is not one of the underlying principles of an effective control environment as developed by COSO?

Accepted Answer

Consideration of potential fraud is actually one of the underlying principles of an effective control environment, as developed by COSO. Therefore, option D is the incorrect statement. Options A, B, and C are all correct principles of an effective control environment.

Question 2

Which of the following is another name for transaction controls?

Accepted Answer

Transaction controls are also known as application controls as they are implemented within specific applications to ensure the accuracy, completeness, and validity of individual transactions. Entity-wide controls are broader controls that ensure the effectiveness of an organization's overall control environment. Supporting controls are controls that support the functioning of application and entity-wide controls. Detail controls are controls that focus on specific transaction details rather than overall control effectiveness.

Question 3

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 fraudulent activities from occurring in the first place by introducing a system of checks and balances. The other options are detective controls because they are designed to detect errors or discrepancies after they have occurred. Reconciling the accounts receivable subsidiary file with the control account, using batch totals, and preparing bank reconciliations are all examples of detective controls.

Question 4

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 5

The COSO principle that an organization should identify and assess changes that significantly impact the system of internal control is related to which COSO component?

Accepted Answer

The principle of identifying and assessing changes that significantly impact the system of internal control is related to the risk assessment component of COSO. The risk assessment component involves identifying and analyzing risks relevant to the achievement of objectives, which includes changes that could impact the effectiveness of internal controls.

Question 6

Which of the following is a major component of an organization's internal control structure?

Accepted Answer

Risk assessment is a major component of an organization's internal control structure as it involves identifying potential risks and implementing controls to mitigate those risks. The other options, such as major new financing and telecommunication equipment, are not necessarily key components of an organization's internal control structure. The financial environment may influence the internal control structure, but it is not a component of it.

Question 7

With whom does the tone of internal control typically originate?

Accepted Answer

The tone of internal control typically originates from management, as they set the tone for the overall ethical culture and behavior within the organization. This includes establishing policies, procedures, and controls to ensure compliance and integrity in financial reporting and operations. While auditors may evaluate the effectiveness of internal controls, and employees may follow and enforce them, ultimately it is management's responsibility to establish and maintain a strong tone of internal control. Stockholders are not typically involved in setting or monitoring internal controls.

Question 8

Which of the following is an example of a control environment deficiency?

Accepted Answer

All of the options listed are examples of control environment deficiencies. A low level of control consciousness can lead to a lack of emphasis on internal controls, an audit committee without independent members may lack objectivity, and an audit committee not viewed as the client of the external auditor can lead to a misunderstanding of roles and responsibilities, all of which are critical components of a strong control environment.

Question 9

Which of the following COSO components is the foundation for all other components of internal control?

Accepted Answer

The control environment is the foundation for all other components of internal control as it sets the tone for the organization's control consciousness and influences how other components are implemented and operated. The control environment includes the integrity and ethical values of the organization, management's philosophy and operating style, organizational structure, and the assignment of authority and responsibility.

Question 10

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 11

Which of the following best describes the purpose of personnel policies and procedures?

Accepted Answer

Personnel policies and procedures are designed to guide an organization in hiring the right people, ensure compliance with laws regarding hiring and retention, and ensure employees are properly trained and supervised. Thus, they encompass all the aspects mentioned in the options.

Question 12

Which of the following is not part of the control environment?

Accepted Answer

Control activities are a part of the internal control system, which is a component of the control environment. The control environment includes factors such as management philosophy and operating style, methods of assigning authority and responsibility, and personnel policies and practices.

Question 13

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

Accepted Answer

Collusion refers to the possibility that two or more people could work together to circumvent internal controls. This is an inherent limitation because no matter how well-designed the controls are, there is always a risk that employees could collude to commit fraud or other unethical behavior. Other options listed are not inherent limitations, but rather important aspects or benefits of internal controls.

Question 14

A control designed to ensure that no employee is paid for more than 80 hours of sick pay is an example of which type of control?

Accepted Answer

Input controls are designed to ensure the accuracy, completeness, and authorization of the data entered into a system. In this case, limiting sick pay to no more than 80 hours is a form of input control, as it restricts the amount of sick pay data that can be entered into the payroll system.

Question 15

Requiring two signatures on any check in excess of $10,000 is an example of which type of control?

Accepted Answer

Requiring two signatures on any check in excess of $10,000 is a preventive control because it is put in place to prevent errors or fraud from occurring. By requiring two signatures, it ensures that multiple individuals have reviewed the check and approve of its validity before it can be issued.

Question 16

Which one of the following is an example of an internal risk for an organization?

Accepted Answer

Changes in internal information technology pose a risk to the organization's operations, data security, and efficient business processes. It is an internal risk because it originates within the organization. Option B, C, and D are external risks because they are caused by factors outside the organization, such as market competition, supplier reliability, and government policies, respectively.

Question 17

A control designed to ensure that the number of sales transactions recorded in the accounting records matches the number of sales invoices entered during processing is known as which type of control?

Accepted Answer

The answer of A control designed to ensure that the...

Question 18

A control designed to ensure that sales transactions are generated using the company's most current prices would be considered to be which type of control?

Accepted Answer

A processing control ensures that transactions are processed correctly, including using the most current prices.

Question 19

An edit test is considered to be which type of control?

Accepted Answer

An edit test is an input control. This is because it is designed to ensure that the data being entered into the system is accurate, complete, and valid. Edit tests can include checks for data type, range, consistency, and completeness.

Question 20

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 safeguard assets because they physically restrict access to the assets. Hiring trustworthy cashiers and separation of duties are examples of administrative controls, while safety audits on the production line are an example of a preventative control.

Quiz 3: Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditor