Deck 6: Gaining an Understanding of the Clients System of Internal Controls

Question 1

If controls are in place to ensure that transactions are recorded in the accounting period, this satisfies which internal control objective?

A) Timely
B) Real
C) Valued
D) Posted

Answer 1

A

Question 2

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

A) A control within a software program being overridden or disabled
B) Human error that results in a breakdown in internal control
C) Collusion by two or more individuals to circumvent a control
D) All of the above

Answer 2

D

Question 3

Checklists and preformatted questionnaires are particularly helpful in industries that the auditor may not personally be familiar with auditing.

Answer 3

True

Question 4

The purpose of an auditor's management letter is to inform the client of the auditor's recommendations for improving its internal controls.

Question 5

Control risk refers to the risk that the auditor's testing procedures will not be effective in detecting a material misstatement.

Question 6

Internal control is intended to provide reasonable assurance about the achievement of an entity's objectives.

Question 7

Internal control weaknesses decrease the risk of material misstatements being undetected by management's processes and controls.

Question 8

Which of the following statements about internal control is in?

A) Internal control is a very broad concept
B) Internal control eliminates the possibility of fraud and error
C) Internal control encompasses all of the elements of an organisation
D) Internal control provides reasonable assurance about the achievement of the entity's objectives

Question 9

The internal control objective of 'valued' refers to controls in place to ensure that transactions are recorded in the accounting period.

Question 10

Audit risk is the risk that an entity's internal control system will not prevent or detect material misstatements.

Question 11

An internal control exception is an observed condition that provides evidence that the control being tested did not operate as intended.

Question 12

The concept that no one employee should be in a position both to perpetrate and hide errors or fraud in the normal course of their duties is known as segregation of incompatible duties.

Question 13

In larger entities, there are often limitations surrounding the entity's ability to put effective internal controls in place.

Question 14

The internal control objective of 'classified' means there are controls in place to ensure that:

A) fictitious or duplicate transactions are not included in the books of an organisation
B) amounts are assigned to transactions
C) transactions are recorded in the accounting period
D) transactions are charged and allocated to the general ledger account

Question 15

The internal control objective of 'real' refers to controls in place to ensure that fictitious or duplicate transactions are not included in the books and records of the organisation.

Question 16

One of the elements of an entity's control environment is management's philosophy and operating style.

Question 17

Narratives involve the auditor describing in words each step of the flow of transactions from start to finish.

Question 18

When internal controls are effective:

A) there will be an increased reliance on substantive tests of transactions and account balances
B) control risk will also be high
C) the organisation is more likely to achieve its strategic and operating objectives
D) the organisation is less likely to achieve its strategic and operating objectives

Question 19

All of the following are components of internal control, except for:

A) monitoring of controls
B) the control environment
C) audit committees
D) the information system

Question 20

The inherent limitations of internal control include the possibility of collusion by two or more individuals to circumvent a control.

Question 21

What have been the major impacts on companies and auditors of section 404 of the Sarbanes-Oxley Act (2002)? Has this section improved the quality of companies' internal controls?

Question 22

For identified risks, management:

A) assesses the likelihood of their occurrence
B) decides upon actions to manage them
C) estimates their significance
D) all of the above

Question 23

Which of the following statements relating to control activities is in?

A) They include management's philosophy and operating style
B) They are policies and procedures that help make sure management's directives are carried out
C) They help guarantee that necessary actions are taken to address risks impacting the achievement of the organisation's objectives
D) They have various objectives and are applied at various organisational and functional levels

Question 24

The purpose of the management letter is to inform:

A) the auditor with concerns held by the client's management about the audit fee
B) the client's management of the auditor's opinion on the company's financial statements
C) the client's audit committee of disagreements with management
D) the client of the auditor's recommendations for improving its internal controls

Question 25

What are control activities and explain the major categories of them?

Question 26

For purchasing inventory transactions, an example of a risk that arises is:

A) goods that have been sold and invoiced are included in the inventory on hand
B) the wrong quantities are recorded during the stocktake
C) the wrong labour costs are added to the cost of individual inventory items
D) the wrong amount is paid against an invoice

Question 27

An internal control exception is:

A) only expected to exist when internal controls are effective
B) an observed condition that provides evidence that the control being tested did not operate as indicated
C) both a and b
D) an observed condition that provides evidence that the control being tested did operate as indicated

Question 28

What are the most common forms of documentation used by auditors to document their understanding of internal controls?

Question 29

Why are internal controls so important to companies? What are the implications for companies if their internal controls are not operating effectively?

Question 30

Which of the following is an element of the control environment?

A) Participation by those charged with governance
B) Commitment to competence
C) Segregation of duties
D) Both a and b

Question 31

The most common ways of auditors documenting their understanding of internal controls include:

A) flowcharts
B) narratives
C) preformatted questionnaires
D) all of the above

Question 32

What is a management letter and what are its major purposes?

Question 33

ASA260 Communication of Audit Matters with Those Charged with Governance requires auditors to communicate audit matters of governance interest arising from the audit of the financial report with those charged with governance of an entity. What are some examples of these matters and why is it important for auditors to communicate them?

Question 34

Which of the following is not an example of an internal control for the sales process?

A) Credit committee review of credit limits on a quarterly basis
B) Approved purchase order is reconciled to invoice
C) Application control that only allows orders to be processed against existing approved customers with enough unused credit limit
D) Invoices automatically generated from order and dispatch document

Question 35

Checklists and preformatted questionnaires are particularly helpful:

A) in industries that the auditor may not personally be familiar with auditing
B) when control risk is high
C) when less experienced auditors find it difficult to identify which are the critical controls
D) both a and c

Question 36

Explain the key elements of the control environment.

Question 37

The control environment does not:

A) set the tone of an entity
B) set the foundation for all other components of internal control
C) refer to the policies and procedures that help make sure management's directives are carried out
D) influence the control consciousness of employees

Question 38

Explain the seven generally accepted objectives of internal control activities and identify the relevant assertions.

Question 39

Performance reviews are control activities that include:

A) authorisation for access to computer programs
B) segregating incompatible duties
C) reviews of actual performance versus budgets
D) periodic counting and comparison with amounts shown on control records