Deck 6: Understanding of the Clients System of Internal Controls

Question 1

The control environment helps to set the foundation for effective internal control and provides discipline and structure.

Answer 1

True

Question 2

What does COSO define as a process effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the objectives related to operations, reporting and compliance?

A)Internal control
B)Compliance
C)Reporting
D)Risk assessment

Answer 2

Internal control

Question 3

Internal control ________.

A)relates only to a client's IT systems
B)relates to the efficiency of the internal audit function
C)is a very broad concept and can encompass all of the elements of an organization
D)is unrelated to the audit

Answer 3

is a very broad concept and can encompass all of the elements of an organization

Question 4

The external auditor's primary concern should be ________.

A)adequately controlling the entities operations and its financial reporting
B)adequately supervising the internal audit function
C)with the reporting objective and the operations objectives related to safeguarding of assets
D)ensuring management is immediately made aware of any errors regardless of size

Question 5

The most commonly accepted global auditing framework for internal control is the integrated framework developed by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.

Question 6

An integrated audit refers to the audit of the financial statements as well as the system of internal control.

Question 7

The management letter prepared by the auditor should only discuss internal control related issues discovered during the audit.

Question 8

Management, with the oversight of the internal control department, selects and develops control activities to assure that the entity achieves its objectives.

Question 9

Flowcharts are a form of documenting internal controls in smaller and less complex organizations.

Question 10

Entity-level controls are controls that affect a particular transaction or group of transactions.

Question 11

The COSO Framework identifies three objectives of internal control that allow organizations to focus on the differing purposes of internal control.One of these is ________.

A)client acceptance and continuance
B)compliance objectives which pertain to adherence to laws and regulations to which the entity is subject
C)internal control analysis
D)risk of material misstatement

Question 12

The control environment ________.

A)describes the auditor's system of internal control
B)refers to both the financial statements of the client and the audit work being conducted
C)sets the foundation for effective internal control, and provides discipline and structure
D)speaks to the ability of the client to gain funding in capital markets

Question 13

An effective and robust system of internal control ________.

A)will guarantee that the entity will meet its objectives
B)will eliminate all risks related to entity objectives
C)can only provide an entity with reasonable assurance in achieving its financial reporting objectives
D)should be carefully examined to see if the benefits outweigh the costs of providing such a system

Question 14

Common inherent limitations in internal control include ________.

A)ineffective understanding of the purpose of a control
B)controls within a software system are never overridden
C)no evidence or history of collusion within the organization
D)top management agree as to the type and extent of system to implement

Question 15

An integrated audit focuses on ________.

A)integrating the internal and external audit functions
B)auditing both internal control over financial reporting(ICFR) and the financial statements
C)integrating component auditors
D)comparing prior year results with the current year to look for abnormalities

Question 16

One of the seventeen COSO principles of internal control states that "the organization holds individual accountable for their internal control responsibilities in the pursuit of objectives." To which component of internal control does this principle belong?

A)Control Environment
B)Risk Assessment
C)Control Activities
D)Information and Communication

Question 17

A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness is referred to as a significant deficiency.

Question 18

A shipping document which serves as acknowledgement of receipt of goods for delivery by a freight carrier is referred to as a bill of lading.

Question 19

Compensating controls are described as ________.

A)controls that deal with monetary compensation for employees and contractors
B)controls that compensate for another control's potential ineffectiveness
C)controls that are determined to be redundant after analysis
D)controls that have been determined by the auditor to be effective

Question 20

An IT system that produces a transaction trail that is available for audit for only a short period of time is an example of an IT system risk.

Question 21

Transaction-level controls are those controls that ________.

A)respond to things that can go wrong with transactions.
B)are used reactively to determine where problems have occurred.
C)deal with the financial statements in general.
D)management have suggested the auditor implement.

Question 22

In an audit, the purpose of risk assessment is to ________.

A)form an ultimate opinion on the financial statements based on management's directives
B)assess the combined inherent, control and detection risks to evaluate the likelihood that material misstatements could occur in the financial statements.
C)audit the system of internal control only
D)ultimately ensure that the internal audit function is performing properly

Question 23

Risks related to the prelisting of cash receipts and remittance advices relate to ________.

A)cash sales may not be recorded
B)errors may be made in journalizing cash receipts
C)checks received may not agree with prelist of cash
D)receipts may be posted to the wrong customer account

Question 24

If an employee who has access to the custody of assets steals a cash remittance and covers the theft by recording a bad-debt write off, there was likely a failure in the category of __________.

A)segregation of duties
B)performance reviews
C)authorization control
D)physical controls

Question 25

An example of an entity level control would be ________.

A)an entity's risk assessment process
B)a detective control pertaining to accounts receivable
C)a preventive control relating to an IT function
D)a physical lock on a storage facility

Question 26

As per the COSO Framework, one of the reporting objectives of internal control pertains to ________.

A)reliability and transparency
B)efficiency of the entity's operations,
C)adherence to laws and regulations
D)safeguarding of assets against loss

Question 27

In a top-down approach to understanding internal control over financial reporting and selecting the specific internal controls to test, the auditor focuses on _______-level controls.

A)entity
B)division
C)operating unit
D)function

Question 28

A top-down approach begins by _____.

A)considering what can go wrong in the financial statements
B)considering which members of top management might be committing fraud
C)assigning the highest ranking and most experienced members of an audit team to an audit
D)sending questionnaires to top management to complete before interviewing any mid-level management employees

Question 29

An entity's risk assessment process ________.

A)should be reevaluated every five years to respond to changing market conditions and threats
B)should only solicit feedback from and be crafted by top management
C)is its process for identifying and responding to risks that an organization will not achieve its objectives
D)is the same as the auditor's consideration of risk

Question 30

Establishing an appropriate level of professional skepticism is achieved by ________.

A)gaining an understanding of the entity-level (or entity-wide) internal control components
B)talking to the internal audit function
C)discussions with the client's attorney
D)a directive from the audit partner in charge

Question 31

A control ensuring that sales are recorded in the sales ledger is a/an _______-level control.

A)transaction
B)entity
C)division
D)function

Question 32

Physical controls are concerned with limiting ________.

A)physical access to assets to those authorized to have access
B)the informational output of the firm
C)investors access to certain records of the firm which should be kept private
D)access to accounting information to senior managers only

Question 33

Reports that summarize the detail of account balances such as an aged trial balance of accounts receivable are an example of which category of control activities?

A)Performance reviews
B)Information processing controls
C)Physical controls
D)Segregation of duties

Question 34

Policies and procedures enacted by the entity which help ensure that management's directives are carried out are generally referred to as ________.

A)management activities
B)control activities
C)legislative activities
D)company procedures

Question 35

As per the COSO Framework, the operations objectives of internal control include ________.

A)the safeguarding of assets against loss
B)the adherence to laws and regulations
C)reliability and timeliness
D)timeliness and transparency

Question 36

Which of the following is comprised of the attitudes, awareness and actions of management and those charged with governance concerning the entity's internal control and its importance in the entity?

A)Control environment
B)Entity-level controls
C)Monitoring activities
D)Information and communication

Question 37

Which of the following principles is within the control environment component of the seventeen COSO principles of internal control?

A)The organization demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives.
B)The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives.
C)The organization identifies risks to the achievement of its objectives across the entity and analyzes risk as a basis for determining how the risks should be managed.
D)The organization considers the potential for fraud in assessing the risks to the achievement of objectives.

Question 38

Which process involves assessing the design and operation of controls on a timely basis and taking necessary corrective actions?

A)Monitoring
B)Risk assessment
C)Control activities
D)Information and communication

Question 39

Integrity and ethical behavior ________.

A)are provided by the auditor to the client in training sessions
B)are of no concern, for they are always present
C)are the products of the organization's ethical and behavioral standards
D)should start at the bottom and work their way up the organization

Question 40

Compared to other types of entity-level controls, the auditor finds _______the easiest to test because their operation is readily verifiable.

A)control activities
B)control environment
C)risk assessment
D)information and communication

Question 41

Which of the following types of control are designed to control program development, program changes, computer operations, and access to programs and data?

A)Computer general controls
B)Computer application controls
C)IT dependent manual controls
D)None of these options are correct.

Question 42

A major benefit of an IT system is ________.

A)elimination of mistakes
B)elimination of the need for personnel
C)greater consistency in processing than manual systems
D)increased workload created by exception reports

Question 43

Which of the following is a report sent to each customer showing the beginning receivable balance, transactions during the month, and the ending receivable balance?

A)Monthly statement of receivable balances
B)Sales invoice
C)Sales cycle database
D)Customer master file

Question 44

Applications controls will ________.

A)differ for each transaction cycle
B)remain the same for each transaction cycle
C)be closely related to transaction processing controls
D)always consist of input controls and processing controls

Question 45

IT general controls are ________-level controls.

A)entity
B)division
C)transaction
D)function

Question 46

An example of a risk created by an IT system is ________.

A)increased efficiency in processing transactions
B)less documentary evidence
C)potential availability of real-time financial information
D)the extra cost of staffing an IT support function

Question 47

If you place a control that the computer checks run-to-run total of beginning receivables, plus sales transactions with the sum of ending receivables, which of the following risks will you be addressing?

A)Invoices not journalized or posted to customer accounts
B)Sales invoices recorded in the incorrect accounting period
C)Products shipped without shipping documents being generated
D)Sale made without credit approval

Question 48

Documents and files relating to recording sales would be ________.

A)bill of lading and sales database
B)sales invoice and sales database
C)sales invoice, sales cycle database, and monthly statements of receivables balances
D)bill of lading and monthly receivables balances

Question 49

Documents and files related to initiating credit sales would be ________.

A)customer master file and sales order
B)sales order and sales invoice
C)bill of lading and packing slip
D)credit sales order

Question 50

The key assertion an auditor would be testing when examining a sales invoice to determine if it was billed to the correct customer would be ________.

A)valuation and accuracy
B)classification
C)rights and obligations
D)cutoff

Question 51

The concept of computer general controls, controlling computer systems, and programs is an example of a(an) ________.

A)layering activity
B)IT activity
C)general control activity
D)auditing process activity

Question 52

Which of the following documents contains the customer shipping and billing information and the customer credit limit?

A)Customer master file
B)Packing slip
C)Bill of landing
D)Sales invoice

Question 53

A bill of lading is a (an) ________.

A)shipping document serving as acknowledgement of receipt of goods for delivery by a freight carrier.
B)client prepared document with the details of items included in a shipment.
C)electronic file that accumulates data on sales, cash receipts, and accounts receivables.
D)electronic file containing the customer shipping and billing information and the customer credit limit.

Question 54

When an auditor decides to follow a particular transaction from initiation through where it is recorded in the financial records, this is known as ________.

A)reperformance
B)walkthrough
C)recalculation
D)vouching

Question 55

A report sent to each customer showing the beginning receivable balance, transactions during the month, and the ending receivable balance is best described as ________.

A)a statement of cash receipts
B)an aging of accounts receivable
C)monthly statements of receivable balances
D)a general ledger receivables report

Question 56

Which of the following are designed to provide reasonable assurance that the recording, processing, and reporting of data by an IT system are properly performed for specific applications?

A)Computer application controls
B)Computer general controls
C)IT dependent manual controls
D)None of these options are correct.

Question 57

IT dependent manual controls are controls that chiefly involve manual review of the _________ of computer- generated information.

A)completeness and accuracy
B)cutoff and classification
C)rights and obligations
D)valuation and allocation

Question 58

Key assertions pertaining to the delivery of goods are ________.

A)accuracy, completeness, and occurrence
B)completeness, occurrence, and cutoff
C)accuracy, occurrence, and rights and obligations
D)presentation and disclosure

Question 59

Key assertions pertaining to the audit of credit sales are ________.

A)completeness and valuation
B)accuracy and occurrence
C)valuation and allocation
D)rights and obligations

Question 60

If you place a control that only a limited number of individuals can change the customer master file and all file changes are reviewed by appropriate levels of management, which of the following risks will you be addressing?

A)Sales made to unauthorized customers
B)Goods released from warehouse for unauthorized orders
C)Some shipments going unbilled
D)Sales invoices recorded in the incorrect amount

Question 61

Good use of a narrative method of understanding a client's system of internal control would be when the ________.

A)client is large and complicated
B)is relatively small and not overly complex
C)requests the auditor do so
D)inherent risk is deemed to be high

Question 62

When an output is reviewed for completeness and apparent reasonableness, it is known as ________.

A)a reasonableness test
B)visual scanning
C)a comparison to source documents
D)statistical accuracy checking

Question 63

What kind of internal control documentation is particularly helpful in industries that the auditor may not personally be familiar with?

A)Checklists and preformatted questionnaires
B)Combinations of narratives and flowcharts
C)Flowcharts and logic diagrams
D)Narratives and logic diagrams

Question 64

Run-to-run totals compare ________.

A)ending balances with beginning balances plus known transactions processed.
B)contents of a master file before and after each update.
C)data with an expected limit.
D)actual results and estimated results.

Question 65

What are the most common forms of documentation for client internal controls, particularly in smaller environments where accounting and internal control activities are simple?

A)Narratives
B)Logic diagrams
C)Flow charts
D)Preformatted questionnaires

Question 66

One disadvantage of flowcharts is they ________.

A)are technically complex and thus misunderstood
B)are too simplistic
C)usually take longer to prepare than narratives or checklists
D)are more expensive to prepare due to the number of audit hours involved

Question 67

The most common forms of documentation that auditor uses to signify their understanding of the system of internal control include ________.

A)audit plan
B)only flowcharts
C)flowcharts, narratives, and logic diagrams
D)logic diagrams only

Question 68

The auditor's understanding of the client's system of internal control should be ________.

A)discussed among audit team members only
B)submitted to the client's internal audit function for agreement/approval
C)well documented so it can be referred back to at any time
D)in documentary form only and submitted to the client's attorneys for risk assessment

Question 69

Which of the following is a form of documenting internal controls that is typically a page divided into two sections?

A)Combinations of narratives and flowcharts
B)Checklists
C)Preformatted questionnaires
D)Narratives

Question 70

Computer general controls pertain to ________.

A)only the IT environment
B)only IT activities
C)the IT environment and all IT activities
D)individual IT applications

Question 71

An auditor's documentation of the client's system of internal controls ________.

A)should always be written and updated regularly as the auditor gains further understanding
B)is the client's responsibility, and should be provided to the auditor by the client
C)should be jointly drafted by the auditor and the client
D)should be retained in the permanent audit file and never shared with the client

Question 72

Input controls are designed to provide reasonable assurance that ________.

A)data received for processing have been properly authorized and converted into machine-sensible form
B)data received for processing have been properly authorized only
C)the computer processing has been performed as intended for the particular application
D)reports generated by the accounting system are accurate and reliable

Question 73

A logic diagram is best described as ________.

A)a complex system of flowcharts detailing the audit procedures conducted and key audit findings
B)a narrative surmise of the key audit findings
C)being similar to a flowchart but including little detail
D)being completed by the client and the auditor upon conclusion of the audit

Question 74

Which application control matches the classification (or transaction) code against the master list of codes permitted for the type of transaction to be processed?

A)Valid code check
B)Missing data check
C)Limit check
D)Valid character check

Question 75

Which of the following application controls is a processing control?

A)Before-and-after report
B)Missing data check
C)Visual scanning
D)Reconciliation of totals

Question 76

Access controls include a combination of ________ safeguards.

A)physical, software, and procedural
B)administrative and legal
C)software and hardware
D)transaction-level

Question 77

When the computer system checks the validity of a customer number or whether a customer has reached their credit limit is an example of a(an) _____.

A)internal audit control
B)internal system control
C)computer application control
D)systems application control

Question 78

Controlling program development, program changes, computer operations, and securing access to programs and data is the purpose of ________.

A)independent controls
B)manual controls
C)IT general controls
D)tech controls

Question 79

What group or groups of application controls are widely recognized?

A)Input, timing, and service controls
B)Timing, service, and processing controls
C)Processing, output, and service controls
D)Input, processing, and output controls

Question 80

An automated procedure to verify that only alphabetical, numerical, or other special characters appear as required in data fields is known as ________.

A)missing data check
B)valid character check
C)valid code check
D)sequence test check