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

Question 1

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

Answer 1

True

Question 2

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

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

Answer 2

B

Question 3

Which of the following statements about internal control is in?

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

Answer 3

C

Question 4

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

Question 5

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

Question 6

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

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

Question 7

When internal controls are effective:

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

Question 8

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

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

Question 9

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

Question 10

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 11

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

Question 12

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

Question 13

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 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

Significant professional judgement is never required to decide whether an identified internal control weakness is significant enough to warrant communicating to management.

Question 21

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

Question 22

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 23

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 audit committee of disagreements with management
C)the client of the auditor's recommendations for improving its internal controls
D)the client's management of the auditor's opinion on the company's financial statements

Question 24

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

Question 25

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

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

Question 26

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 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

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)Invoices automatically generated from order and dispatch document
D)Application control that only allows orders to be processed against existing approved customers with enough unused credit limit

Question 29

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

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

Question 30

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

Question 31

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

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

Question 32

Explain the key elements of the control environment.

Question 33

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 labour costs are added to the cost of individual inventory items
C)the wrong amount is paid against an invoice
D)the wrong quantities are recorded during the stocktake

Question 34

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 35

Performance reviews are control activities that include:

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

Question 36

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 37

The control environment does not:

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

Question 38

For identified risks,management:

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

Question 39

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

Question 40

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