Question 1

Distinguish between entity level controls and transactional controls.Give an example of each.

Accepted Answer

Entity-level controls are controls that are implemented for multiple transaction cycles or for the entire organization.
Entity-level controls contribute to the "tone at the top" and establish expectations in the control environment.Entity-level controls are often less tangible but they form the foundation on which other internal controls are built.Entity-level controls such as controls over management override,period-end reporting,hiring competent staff,and fraud-risk controls have an impact on all other control processes.If these entity-level controls are weak or unreliable,the best designed transaction controls will not be effective in preventing key risks such as management override.
Transaction controls are controls that are implemented for specific transaction risks and are designed to specifically prevent or detect and correct misstatements in classes of transactions,account balances,or disclosures and their related assertions.
The accuracy of the results of the accounting system (the account balances)is heavily dependent upon the accuracy of the inputs and processing (the transactions).For example,if products sold,units shipped,or unit-selling prices are incorrectly billed to customers for sales,both sales and accounts receivable will be misstated.If controls are adequate to ensure that billings,cash receipts,sales returns and allowances,and charge-offs are correct,the ending balance in accounts receivable is likely to be correct.

Question 2

The Sarbanes Oxley Act has had consequences for many areas of corporate activities,including the following impact on the work of the auditor:
A)The auditor is now required to report all fraudulent activities he/she uncovers directly to the Securities and Exchange Commission.
B)The auditor must prepare a report verifying the information in the financial statements.
C)The auditor must monitor how well management is carrying out its financial reporting responsibilities.
D)The auditor is specifically required to assess and report on the effectiveness of internal control over financial reporting.

Accepted Answer

The Sarbanes Oxley Act specifically requires auditors to assess and report on the effectiveness of internal control over financial reporting. While the other options may also have some impact on the work of the auditor, D is the most direct and significant requirement imposed by the act.

Question 3

Who is responsible to identify and assess the risks and then manage and mitigate those risks by the implementation of a strong system of internal control?
A)management
B)external auditors
C)internal auditors
D)shareholders

Accepted Answer

Management is ultimately responsible for identifying and assessing risks within a company, and implementing a system of internal controls to manage and mitigate those risks. External auditors and internal auditors may provide additional guidance and support, but it is ultimately management's responsibility to ensure effective risk management. Shareholders have a vested interest in the company's success and may provide input, but do not have direct responsibility for managing risks.

Question 4

Joan is the owner of a small manufacturing company.In prior years,your firm has conducted a review engagement of the company.However,this year,Joan obtained a loan from the federal business development bank and is required to have an audit of her financial statements.When you started asking about controls and procedures at the company,Joan got pretty upset.
"All you need to be concerned about is the numbers! Why are you asking all of these questions? It takes too much time away from my staff to answer these questions! Just check the numbers and let us get on with our work!"
You calmed her down a bit,and reminded her about the general discussion that occurred with the engagement letter.You have invited her for coffee to briefly explain the following items:
1.Why auditors are concerned about internal controls.
2.Why auditors are required to be concerned about internal controls.
3.What you need to do to understand internal controls.
4.What you will do once you have documented your understanding of internal controls.
Required:
Explain what you will say to Joan.

Accepted Answer

The answer of Joan is the owner of a small...

Question 5

A system of internal control consists of policies and procedures designed to provide management with
A)reasonable assurance that the company achieves its objectives.
B)assurance that fraud will be prevented.
C)reasonable assurance that fraud will be detected.
D)assurance that the firm's resources will be used in the optimal way.

Accepted Answer

A system of internal control is designed to provide reasonable assurance to the company's management that the organization achieves its objectives. These objectives may include the following: efficient and effective operations, reliable financial reporting, compliance with applicable laws and regulations, and safeguarding of assets. Internal controls also help to ensure that resources are used efficiently and effectively. While preventing and detecting fraud can be a byproduct of implementing internal controls, it is not the primary purpose.

Question 6

Which of the following controls would not be of concern to the auditor?
A)controls over the collection of accounts receivable amounts
B)controls over the entry of payroll wage rates into the computer systems
C)controls over health and safety guidelines compliance by employer
D)controls over the cost of inventory items as recorded in the perpetual inventory system

Accepted Answer

Controls over health and safety guidelines compliance by employer are typically outside the scope of the auditor's concern as they relate to non-financial reporting matters. The other three controls listed are all relevant to the financial reporting and would be of concern to the auditor.

Question 7

Management's objectives with respect to internal control include
A)having reasonable assurance that the financial statements are in accordance with IFRS or ASPE.
B)ensuring that all policies and procedures are clearly documented to reduce employee training costs.
C)preventing fraud and illegal activities at all costs.
D)providing reasonable assurance that the company can achieve its objectives and goals.

Accepted Answer

Management's main objective with respect to internal control is to provide reasonable assurance that the company can achieve its objectives and goals. While preventing fraud and ensuring compliance with reporting standards are important, they are not the primary focus of internal control. Documenting policies and procedures may be important for training purposes, but it is not a primary objective of internal control.

Question 8

Which of the following controls would be of concern to management but not to the auditor?
A)controls over the collection of accounts receivable amounts
B)controls over the entry of payroll wage rates into the computer systems
C)controls over health and safety guidelines compliance by employer
D)controls over the cost of inventory items as recorded in the perpetual inventory system

Accepted Answer

Controls over health and safety guidelines compliance by employer are typically management controls, as they are concerns related to organizational policies and culture rather than financial reporting or auditing processes. The other options all relate to financial reporting or auditing processes that the auditor would need to be concerned with.

Question 9

To comply with auditing standards,the auditor need not be concerned with all areas of internal control that apply to management.The auditor's primary concerns are with the system's ability to
A)maintain reliable control systems pertaining to financial transactions.
B)promote efficiency and encourage adherence to policy.
C)prevent and detect financial statement fraud and error.
D)provide reliable data and safeguard assets.

Accepted Answer

The answer of To comply with auditing standards,the auditor need...

Question 10

Which is one aspect of management's assessment of internal control over financial reporting?
A)Have the external auditors document the internal control over financial reporting.
B)Have the external auditors test the effectiveness the internal control over financial reporting.
C)Evaluate the design of internal control over financial reporting.
D)Evaluate the design of the payroll system.

Accepted Answer

Management should evaluate the design of internal control over financial reporting to determine if it is effective in preventing or detecting errors or fraud in financial reporting. This includes assessing whether the control activities are properly designed and implemented to achieve control objectives. Choices A and B are activities that external auditors may perform, but management is responsible for the overall assessment of internal control over financial reporting. Choice D is too narrow and specific, and not part of the broader assessment of internal control.

Question 11

Internal controls can never be regarded as completely effective.Even if systems personnel could design an ideal system,its effectiveness depends on the
A)adequacy of the computer system.
B)proper implementation by management.
C)ability of the internal audit staff to maintain it.
D)competency and dependability of the people using it.

Accepted Answer

The effectiveness of internal controls largely depends on the competency and dependability of the people using them, as human error or intentional misconduct can undermine even the best-designed systems.

Question 12

The essence of an effectively controlled organization lies in the
A)effectiveness of its auditor.
B)effectiveness of its internal auditor.
C)attitude of its employees.
D)attitude of its management.

Accepted Answer

The attitude of the management is crucial in creating and maintaining a culture of effective control within an organization. Management sets the tone at the top and is responsible for establishing policies, procedures, and systems that ensure effective risk management and internal control. Without a committed and accountable management team, efforts to establish and maintain effective internal control are likely to fail. The other choices may be important factors in supporting effective control, but they are not as fundamental as management attitude.

Question 13

Carrie is the manager of the Bay Street Pharmacy.Carrie is considering implementing a security tag system to reduce the losses related to stolen goods at their store.The system Carrie is looking at currently costs $60 000 and is expected to be effective for 5 years.In order to justify the implementation of the security tag system,average theft per year should be at least
A)$1000.
B)$12 000.
C)$60 000.
D)Theft should be prevented at all costs.

Accepted Answer

Carrie needs to calculate the annual amount that the security tag system would save the store in stolen goods in order to justify the cost of the system. If we divide the cost of the system by the number of years it is expected to be effective, we get $60,000/5 = $12,000 per year. This means that if the store is losing at least $12,000 per year in stolen goods, then it would be worth implementing the security tag system. Any amount less than $12,000 per year would not justify the cost of the system. Therefore, option B is the best choice.

Question 14

An act of two or more employees to work together to misstate records is called
A)malfeasance.
B)collusion.
C)defalcation.
D)felony.

Accepted Answer

Collusion is defined as two or more employees working together to commit a fraudulent act, which in this case is to misstate records. Malfeasance refers to the intentional act of doing something wrong, while defalcation implies a financial misappropriation or embezzlement. Felony is a criminal offense that is punishable by imprisonment for more than one year, but it does not specifically relate to the act described in the question.

Question 15

The accuracy of the results of the accounting system (account balances)is heavily dependent upon the
A)knowledge and skills of the auditor.
B)adequacy of the entity-level controls.
C)accuracy of the inputs and processing (the transactions).
D)training provided to the personnel.

Accepted Answer

The accuracy of the account balances in the accounting system is dependent upon the accuracy of the inputs and processing of the transactions. If errors occur during data entry or processing, it can result in inaccurate account balances. Therefore, it is important to have strong controls in place to ensure accurate transactions are input and processed correctly. While the knowledge and skills of the auditor and training of personnel are important factors, they do not have as direct of an impact on the accuracy of the accounting system's results.

Question 16

Which of the following best describes the inherent limitations that should be recognized by an auditor when considering the potential effectiveness of an accounting system?
A)Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.
B)The competence and integrity of client personnel provides an environment conducive to accounting control and provides assurance that effective control will be achieved.
C)Procedures designed to assure the execution and recording of transactions in accordance with proper authorizations are effective against irregularities perpetrated by management.
D)The benefits expected to be derived from an effective accounting system usually do not exceed the costs of such control.

Accepted Answer

It is important for the auditor to recognize that even the most well-designed accounting system can still be susceptible to fraud and manipulation. Collusion among employees can undermine safeguards such as segregation of duties. Therefore, the auditor must always exercise professional skepticism and be alert to the potential for fraud. Choices B, C, and D are incorrect because they do not address inherent limitations of accounting systems, but rather general principles related to control environments, transaction processing, and cost-benefit analysis.

Question 17

A)Describe the three basic concepts (assumptions)underlying the study of internal control and assessment of control risk.B)Describe the inherent limitations of internal control.

Accepted Answer

The answer of A)Describe the three basic concepts (assumptions)underlying the...

Question 18

The control environment consists of actions,policies,and procedures that
A)reflect the overall attitudes of top management,the directors,and the owners of an entity about control and its importance.
B)govern access to particular applications,such as how employees use passwords to change master file payroll rates.
C)are recorded on the web site (for example,access policies to data).
D)help implement the ethical attitudes at the organization,such as a computer usage policy.

Accepted Answer

The control environment encompasses the philosophies and attitudes of an organization's top management, directors, and owners pertaining to control and its significance in achieving the objectives of the entity. It is the foundation for all other components of internal control, giving discipline and structure.

Question 19

A)Describe the four broad objectives of management when designing an effective system of internal control.B)Describe the aspect of internal control that auditors are primarily concerned with for a financial statement audit.

Accepted Answer

The answer of A)Describe the four broad objectives of management...

Question 20

Define a system of internal control.How does risk affect a system of internal control?

Accepted Answer

The answer of Define a system of internal control.How does...

Quiz 8: Internal Control and COSO Framework

Distinguish between entity level controls and transactional controls.Give an example of each.

The Sarbanes Oxley Act has had consequences for many areas of corporate activities,including the following impact on the work of the auditor:

Who is responsible to identify and assess the risks and then manage and mitigate those risks by the implementation of a strong system of internal control?

A system of internal control consists of policies and procedures designed to provide management with

Which of the following controls would not be of concern to the auditor?

Management's objectives with respect to internal control include

Which of the following controls would be of concern to management but not to the auditor?

To comply with auditing standards,the auditor need not be concerned with all areas of internal control that apply to management.The auditor's primary concerns are with the system's ability to

Which is one aspect of management's assessment of internal control over financial reporting?

Internal controls can never be regarded as completely effective.Even if systems personnel could design an ideal system,its effectiveness depends on the

The essence of an effectively controlled organization lies in the

An act of two or more employees to work together to misstate records is called

The accuracy of the results of the accounting system (account balances) is heavily dependent upon the

Which of the following best describes the inherent limitations that should be recognized by an auditor when considering the potential effectiveness of an accounting system?

A)Describe the three basic concepts (assumptions)underlying the study of internal control and assessment of control risk.B)Describe the inherent limitations of internal control.

The control environment consists of actions,policies,and procedures that

A)Describe the four broad objectives of management when designing an effective system of internal control.B)Describe the aspect of internal control that auditors are primarily concerned with for a financial statement audit.

Define a system of internal control.How does risk affect a system of internal control?