Question 1

External auditors should consider the work of internal auditors in their assessment of control risk.
a.Are internal auditors independent of management? Explain.
b.What is the difference between the primary objective of the external auditors and that of internal auditors? Explain.
c.Discuss the factors that should be considered by the external auditors in deciding how much,if any,reliance should be placed on the work of the internal auditors.

Accepted Answer

The answer of External auditors should consider the work of...

Question 2

A report on internal control performed in accordance with PCAOB Standard No.5 includes an opinion on internal control for:
A)The entire year.
B)The prior quarter.
C)The "as-of date."
D)The end of each quarter.

Accepted Answer

The opinion on internal control performed in accordance with PCAOB Standard No.5 is based on an evaluation of internal control as of a specific "as-of date." This date is usually the end of the fiscal year for which the opinion is being provided. Therefore, the best choice is option C, which correctly identifies the "as-of date" as the focus of the internal control opinion.

Question 3

Applying a data analytical approach to tests of controls is least likely to result in which of the following? A)Testing a number of control simultaneously electronically. B)Documenting the engagement through an electronic representation letter obtained monthly. C)Testing all incidents of operation of a control during the year. D)Following up sample results with an analysis of the entire population.

Accepted Answer

Documenting the engagement through an electronic representation letter obtained monthly is not related to the application of a data analytical approach to tests of controls. The other options (A, C, D) are all potential outcomes of applying a data analytical approach to tests of controls.

Question 4

Which of the following is a likely approach for testing the segregation of duties?
A)Personal inquiry and confirmation.
B)Counting variations of performance.
C)Analytical procedures.
D)Observing employee performance of processes.

Accepted Answer

Observing employee performance of processes is the most likely approach for testing the segregation of duties as it allows for direct observation of whether employees are performing duties that conflict with each other or have the potential to enable fraud or error. Personal inquiry and confirmation may provide some information, but it may not be reliable or accurate. Counting variations of performance and analytical procedures may be useful for other types of testing, but are not specific to testing segregation of duties.

Question 5

When performing an internal control audit under PCAOB requirements,one or more material weaknesses in internal control that exist at year-end will result in what type of report(s)? 
$\begin{array} { c c c } 
& \quad\quad  \text { Qualified } & \text { Adverse}  \\end{array}$
A- $\begin{array} { c c c }   \quad\quad\quad\text { Yes } &\quad\quad\quad  \text { Yes } \\end{array}$
B- $\begin{array} { c c c }\quad\quad\quad \text { Yes } &\quad\quad\quad \text { No } \\end{array}$
C-  $\begin{array} { c c c } \quad\quad\quad\text {No} & \quad\quad\quad\quad\text { Yes } \\end{array}$
D-   $\begin{array} { c c c }\quad\quad\quad \text { No } &\quad\quad\quad\quad\text { No }
\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The presence of one or more material weaknesses in internal control at year-end under PCAOB requirements results in an adverse opinion on the effectiveness of internal control over financial reporting, not a qualified opinion.

Question 6

When obtaining an understanding of internal control relevant to planning of a financial statement audit,the auditor should obtain adequate knowledge about the ________.
A)Design of controls.
B)Controls related to audit engagement assessment.
C)Operating effectiveness of all controls.
D)Safeguards over realization transactions.

Accepted Answer

When obtaining an understanding of internal control relevant to planning of a financial statement audit, the auditor should obtain adequate knowledge about the design of controls. This means that the auditor should understand how the control activities are structured, what processes they are intended to control, and how they are expected to operate. This understanding will help the auditor to identify areas of potential risk and to design effective audit procedures. The other options listed (B, C, and D) are also important aspects of internal control, but obtaining knowledge about the design of controls is the most relevant to planning the audit.

Question 7

Which of the following would least likely be included in an auditor's tests of controls? A)Inspection. B)Observation. C)Inquiry. D)Analytical procedures.

Accepted Answer

Analytical procedures are typically used in substantive testing rather than tests of controls. Tests of controls usually involve inspection, observation, and inquiry, which are more direct methods of assessing whether the internal controls are functioning as intended.

Question 8

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with ________.
A)Knowledge necessary to assess the risks of material misstatements.
B)Evidence to use to assess inherent risk.
C)A basis for modifying tests of controls.
D)An evaluation of the consistency of application of management's policies.

Accepted Answer

The primary objective of performing procedures to obtain an understanding of internal control is to provide the auditor with the knowledge necessary to assess the risks of material misstatements. This understanding of internal control is a critical component of the auditor's risk assessment process, which is used to design further audit procedures. Thus, option A is the correct answer. Option B is incorrect because procedures to obtain an understanding of internal control do not directly provide evidence to assess inherent risk. Option C is incomplete because audit procedures may be modified based on the understanding of internal control. Finally, option D is incorrect because evaluating the consistency of application of management's policies is not the primary objective of procedures performed to obtain an understanding of internal control.

Question 9

An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and:
A)Compliance with laws.
B)Internal control over asset safeguarding.
C)Internal control over financial reporting.
D)Suitable criteria.

Accepted Answer

An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and internal control over financial reporting. Therefore, option C is the correct choice as it specifically addresses the area covered by an integrated audit under Section 404b. Options A and B may also be important areas of audit attention, but they are not the primary focus of Section 404b audits. Option D is not relevant to the scope of an integrated audit under Section 404b.

Question 10

When performing an internal control audit under PCAOB standards,one or more material weaknesses in internal control that exist at year-end will result in what type of report(s)? 
$\begin{array} { c c c } 
& \quad\quad  \text { Qualified } & \text { Disclaimer}  \\end{array}$
A- $\begin{array} { c c c }   \quad\quad\quad\text { Yes } &\quad\quad\quad  \text { Yes } \\end{array}$
B-  $\begin{array} { c c c }\quad\quad\quad \text { Yes } &\quad\quad\quad \text { No } \\end{array}$
C-  $\begin{array} { c c c } \quad\quad\quad\text {No} & \quad\quad\quad\quad\text { Yes } \\end{array}$
D-   $\begin{array} { c c c }\quad\quad\quad \text { No } &\quad\quad\quad\quad\text { No }

\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

A material weakness in internal control results in an adverse opinion, not a qualified opinion or disclaimer.

Question 11

When considering a client's internal control,the auditors focus on its various characteristics.For each of the following characteristics indicate the auditors' responsibility under generally accepted auditing standards and the procedures used to meet that responsibility.
a.The design of internal control.
b.Controls have been implemented (placed in operation).
c.The operating effectiveness of controls.

Accepted Answer

The answer of When considering a client's internal control,the auditors...

Question 12

The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States?
A)All companies.
B)SEC registrants.
C)Only those companies included in the Fortune 500.
D)All nonpublic companies.

Accepted Answer

The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to SEC registrants, which are companies that have registered securities with the Securities and Exchange Commission or are required to file periodic reports with the SEC. This includes public companies and some private companies that have issued publicly traded debt securities or certain classes of preferred stock. The provisions do not apply to all companies or all nonpublic companies.

Question 13

Auditors are required to consider a client's internal control.
a.Describe the two purposes of the auditors' consideration of a client's internal control.
b.Even the best internal control has certain limitations.List three of those limitations.

Accepted Answer

The answer of Auditors are required to consider a client's...

Question 14

Tests of controls are most likely to be performed when:
A)Controls seem weak and must be properly documented.
B)The auditor plans to rely on the controls.
C)The auditor wishes to assess control risk at the maximum.
D)The client's control environment appears weak.

Accepted Answer

Tests of controls are conducted when the auditor intends to rely on the effectiveness of the controls to reduce the assessed level of control risk. If the auditor plans to rely on the controls, they must be tested to determine the level of risk associated with the controls. Weak controls would result in a higher risk of misstatement, and maximum control risk may not allow reliance on the controls. Therefore, options A, C, and D are incorrect.

Question 15

For A through F place an X in the box (for Situation 1 or Situation 2)which is most accurate for each statement below;if for any question you believe that the situations are the same relating to that question place an X in each of the two boxes.
In both situations assume inherent risk is at a high level.
Situation 1: While obtaining an understanding of internal control,you have determined that it appears to be very strong. You choose not to test controls in the area.
Situation 2: While obtaining an understanding of internal control,you have determined that it appears to be adequate-not strong,not weak. You choose to test controls in the area-they reveal that the system functions as expected.
 $\begin{array}{|l|l|l|l|}
\hline &&\text { Situation } 1 &\text { Situation } 2\
\hline \text { A } & \begin{array}{l}
\text { The planned assessed level of control risk is } \
\text { lower for this situation. }
\end{array} \
\hline \text { B. } & \begin{array}{l}
\text { The planned allowable detection risk is lower for } \
\text { this situation. }
\end{array} \
\hline \text { C. } & \begin{array}{l}
\text { More tests of controls will be performed for this } \
\text { situation. }
\end{array} \
\hline \text { D. } & \begin{array}{l}
\text { More substantive procedures will be performed } \
\text { for this situation. }
\end{array} \
\hline \text { E. } & \begin{array}{l}
\text { The assessed level of control risk will be lower } \
\text { for this situation. }
\end{array} \
\hline \text { F. } & \begin{array}{l}
\text { The risk of misstatement will be lower in this } \
\text { situation. }\
\end{array}\\hline
\end{array}$

Accepted Answer

The answer of For A through F place an X...

Question 16

When performing an audit of internal control under PCAOB requirements,auditors evaluate control: 
$\begin{array} { c c c } 
& \text { Design Effectiveness } & \text {  Operating Effectivenes:}  \\end{array}$
A- $\begin{array} { c c c }   \quad\quad\quad\quad\quad\quad\text { Yes } &\quad\quad\quad\quad  \quad\quad\quad\text { Yes } \\end{array}$
B-  $\begin{array} { c c c }\quad\quad\quad\quad\quad\quad \text { Yes } &\quad\quad\quad\quad\quad\quad\quad \text { No } \\end{array}$
C-  $\begin{array} { c c c } \quad\quad\quad\quad\quad\quad\text {No} & \quad\quad\quad\quad\quad\quad\quad\text { Yes } \\end{array}$
D-   $\begin{array} { c c c }\quad\quad\quad\quad\quad\quad \text { No } &\quad\quad\quad\quad \quad\quad\quad\text { No }
\end{array}$
 
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

PCAOB requirements mandate that auditors evaluate the design and operating effectiveness of internal control over financial reporting (ICFR). Option A indicates that the auditors evaluate controls to obtain evidence regarding the operating effectiveness and design of ICFR, which is consistent with PCAOB requirements. Option B, evaluating the effectiveness of the financial reporting system, is only a partial evaluation as it does not cover the design of the system. Option C, evaluating the effectiveness of management control, is too broad and vague as it covers all aspects of management control rather than just ICFR. Option D, evaluating the performance of employees, is not relevant to assessing internal control over financial reporting.

Question 17

Which of the following statements regarding auditor documentation of the client's internal control is correct?
A)Documentation must include flowcharts.
B)Documentation must include procedural write-ups.
C)No documentation is necessary,although it is desirable.
D)No one particular form of documentation is necessary,and the extent of documentation may vary.

Accepted Answer

There is no specific form of documentation required by auditors, and the extent of documentation may vary depending on the auditor's judgment and the size and complexity of the client's internal control system. The auditor must have sufficient documentation to support their audit findings and conclusions. Flowcharts and procedural write-ups may be helpful, but they are not mandatory.

Quiz 7: Internal Control

A report on internal control performed in accordance with PCAOB Standard No.5 includes an opinion on internal control for:

Applying a data analytical approach to tests of controls is least likely to result in which of the following?

Which of the following is a likely approach for testing the segregation of duties?

When obtaining an understanding of internal control relevant to planning of a financial statement audit,the auditor should obtain adequate knowledge about the ________.

Which of the following would least likely be included in an auditor's tests of controls?

A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with ________.

An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and:

The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States?

Auditors are required to consider a client's internal control. a.Describe the two purposes of the auditors' consideration of a client's internal control. b.Even the best internal control has certain limitations.List three of those limitations.

Tests of controls are most likely to be performed when:

Which of the following statements regarding auditor documentation of the client's internal control is correct?