Question 1

A transaction-level internal control activity is best described as
A) An action taken by auditors to obtain evidence.
B) An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company.
C) A method for recording, summarizing, and reporting financial information.
D) The functioning of the board of directors in support of its audit committee.

Accepted Answer

A transaction-level internal control activity is an action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company. These activities are designed to ensure that transactions are accurately recorded, processed, and reported in the financial statements. Auditors may rely on these activities as evidence, but they are ultimately the responsibility of the client's management and employees.

Question 2

A report on internal control effectiveness by the management team of public companies is required by
A) The Sarbanes-Oxley Act of 2002.
B) The PCAOB.
C) The AICPA.
D) The ASB.

Accepted Answer

The Sarbanes-Oxley Act of 2002 requires public companies to file a report on internal control effectiveness, known as the Management Assessment of Internal Controls (MAIC), in order to increase transparency and accountability in financial reporting. The PCAOB is responsible for auditing the effectiveness of internal controls, while the AICPA and ASB provide guidance and standards for auditors.

Question 3

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client?
A) A narrative memorandum describing the control system.
B) An internal control questionnaire.
C) A flowchart of the documents and procedures used by the company.
D) All of the above.

Accepted Answer

The answer of Which of the following is a device...

Question 4

A material weakness is a situation in which
A) It is probable that an immaterial financial statement misstatement would not be detected on a timely basis.
B) There is a remote likelihood that a material misstatement would be detected on a timely basis.
C) It is reasonably possible that a material misstatement would not be detected on a timely basis.
D) It is reasonably possible that an immaterial misstatement would not be detected on a timely basis.

Accepted Answer

A material weakness is when there is a reasonable possibility that a material misstatement would not be detected on a timely basis. Option A talks about an immaterial misstatement which is not relevant here. Option B talks about a remote likelihood which does not fit the definition of a material weakness. Option D talks about an immaterial misstatement again.

Question 5

Assessing control risk at below the maximum level most likely would involve
A) Performing more extensive substantive tests with larger sample sizes than originally planned.
B) Reducing inherent risk for most of the assertions relevant to significant account balances.
C) Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end.
D) Identifying specific internal control activities that are relevant to specific financial statement assertions.

Accepted Answer

Assessing control risk at below the maximum level would involve identifying specific internal control activities that are relevant to specific financial statement assertions, rather than simply performing more extensive substantive tests, reducing inherent risk, or changing the timing of substantive tests. By identifying the specific internal control activities that are relevant to specific financial statement assertions, auditors can rely on those activities to help mitigate the risk of material misstatement to below the maximum level.

Question 6

To test the operating effectiveness of a control,an audit team might use a combination of each of the following tests except for:
A) Inquiry of client personnel.
B) Observation of company operations.
C) Confirmation of balances.
D) Inspection of documentation.

Accepted Answer

Confirmation of balances is not typically used to test the operating effectiveness of a control, as it is a procedure typically used to test the existence and completeness of account balances or transactions. The other choices listed (inquiry of client personnel, observation of company operations, and inspection of documentation) are all commonly used to test the operating effectiveness of controls.

Question 7

The most important fundamental component of an entity's internal control is
A) Effectiveness and efficiency of operations.
B) People who operate the control system.
C) Reliability of financial reporting.
D) Compliance with applicable laws and regulations.

Accepted Answer

The people who operate the control system are crucial as they design, implement, and monitor the internal controls, ensuring their effectiveness and adaptability to changing circumstances.

Question 8

A bridge workpaper shows the connection between
A) Control evaluation findings and subsequent audit procedures.
B) Management objectives and accounting system procedures.
C) Management objectives and entity control activities.
D) Financial statement assertions and tests of controls.

Accepted Answer

Control evaluation findings are used to determine the subsequent audit procedures that will be performed.

Question 9

The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to
A) Provide a basis for making constructive suggestions in a management letter.
B) Determine the nature, timing, and extent of tests to be performed in the audit.
C) Provide the rationale for the inherent risk assessment at the financial statement assertion level.
D) Provide information for a communication of internal control-related matters to management.

Accepted Answer

The primary purpose of obtaining an understanding of a nonpublic audit client's internal control is to determine the nature, timing, and extent of tests to be performed in the audit. This understanding helps the auditor to identify areas of increased risk, plan the audit procedures accordingly, and assess control risk. Options A, C, and D may be secondary purposes, but not the primary purpose.

Question 10

Which of the following is a preventive control?
A) Reconciliation of a bank account.
B) Recalculation of a sample of payroll entries by internal auditors.
C) Separation of duties between the payroll and personnel departments.
D) Detailed fluctuation analysis completed by the CFO for revenue.

Accepted Answer

Separation of duties is a preventive control because it is designed to prevent errors or fraud from occurring in the first place by ensuring that multiple individuals are involved in a process and can act as checks and balances on one another's work. The other options listed are detective controls, which are designed to detect errors or fraud after they have occurred.

Question 11

Tests of controls in a GAAS audit are required for
A) Obtaining evidence about the financial statement assertions.
B) Accomplishing control over the occurrence of recorded transactions.
C) Applying analytical procedures to financial statement balances.
D) Obtaining evidence about the operating effectiveness of client control activities.

Accepted Answer

Tests of controls are designed to obtain evidence about the operating effectiveness of client control activities. This is done to evaluate whether the controls are designed properly and operating effectively in achieving their intended purposes, and to determine the extent to which reliance can be placed on these controls in planning the audit. While tests of controls may provide some evidence about financial statement assertions, their primary purpose is to evaluate control risk and to determine the extent of substantive testing needed. Accomplishing control over the occurrence of recorded transactions is the ultimate goal of client control activities, not tests of controls. Analytical procedures are used to analyze financial statement balances, not to test controls.

Question 12

In most audits of large entities,control risk assessment contributes to audit efficiency,which means that
A) The cost of substantive procedures will exceed the cost of control evaluation work.
B) Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs.
C) The cost of control evaluation work will exceed the cost of substantive procedures.
D) Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls.

Accepted Answer

Control risk assessment allows auditors to assess the effectiveness of the entity's internal controls, which can help to reduce the extent of substantive procedures required. As a result, auditors can reduce the cost of substantive procedures by an amount greater than the cost of control evaluation work, leading to greater audit efficiency.

Question 13

Effectiveness of audit procedures would be reduced by
A) Selecting larger sample sizes for audit.
B) Performing audit procedures at the fiscal year-end date as opposed to the interim period.
C) Deciding to obtain external evidence instead of internal evidence.
D) Performing procedures during the interim period as opposed to at the fiscal year-end date.

Accepted Answer

Performing procedures during the interim period may not capture year-end transactions and balances, reducing the effectiveness of audit procedures.

Question 14

In testing control activities,an auditor ordinarily selects from a variety of techniques,including
A) Inquiry and analytical procedures.
B) Reperformance and observation.
C) Comparison and confirmation.
D) Inspection and verification.

Accepted Answer

Reperformance and observation are the two most common techniques used by auditors in testing control activities.

Reperformance involves testing a control activity by performing the same procedure that is used by the entity to determine whether the procedure is working effectively.

Observation involves watching the entity's employees perform a control activity to determine whether they are following the procedure as designed.

Inquiry and analytical procedures may also be used to test control activities, but they are not as reliable as reperformance and observation.

Comparison and confirmation may be used to test certain types of control activities, but they are not as commonly used as reperformance and observation.

Inspection and verification are not appropriate techniques for testing control activities as they do not provide evidence on whether the control activities are working effectively.

Question 15

Management's report on internal controls must include each of the following except
A) A statement that management is responsible for establishing and maintaining adequate internal control over financial reporting.
B) A statement identifying the framework management uses to evaluate the effectiveness of the company's internal control.
C) A statement providing management's assessment of the effectiveness of the company's internal control.
D) A statement providing management's evaluation of the company's control environment.

Accepted Answer

All of the options given are required components of management's report on internal controls except for D, which is not explicitly required. However, evaluating the control environment is a commonly included component of such a report, so it may be included even though it is not strictly required.

Question 16

Which of the following areas can external auditors rely on internal auditors' work in auditing internal controls?
A) Evaluation of the auditing environment.
B) Testing of low-risk internal control activities.
C) All testing of the operating effectiveness of internal control activities.
D) Providing the principal evidence for the external auditors' opinion.

Accepted Answer

External auditors can rely on internal auditors' work in testing low-risk internal control activities. However, external auditors cannot rely on internal auditors' work for all testing of internal control effectiveness or as principal evidence for the opinion. Additionally, the evaluation of the auditing environment is typically the responsibility of external auditors, not internal auditors.

Question 17

According to the PCAOB,during the audit of internal controls for an issuer,the ultimate objective of testing the design effectiveness of internal controls is to
A) Determine whether the company's controls are processing company data effectively.
B) Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed.
C) Determine that the company's employees are processing the controls according to the policy and procedure manuals at the company.
D) None of the above.

Accepted Answer

The ultimate objective of testing the design effectiveness of internal controls during the audit of internal controls for an issuer is to determine that the company's controls will satisfy its control objectives and effectively prevent or detect errors or fraud that could result in material misstatements if they operate as prescribed. Therefore, option B is the correct answer. Option A focuses only on the processing of company data, and option C focuses only on whether employees are following policies and procedures, which are not the ultimate objective of testing the design effectiveness of internal controls. Option D is incorrect because there is a correct choice.

Question 18

When completing the audit of internal controls for an issuer,the severity of an internal control deficiency depends on:
A) Whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure.
B) Whether the account has a history of errors.
C) The magnitude of the potential misstatement resulting from the deficiency or the deficiencies.
D) Both A and C are correct.
E) All of the above are correct.

Accepted Answer

The severity of an internal control deficiency is dependent on two factors - the likelihood of an error occurring and the potential magnitude of the impact. Option A deals with likelihood, while Option C deals with magnitude. Hence, both options A and C are correct.

Question 19

When planning an audit of internal controls for an issuer,the audit team should
A) Identify significant accounts, locations, and assertions.
B) Conduct a walkthrough of the internal control process.
C) Make inquiries of employees regarding the existence of control activities.
D) Reperform control activities performed by client employees to determine their effectiveness.

Accepted Answer

The audit team should identify significant accounts, locations, and assertions to focus their efforts on areas that could have a material impact on the financial statements, ensuring a thorough and effective audit of internal controls.

Question 20

Which of the following does not accurately summarize auditors' requirements regarding internal control? 
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

This question cannot be answered without seeing the options.

Quiz 5: Risk Assessment: Internal Control Evaluation

A transaction-level internal control activity is best described as

A report on internal control effectiveness by the management team of public companies is required by

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client?

A material weakness is a situation in which

Assessing control risk at below the maximum level most likely would involve

To test the operating effectiveness of a control,an audit team might use a combination of each of the following tests except for:

The most important fundamental component of an entity's internal control is

A bridge workpaper shows the connection between

The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to

Which of the following is a preventive control?

Tests of controls in a GAAS audit are required for

In most audits of large entities,control risk assessment contributes to audit efficiency,which means that

Effectiveness of audit procedures would be reduced by

In testing control activities,an auditor ordinarily selects from a variety of techniques,including

Management's report on internal controls must include each of the following except

Which of the following areas can external auditors rely on internal auditors' work in auditing internal controls?

According to the PCAOB,during the audit of internal controls for an issuer,the ultimate objective of testing the design effectiveness of internal controls is to

When completing the audit of internal controls for an issuer,the severity of an internal control deficiency depends on:

When planning an audit of internal controls for an issuer,the audit team should

Which of the following does not accurately summarize auditors' requirements regarding internal control?