Question 1

Potential benefits of an entity's controls in an IT environment include all of the following except:
A) Reduction in the risk that controls will be circumvented.
B) More accurate accounting estimates.
C) Consistent application of predefined business rules.
D) More timely information.

Accepted Answer

The potential benefits of an entity's controls in an IT environment include reduction in the risk that controls will be circumvented, consistent application of predefined business rules, and more timely information. While controls may contribute to more accurate accounting estimates indirectly, this is not typically cited as a direct benefit of controls in an IT environment.

Question 2

The extent of an entity's use of IT can affect any of the components of internal control.

Accepted Answer

An entity's use of IT can affect any of the components of internal control, including the control environment, risk assessment, control activities, information and communication, and monitoring activities. IT can enhance or weaken these components, depending on how it is designed, implemented, and monitored. Therefore, it is important for businesses to assess and manage the risks associated with IT, and ensure that their IT systems support their internal control objectives.

Question 3

Once a level of control risk has been established, it cannot be changed.

Accepted Answer

The level of control risk can be changed based on changes in internal controls or external factors. As such, it is not a fixed or immutable characteristic.

Question 4

Tests of controls must be performed if control risk is set at a lower level.

Accepted Answer

When control risk is set at a lower level, it means the auditor believes the control is effective and reliable, which justifies reduced sample sizes for substantive testing. However, the auditor still needs to perform some level of testing to provide assurance that the control is indeed operating effectively. These tests of controls are necessary to assess the risk of misstatement and form the basis for the auditor's opinion on the financial statements.

Question 5

Management philosophy and operating style most likely would have a significant influence on an entity's control environment when
A) The internal audit function reports directly to management.
B) Management is dominated by one individual.
C) Accurate management job descriptions delineate specific duties.
D) The audit committee actively oversees the financial reporting process.

Accepted Answer

When management is dominated by one individual, their management philosophy and operating style will have a significant influence on the control environment. This is because the dominant individual's management approach will likely permeate throughout the organization and affect the attitudes and behaviors of other employees. The other choices may also have some impact on the control environment, but not to the same extent as the dominant management style.

Question 6

Internal controls are not designed to provide reasonable assurance that
A) Transactions are executed in accordance with management's authorization.
B) Embezzlement will be eliminated.
C) Access to assets is permitted only in accordance with management's authorization.
D) Amounts recorded for assets are compared with the actual existing assets at reasonable intervals.

Accepted Answer

While internal controls can reduce the risk of embezzlement and theft, they cannot eliminate it completely. Internal controls are designed to provide reasonable assurance that transactions are authorized and recorded correctly, that access to assets is controlled, and that assets are compared with recorded amounts at reasonable intervals.

Question 7

The concept of internal control includes IT systems and manual systems.

Accepted Answer

The concept of internal control includes both IT systems and manual systems. Internal control refers to the processes and procedures implemented within an organization to ensure that they achieve their objectives in an effective and efficient manner, with integrity and compliance with laws and regulations. IT systems and manual systems both play a vital role in internal control, as they are used to optimize and regulate various operations and processes.

Question 8

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when
A) External policies established by parties outside the entity affect its accounting practices.
B) Management is dominated by one individual.
C) Internal audit personnel have direct access to the board of directors and the entity's management.
D) The audit committee is active in overseeing the entity's financial reporting policies.

Accepted Answer

The answer of Management's attitude toward aggressive financial reporting and...

Question 9

The basic concept of internal control that recognizes the cost of internal control should not exceed the benefits expected to be derived is known as
A) Reasonable assurance.
B) Management responsibility.
C) Limited liability.
D) Management by exception.

Accepted Answer

This basic concept of internal control is commonly known as the "cost-benefit principle." It is important for organizations to balance the costs of implementing and maintaining internal control measures with the benefits that are expected to be derived from them. This principle helps to ensure that internal control is efficient, effective, and economical. While management responsibility, limited liability, and management by exception are important concepts in internal control, they do not specifically relate to the cost-benefit principle.

Question 10

The auditor must understand internal control before assessing inherent risk.

Accepted Answer

Understanding internal control is primarily related to assessing control risk, not inherent risk. Inherent risk assessment involves evaluating the susceptibility of an assertion to a material misstatement, assuming there were no related controls.

Question 11

An entity's IT infrastructure refers to
A) Hardware components.
B) Programmers.
C) Software.
D) Data provided by the system.

Accepted Answer

The answer of An entity's IT infrastructure refers to
A) Hardware...

Question 12

A substantive strategy is used when control risk has been set at high.

Accepted Answer

When control risk is set at a high level, it means that the auditor perceives a high risk of material misstatement in the financial statements, which may not be detected and prevented by the client's internal control system. In such a situation, a substantive strategy is appropriate because it involves obtaining audit evidence directly from the financial statements and performing extensive substantive procedures to reduce the risk of material misstatement to an acceptable level. This is in contrast to a reliance strategy, where the auditor relies on the client's internal controls to reduce the risk of material misstatement.

Question 13

A primary purpose of internal controls is to
A) Form a basis for evaluating employees.
B) Monitor production quality.
C) Avoid clerical errors.
D) Meet objectives of maintaining reliable documents and records and accurate financial reporting.

Accepted Answer

The primary purpose of internal controls is to help ensure that a company's financial statements are reliable and accurate. This includes maintaining reliable documents and records and accurate financial reporting. While internal controls may help with employee evaluation, monitoring production quality, and avoiding clerical errors, these are not the primary purposes of internal controls.

Question 14

An entity's control activities include all of the following except:
A) Performance reviews.
B) Information processing.
C) External auditor's tests of controls.
D) Segregation of duties.

Accepted Answer

External auditor's tests of controls are not considered as an entity's control activities as they are performed by the external auditor to evaluate the effectiveness of the entity's control activities. Control activities are the specific policies, procedures, and activities performed by an entity to address and mitigate risks and achieve objectives. Examples of control activities include performance reviews, information processing, and segregation of duties.

Question 15

Internal control consists of six components.

Accepted Answer

Internal control consists of five components: control environment, risk assessment, control activities, information and communication, and monitoring activities.

Question 16

Internal control includes monitoring of controls.

Accepted Answer

Internal control involves not only setting up control procedures but also monitoring their effectiveness continuously to ensure that they are working as intended. This monitoring helps to identify any weaknesses in the control systems and enables timely corrective actions to be taken.

Question 17

An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the
A) Efficiency of management's decision-making process.
B) Appropriate prices that the entity should charge for its products.
C) Methods of assigning production tasks to employees.
D) Entity's ability to accurately process and summarize financial data.

Accepted Answer

An auditor's main concern is to ensure that the financial statements presented by the entity are accurate and reliable. Therefore, the auditor would be most concerned with internal control policies and procedures that provide reasonable assurance about the entity's ability to accurately process and summarize financial data. Option A is incorrect because the auditor is not primarily focused on management decision-making; Option B is incorrect because pricing decisions are not part of internal control policies and procedures; and Option C is incorrect because the methods of assigning production tasks to employees are not directly related to financial reporting.

Question 18

Proper monitoring within an internal control framework may include all of the following except:
A) An external auditor.
B) An effective audit committee.
C) An internal audit function.
D) The internal revenue service.

Accepted Answer

The internal revenue service is not a part of an internal control framework for monitoring, as it is an external regulatory authority and not a part of the organization's internal control system. The other options - an external auditor, an effective audit committee, and an internal audit function - are all important components of an internal control framework for monitoring.

Question 19

A reliance strategy is used when control risk has been set at high.

Accepted Answer

A reliance strategy is used when control risk is assessed as low, indicating that the auditor plans to rely on the entity's internal controls.

Question 20

One of the risks associated with internal control from IT is potential loss of data.

Accepted Answer

IT systems can be prone to data breaches or loss, which can compromise the effectiveness of internal controls. Companies need to implement adequate security measures to protect their data and prevent such risks from occurring.

Quiz 6: Internal Control in a Financial Statement Audit

Potential benefits of an entity's controls in an IT environment include all of the following except:

The extent of an entity's use of IT can affect any of the components of internal control.

Once a level of control risk has been established, it cannot be changed.

Tests of controls must be performed if control risk is set at a lower level.

Management philosophy and operating style most likely would have a significant influence on an entity's control environment when

Internal controls are not designed to provide reasonable assurance that

The concept of internal control includes IT systems and manual systems.

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when

The basic concept of internal control that recognizes the cost of internal control should not exceed the benefits expected to be derived is known as

The auditor must understand internal control before assessing inherent risk.

An entity's IT infrastructure refers to

A substantive strategy is used when control risk has been set at high.

A primary purpose of internal controls is to

An entity's control activities include all of the following except:

Internal control consists of six components.

Internal control includes monitoring of controls.

An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the

Proper monitoring within an internal control framework may include all of the following except:

A reliance strategy is used when control risk has been set at high.

One of the risks associated with internal control from IT is potential loss of data.