Question 1

Information and communication includes all of the following except:
A) Identifying and recording all valid transactions.
B) Determining the time period in which transactions occurred.
C) Communicating price changes to customers.
D) Properly presenting transactions and related disclosures in the financial statements.

Accepted Answer

The answer of Information and communication includes all of the...

Question 2

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?
A) Incompatible duties.
B) Management override.
C) Mistakes in judgment.
D) Collusion among employees.

Accepted Answer

Incompatible duties are not an inherent limitation of internal controls; rather, they represent a flaw in the design of the control environment. Inherent limitations, such as management override, mistakes in judgment, and collusion among employees, acknowledge that even well-designed internal controls can fail or be circumvented.

Question 3

As part of gaining an initial understanding of internal control,an auditor is required to do all of the following except:
A) Consider factors that affect the risk of material misstatement.
B) Ascertain whether internal control policies and procedures have been placed in operation.
C) Identify the types of potential misstatements that can occur.
D) Obtain knowledge about the operating effectiveness of the internal control.

Accepted Answer

The answer of As part of gaining an initial understanding...

Question 4

An organizational structure is important for all of the following reasons except:
A) Ensuring proper monitoring.
B) Defining areas of authority.
C) Creating clear lines of reporting.
D) Ensuring a proper commitment to controls.

Accepted Answer

An organizational structure primarily focuses on defining roles, responsibilities, and reporting lines, rather than ensuring a commitment to controls, which is more related to management practices and policies.

Question 5

As opposed to a manual control,an automated control
A) Can never be circumvented.
B) Should function consistently in the absence of program changes.
C) Need not be tested by the auditor.
D) Must be tested using the same techniques as a manual control.

Accepted Answer

One advantage of an automated control is that it should function consistently without manual intervention, assuming the program is properly designed and tested. However, this does not mean that the control can never be circumvented, and it still needs to be tested and monitored by the auditor using appropriate techniques. Therefore, choices A, C, and D are not accurate.

Question 6

The control environment component of internal controls includes all of the following except:
A) Management's operating style.
B) Access to computer programs.
C) Organizational structure.
D) Human resource policies and practices.

Accepted Answer

Access to computer programs is not a component of the control environment. The control environment includes factors such as management's operating style, the organizational structure, and human resource policies and practices. The access to computer programs falls under the information and communication component of internal controls.

Question 7

Which of the following statements concerning control risk is correct?
A) Assessing control risk and obtaining an understanding of an entity's internal controls may be performed concurrently.
B) When control risk is at the maximum level, an auditor is required to document the basis for that assessment.
C) Control risk may be assessed sufficiently low to eliminate substantive procedure for significant transaction classes.
D) When assessing control risk, an auditor should not consider evidence obtained in prior audits about the operation of control activities.

Accepted Answer

Assessing control risk and obtaining an understanding of an entity's internal controls can be performed concurrently as part of the audit process to evaluate the effectiveness of internal controls.

Question 8

An IT specialist is least likely to be necessary when
A) Data are shared extensively among systems.
B) The entity participates heavily in electronic commerce.
C) The system has not changed from the prior year.
D) Significant audit evidence is in electronic form.

Accepted Answer

If the system has not changed from the prior year, there is little need for an IT specialist to be involved as their expertise is not necessary for maintaining the system's stability. However, in all other cases, an IT specialist would be necessary to ensure the smooth operation and integration of data systems, electronic commerce, and audit evidence.

Question 9

In the audit of financial statements,an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure
A) Reflects management's philosophy and operating style.
B) Affects management's financial statement assertions.
C) Provides adequate safeguards over access to assets.
D) Enhances management's decision-making processes.

Accepted Answer

An internal control policy or procedure is audited to determine whether it affects management's financial statement assertions, meaning whether it helps ensure that the financial statements are accurate and reliable. While management's philosophy and operating style, safeguards over access to assets, and decision-making processes are important factors, they are not the primary consideration when assessing internal control policies and procedures in an audit.

Question 10

After completing the preliminary phase of the review of internal control,the auditor decides not to rely on the system to restrict substantive procedures.Documentation may be limited to the auditor's
A) Understanding of the internal control.
B) Reasons for deciding not to extend the review.
C) Basis for concluding that errors and fraud will be prevented.
D) Completed internal control questionnaire.

Accepted Answer

The auditor's documentation should be limited to their understanding of the internal control, as they have decided not to rely on it and thus wouldn't need to document the completed questionnaire or the basis for concluding that errors and fraud will be prevented. They should, however, adequately document their reasons for deciding not to extend the review.

Question 11

In obtaining an understanding of an entity's internal control in a financial statement audit of a non-public company,an auditor is not obligated to
A) Determine whether the control activities have been placed in operation.
B) Perform procedures to understand the design of the internal control policies.
C) Document the understanding of the entity's internal control components.
D) Search for significant deficiencies in the operation of the internal control.

Accepted Answer

While an auditor is required to obtain an understanding of the entity's internal control, they are not obligated to search for significant deficiencies in the operation of the internal control. However, if such deficiencies are identified during the audit, the auditor has a responsibility to communicate them to management and those charged with governance. Therefore, option D is the correct choice. Options A, B, and C are all obligations of the auditor when obtaining an understanding of an entity's internal control.

Question 12

The concept of reasonable assurance in the context of an entity's internal controls recognizes that
A) Auditors may fail to detect material misstatements.
B) Proper internal controls guarantee that material misstatements will not occur.
C) Proper internal controls preclude fraud.
D) The costs of some controls may be too high to implement in relation to potential benefits.

Accepted Answer

Reasonable assurance acknowledges that even with proper internal controls in place, there is still a risk that material misstatements could occur. It is not possible to completely eliminate all risks, and the cost of implementing some controls may be too high in relation to the potential benefits. Therefore, reasonable assurance is a level of assurance that is achievable and practical, given the entity's resources and limitations.

Question 13

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

Accepted Answer

Assessing control risk at below the maximum involves identifying specific internal controls that are relevant to specific assertions, which can be relied upon to reduce the amount of substantive testing required. This allows the auditor to reduce overall audit risk, while still obtaining sufficient audit evidence. Changing the timing of substantive procedures (A) or performing more extensive substantive procedures (C) would not necessarily be appropriate if control risk is assessed at less than the maximum. Reducing inherent risk (D) is not directly related to control risk assessment.

Question 14

The risk assessment component of internal controls refers to
A) The auditor's assessment of control risk.
B) The auditor's assessment of client risk.
C) The entity's identification and analysis of risks relevant to achievement of its objectives.
D) The entity's monitoring of the potential for material misstatements.

Accepted Answer

The risk assessment component of internal controls refers to the entity's identification and analysis of risks relevant to achievement of its objectives. This includes identifying internal and external factors that may affect the achievement of goals, and assessing the likelihood and potential impact of those risks. It is a crucial part of establishing effective internal controls. The auditor's assessment of control risk and client risk is part of the audit process and not specifically related to internal controls. The entity's monitoring of potential misstatements is also a component of internal controls, but it is not specifically related to risk assessment.

Question 15

Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by
A) Employment of temporary personnel to aid in the separation of duties.
B) Direct participation by the owner of the business in the record-keeping activities of the business.
C) Engaging a CPA to perform monthly bookkeeping.
D) Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.

Accepted Answer

The answer of Effective internal control in a small company...

Question 16

An effective control environment
A) Allows management to identify all relevant risks.
B) Creates a commitment to competence.
C) Guarantees that all controls are followed as prescribed.
D) Requires an internal audit department.

Accepted Answer

An effective control environment fosters a culture of integrity and competence, which is essential for the proper functioning of internal controls.

Question 17

The independent auditor should acquire an understanding of the internal audit function as it relates to the assessment of control risk because
A) Internal auditors' audit programs, audit documents, and reports can eliminate the need for the independent auditor's staff.
B) The procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control.
C) The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures.
D) The understanding of the internal audit function is an important substantive procedure to be performed by the independent auditor.

Accepted Answer

The work performed by the internal audit function can assist the independent auditor in determining the nature, timing, and extent of their procedures. Internal audit reports and findings can provide valuable insight into the effectiveness of internal control and the areas with higher control risk, which can inform the independent auditor's risk assessment and audit approach. However, the independent auditor cannot solely rely on the work of the internal audit function and must still perform their own procedures to obtain sufficient evidence.

Question 18

In planning an audit of a new client,an auditor most likely would consider the methods used to process accounting information because such methods
A) Influence the design of internal controls.
B) Affect the auditor's planning materiality levels.
C) Assist in evaluating the planned audit assertions.
D) Determine the auditor's acceptable level of audit risk.

Accepted Answer

The methods used to process accounting information influence the design of internal controls, which the auditor must understand to assess control risk and plan the audit accordingly.

Question 19

It is important for the CPA to consider the competence of the audit client's employees because their competence bears directly and importantly upon the
A) Cost/benefit relationship of the system of internal control.
B) Achievement of the objectives of the system of internal control.
C) Comparison of recorded accountability with assets.
D) Timing of the tests to be performed.

Accepted Answer

The competence of the audit client's employees is directly related to the achievement of the objectives of the system of internal control. If the employees are competent, they can implement and maintain a strong system of internal control, which increases the effectiveness of the audit. On the other hand, if the employees are not competent, it can result in weak internal controls, increasing the risk of material misstatement in the financial statements. Therefore, the auditor must assess the competence of the client's employees to determine the nature, timing, and extent of audit procedures necessary to achieve the objectives of the audit.

Question 20

A substantive strategy differs from a reliance strategy in that a substantive strategy includes
A) Increased implementation of detailed tests of transactions and balances.
B) Extra tests of controls.
C) Increased emphasis on verbal representations from management.
D) Setting control risk at a minimum level.

Accepted Answer

A substantive strategy focuses on testing the accuracy of transactions and balances through detailed tests, while a reliance strategy relies on the effectiveness of the client's internal controls and reduces substantive testing. Therefore, increased implementation of detailed tests of transactions and balances is a characteristic of a substantive strategy.

Quiz 6: Internal Control in a Financial Statement Audit

Information and communication includes all of the following except:

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal controls?

As part of gaining an initial understanding of internal control,an auditor is required to do all of the following except:

An organizational structure is important for all of the following reasons except:

As opposed to a manual control,an automated control

The control environment component of internal controls includes all of the following except:

Which of the following statements concerning control risk is correct?

An IT specialist is least likely to be necessary when

In the audit of financial statements,an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure

After completing the preliminary phase of the review of internal control,the auditor decides not to rely on the system to restrict substantive procedures.Documentation may be limited to the auditor's

In obtaining an understanding of an entity's internal control in a financial statement audit of a non-public company,an auditor is not obligated to

The concept of reasonable assurance in the context of an entity's internal controls recognizes that

Assessing control risk at below the maximum most likely would involve

The risk assessment component of internal controls refers to

Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by

An effective control environment

The independent auditor should acquire an understanding of the internal audit function as it relates to the assessment of control risk because

In planning an audit of a new client,an auditor most likely would consider the methods used to process accounting information because such methods

It is important for the CPA to consider the competence of the audit client's employees because their competence bears directly and importantly upon the

A substantive strategy differs from a reliance strategy in that a substantive strategy includes