Question 1

Audit evidence concerning proper segregation of duties ordinarily is best obtained by
A) Preparation of a flowchart of duties performed by available personnel.
B) Inquiring whether control activities operated consistently throughout the period.
C) Reviewing job descriptions prepared by the Personnel Department.
D) Direct personal observation of the employees who apply control activities.

Accepted Answer

Direct personal observation of the employees who apply control activities provides the auditor with the best audit evidence concerning proper segregation of duties. This is because the auditor can observe the employees performing their assigned duties and examine whether they have adequate knowledge and competence in their respective jobs. This helps the auditor ascertain whether there is proper segregation of duties to reduce the risk of fraud or error. Other methods such as preparing a flowchart, inquiring whether controls operated consistently or reviewing job descriptions may provide some evidence, but they may not be sufficient to establish whether proper segregation of duties exists in practice.

Question 2

As the acceptable level of detection risk increases,an auditor may change the
A) Assessed level of control risk from below the maximum to the maximum level.
B) Assurance provided by tests of controls by using a larger sample size than planned.
C) Timing of substantive procedures from year-end to an interim date.
D) Nature of substantive procedures from less effective to more effective procedures.

Accepted Answer

As detection risk increases, auditors may perform substantive procedures at an interim date rather than at year-end, as they can accept more risk of not detecting a material misstatement.

Question 3

In a properly designed internal control system,the same employee may be permitted to
A) Receive and deposit checks and also approve write-offs of customer accounts.
B) Approve vouchers for payment and also sign checks.
C) Reconcile the bank statements and also receive and deposit cash.
D) Sign checks and also cancel supporting documents.

Accepted Answer

The answer of In a properly designed internal control system,the...

Question 4

During consideration of internal control in a financial statement audit of a nonpublic company,an auditor is not obligated to
A) Search for significant deficiencies in the operation of internal control.
B) Understand the internal control environment and the information system.
C) Determine whether the controls relevant to audit planning have been placed in operation.
D) Perform procedures to understand the design of internal control.

Accepted Answer

Although the auditor should be aware of any significant deficiencies in internal control, they are not required to perform a separate search for such deficiencies in a nonpublic company. However, the other options listed (B, C, D) are all obligations of the auditor during consideration of internal control in a financial statement audit of a nonpublic company.

Question 5

After the auditor has prepared a flowchart of the internal controls surrounding sales and evaluated the design of the system,the auditor would perform tests of controls on all control activities
A) Documented in the flowchart.
B) Considered to be weaknesses that might allow errors to enter the accounting system.
C) That the auditor plans to rely on.
D) That would aid in preventing fraud.

Accepted Answer

The purpose of performing tests of controls is to gather evidence about the operating effectiveness of specific control activities that the auditor plans to rely on. Therefore, the auditor would only perform tests of controls on those control activities that they plan to rely on, which is option C. Options A, B, and D do not accurately describe the purpose of performing tests of controls.

Question 6

When communicating internal control-related matters noted in an audit of a nonpublic company,an auditor's report issued on significant deficiencies should indicate that
A) Errors or fraud may occur and not be detected because there are inherent limitations in any internal control system.
B) The issuance of an unqualified opinion on the financial statements may depend on corrective follow-up action.
C) The deficiencies noted were not detected within a timely period by employees in the normal course of performing their assigned functions.
D) The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

Accepted Answer

The answer of When communicating internal control-related matters noted in...

Question 7

Before applying substantive procedures to the details of asset and liability accounts at an interim date,the auditor should
A) Assess the difficulty in controlling audit risk for the remainder of the period.
B) Investigate significant fluctuations that have occurred in the asset and liability accounts since the previous balance sheet date.
C) Select only those accounts which can effectively be sampled during year-end audit work.
D) Consider the compliance tests that must be applied at the balance sheet date to extend the audit conclusions reached at the interim date.

Accepted Answer

The auditor should assess the difficulty in controlling audit risk for the remainder of the period to ensure that the interim audit conclusions remain valid through to the year-end.

Question 8

While substantive procedures may support the accuracy of underlying records,these tests frequently provide no affirmative evidence of segregation of duties because
A) Substantive procedures rarely guarantee the accuracy of the records if only a sample of the transactions has been tested.
B) The records may be accurate even though they are maintained by persons having incompatible functions.
C) Substantive procedures relate to the entire period under audit, but compliance tests ordinarily are confined to the period during which the auditor is on the client's premises.
D) Many computerized procedures leave no audit trail of who performed them, so substantive procedures may necessarily be limited to inquiries and observation of office personnel.

Accepted Answer

Substantive procedures may support the accuracy of underlying records, but they do not necessarily provide affirmative evidence of segregation of duties because these procedures only test the accuracy of the records and not the segregation of duties. It is possible for the records to be accurate even if they are being maintained by persons having incompatible functions. Hence, option B is the best choice. The other options are incorrect because substantive procedures can guarantee the accuracy of the records tested, compliance tests can cover the entire period under audit, and computerized procedures can leave an audit trail of who performed them.

Question 9

Assume that an auditor estimates that 10,000 checks were issued during the accounting period.If an IT application control which performs a limit check for each check request is to be subjected to the auditor's test data approach,the sample should include
A) Approximately 1,000 test items.
B) A number of test items determined by the auditor to be sufficient under the circumstances.
C) A number of test items determined by the auditor's reference to the appropriate sampling tables.
D) One transaction.

Accepted Answer

The answer of Assume that an auditor estimates that 10,000...

Question 10

In terms of an audit,define substantive strategy and reliance strategy.Include in your definition how the different strategies relate to internal control.Which strategy would best relate to a lower control risk?

Accepted Answer

The answer of In terms of an audit,define substantive strategy...

Question 11

Internal control has become a very important focus for publicly traded and privately-held companies alike.Internal control is intended to accomplish at least four objectives and consists of five components of internal control.List the four objectives and five components of internal control.

Accepted Answer

The answer of Internal control has become a very important...

Question 12

What are two potential benefits and two potential risks of using IT for an entity's internal control?

Accepted Answer

The answer of What are two potential benefits and two...

Question 13

A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions and that leave no transaction trail is
A) Inspection.
B) Observation.
C) Reperformance.
D) Reconciliation.

Accepted Answer

When testing control activities that involve segregation of functions and do not leave a transaction trail, such as observing employees to ensure that they are not performing conflicting duties, an auditor would most likely use observation as the procedure. Inspection involves the viewing of documentation, reperformance involves redoing a process, and reconciliation involves comparing two sets of data. None of these procedures would be suitable for testing segregation of functions without a transaction trail.

Question 14

What are four potential tools available to the auditor for documenting their understanding of a client's system of internal control?

Accepted Answer

The answer of What are four potential tools available to...

Question 15

A customer intended to order 100 units of product Z96014,but incorrectly ordered nonexistent product Z96015.Which of the following controls most likely would detect this error?
A) Check digit verification.
B) Record count.
C) Hash total.
D) Redundant data check.

Accepted Answer

Check digit verification is a control that helps detect errors in data entry by verifying that the digits in a product code are correct. If the customer entered a nonexistent product code, the check digit verification would likely catch this error.

Question 16

Which of the following is a general control that would most likely assist an entity whose systems analyst left the entity in the middle of a major project?
A) Grandfather-father-son record retention.
B) Input and output validation routines.
C) Systems documentation.
D) Check digit verification.

Accepted Answer

Systems documentation would be the most helpful in this situation. It would provide a clear understanding of the project and the systems that have been put in place, making it easier for a new systems analyst to come in and take over the project. Grandfather-father-son record retention, input and output validation routines, and check digit verification are specific controls that do not directly address the issue of an analyst leaving a major project.

Question 17

What are some typical types of evidence that may be collected in testing a client's internal controls?

Accepted Answer

The answer of What are some typical types of evidence...

Question 18

Describe the limitations of internal control.Why do limitations on internal control exist?

Accepted Answer

The answer of Describe the limitations of internal control.Why do...

Question 19

After obtaining an understanding of internal controls and assessing control risk of an entity,an auditor decided not to perform tests of controls for purposes of the audit.The auditor most likely decided that
A) The available evidential matter obtained through tests of controls would not support an increased level of control risk.
B) A reduction in the assessed level of control risk is justified for certain financial statement assertions.
C) It would be inefficient to perform tests of controls that would result in a reduction in planned substantive procedures.
D) The assessed level of inherent risk exceeded the assessed level of control risk.

Accepted Answer

The answer of After obtaining an understanding of internal controls...

Question 20

The program flowcharting symbol representing a decision is a
A) Triangle.
B) Circle.
C) Rectangle.
D) Diamond.

Accepted Answer

The diamond shape is used to represent decisions or conditional statements in program flowcharting. It presents two possible routes or paths to take, depending on whether a condition is true or false. The other symbols listed (triangle, circle, rectangle) do not represent decisions in program flowcharting.

Quiz 6: Internal Control in a Financial Statement Audit

Audit evidence concerning proper segregation of duties ordinarily is best obtained by

As the acceptable level of detection risk increases,an auditor may change the

In a properly designed internal control system,the same employee may be permitted to

During consideration of internal control in a financial statement audit of a nonpublic company,an auditor is not obligated to

After the auditor has prepared a flowchart of the internal controls surrounding sales and evaluated the design of the system,the auditor would perform tests of controls on all control activities

When communicating internal control-related matters noted in an audit of a nonpublic company,an auditor's report issued on significant deficiencies should indicate that

Before applying substantive procedures to the details of asset and liability accounts at an interim date,the auditor should

While substantive procedures may support the accuracy of underlying records,these tests frequently provide no affirmative evidence of segregation of duties because

Assume that an auditor estimates that 10,000 checks were issued during the accounting period.If an IT application control which performs a limit check for each check request is to be subjected to the auditor's test data approach,the sample should include

In terms of an audit,define substantive strategy and reliance strategy.Include in your definition how the different strategies relate to internal control.Which strategy would best relate to a lower control risk?

Internal control has become a very important focus for publicly traded and privately-held companies alike.Internal control is intended to accomplish at least four objectives and consists of five components of internal control.List the four objectives and five components of internal control.

What are two potential benefits and two potential risks of using IT for an entity's internal control?

A procedure that would most likely be used by an auditor in performing tests of control activities that involve segregation of functions and that leave no transaction trail is

What are four potential tools available to the auditor for documenting their understanding of a client's system of internal control?

A customer intended to order 100 units of product Z96014,but incorrectly ordered nonexistent product Z96015.Which of the following controls most likely would detect this error?

Which of the following is a general control that would most likely assist an entity whose systems analyst left the entity in the middle of a major project?

What are some typical types of evidence that may be collected in testing a client's internal controls?

Describe the limitations of internal control.Why do limitations on internal control exist?

After obtaining an understanding of internal controls and assessing control risk of an entity,an auditor decided not to perform tests of controls for purposes of the audit.The auditor most likely decided that

The program flowcharting symbol representing a decision is a