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 the control activities.

Accepted Answer

Direct personal observation of the employees who apply the control activities is the best method to obtain evidence regarding proper segregation of duties. This allows the auditor to directly observe whether the control activities are being applied by the appropriate employees and whether there are any weaknesses or breakdowns in the segregation of duties. Flowcharts, inquiries, and job descriptions may provide some useful information, but they do not provide the same level of firsthand knowledge and observation as direct personal observation.

Question 2

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 test data approach involves using a small number of test transactions, often just one, to verify that the application control is functioning as intended.

Question 3

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 entity'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 focus on verifying the accuracy and completeness of underlying records, but they do not usually provide affirmative evidence of segregation of duties. This is because even if the records are accurate, they may be maintained by individuals who have incompatible functions, which undermines the principle of segregation of duties. Therefore, the best answer is B, which recognizes that substantive procedures do not guarantee segregation of duties. The other answer choices are incorrect for various reasons: A is partially true, but it does not address the issue of segregation of duties; C is incorrect because compliance tests can be performed for the entire period under audit; and D is also partially true, but it confuses audit trails with segregation of duties.

Question 4

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 achieved 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

Before applying substantive procedures to the details of asset and liability accounts at an interim date, the auditor should first assess the difficulty in controlling achieved audit risk for the remainder of the period. This is because the risk of material misstatement may increase or decrease over time, which can affect the auditor's planned procedures and the evaluation of the results obtained. Therefore, the auditor needs to consider the overall audit strategy and adjust it as necessary to ensure that the audit risk is kept within an acceptable level throughout the engagement. Choices B and C are too specific and do not address the overall audit risk. Choice D is partly correct, but compliance tests are only one type of substantive procedures, and there may be other procedures that are more appropriate or necessary, depending on the circumstances.

Question 5

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

While an auditor should evaluate internal controls, the extent of their assessment is dependent on the specific audit engagement and the risk factors involved. The auditor is not obligated to search for significant deficiencies or identify all potential areas of weakness in internal control. However, they should still understand the internal control environment and the information system, determine whether relevant controls have been put into operation, and perform procedures to understand the design of internal control.

Question 6

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

Accepted Answer

When tests of control activities involve segregation of functions that leave no transaction trail, the auditor usually performs observation procedures to verify that the required segregation of duties is actually in place and being followed. Inspection, reperformance, and reconciliation are not typically effective in this scenario because there is no physical transaction trail to examine or reperform, and no accounts or records to reconcile.

Question 7

As the acceptable level of detection risk increases,an auditor may change the
A) Assessed level of control risk from a lower level to a higher 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 earlier (at an interim date) rather than at year-end, as they can accept a higher risk of not detecting a material misstatement.

Question 8

A customer intended to order 100 units of product Z96014,but incorrectly ordered 100 units of a 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 would ensure that the number entered is valid and matches with the expected value. If the customer had tried to enter product Z96015, which does not exist, the check digit verification would have flagged it as an incorrect value.

Question 9

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 auditor likely determined that performing tests of controls would not be efficient because the cost or effort of testing controls would not justify the potential reduction in substantive testing.

Question 10

What are four potential tools available to the auditor for documenting her understanding of an entity's system of internal control?

Accepted Answer

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

Question 11

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

Accepted Answer

The diamond symbol is used to represent a decision point in program flowcharts. It signifies that the program must make a decision between two or more possible paths of execution. The other symbols listed are not typically used to represent a decision point.

Question 12

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 13

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 tests of controls is to assess the effectiveness of the internal controls that the auditor plans to rely on. Therefore, the auditor would test only those control activities that are identified as reliable and effective in the design evaluation stage. The auditor would not test control activities that are considered weaknesses or those that aid in preventing fraud, but rather test those identified as reliable which would be the ones relied upon.

Question 14

Internal control has become a very important focus for publicly traded and privately-held companies alike.Internal control is intended to accomplish at least three objectives and consists of five components of internal control.List the three objectives and five components of internal control.
Objectives of internal control include:
1.reliability,timeliness,and transparency of internal and external,nonfinancial and financial reporting,
2.effectiveness and efficiency of operations,including safeguarding of assets,and
3.compliance with applicable laws and regulations.

Accepted Answer

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

Question 15

Why might an auditor decide to test controls at an interim date?

Accepted Answer

The answer of Why might an auditor decide to test...

Question 16

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 17

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 18

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

Accepted Answer

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

Question 19

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

In a well-designed internal control system, the same employee can sign checks and cancel supporting documents as these tasks are related and do not pose a risk of misappropriation or error if performed by the same person. Other combinations involve conflicting duties that could lead to fraud or errors.

Question 20

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...

Quiz 6: Internal Control in a Financial Statement Audit

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

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

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

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

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

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

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

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

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

What are four potential tools available to the auditor for documenting her understanding of an entity's system of internal control?

The program flowcharting symbol representing a decision is a

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?

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

Why might an auditor decide to test controls at an interim date?

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

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

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

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

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