Question 1

The provisions of the Foreign Corrupt Practices Act apply to:
A) All U.S. corporations.
B) All U.S. corporations that engage in foreign operations.
C) All corporations under the jurisdiction of the SEC.
D) All U.S. partnerships and corporations.

Accepted Answer

The Foreign Corrupt Practices Act (FCPA) applies to all corporations under the jurisdiction of the SEC, which includes U.S. companies that are publicly traded and their subsidiaries, as well as foreign companies listed on U.S. stock exchanges.

Question 2

The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of internal and external reporting, the effectiveness and efficiency of operations, and:
A) Compliance with applicable laws and regulations.
B) Effectiveness of prevention of fraudulent occurrences.
C) Safeguarding of entity equity.
D) Incorporation of ethical business practice standards.

Accepted Answer

The definition of internal control developed by COSO includes controls related to the reliability of internal and external reporting, the effectiveness and efficiency of operations, and compliance with applicable laws and regulations. While the prevention of fraudulent occurrences, safeguarding entity equity, and incorporation of ethical business practice standards are important aspects of internal control, they are not explicitly included in the definition developed by COSO.

Question 3

If the auditors do not perform tests of controls for certain assertions:
A) They have performed a substandard audit.
B) They are not required to communicate significant deficiencies relating to those accounts to management and the board of directors.
C) They must issue a qualified opinion.
D) They must assess control risk at the maximum level for those assertions.

Accepted Answer

If the auditors do not perform tests of controls for certain assertions, they must assess control risk at the maximum level for those assertions. This is because the auditors do not have sufficient evidence to support a lower assessed level of control risk, which in turn affects the nature, timing, and extent of other substantive tests.

Question 4

Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan?
A) The auditors have determined that controls have been implemented (placed in operation) but, in accordance with the audit plan, have performed no tests of controls.
B) Certain controls do not leave a trail of documentary evidence.
C) Deviation rates were greater than zero and approached anticipated levels.
D) The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.

Accepted Answer

If the auditors find that the operating effectiveness of certain controls was less than expected, it may indicate a higher risk of material misstatement and require expanding the extent of substantive procedures beyond what was anticipated in the audit plan.

Question 5

Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits?
A) An understanding of the control environment, information and communication, risk assessment and monitoring is necessary; an understanding of control activities is only necessary for areas in which the auditor is performing tests of controls.
B) The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit.
C) When tests of controls have been performed, control risk must be assessed at a level less than the maximum.
D) An understanding of the control environment is necessary, but no understanding of the other components is necessary unless control risk is to be assessed at a level less than the maximum.

Accepted Answer

The auditor is responsible for obtaining an understanding of each of the five internal control components (control environment, risk assessment, control activities, information and communication, monitoring) sufficient to assess the risks of material misstatement for the audit. This understanding is necessary regardless of whether tests of controls will be performed or control risk will be assessed at less than the maximum.

Question 6

During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to:
A) Assess inherent risk.
B) Design further audit procedures.
C) Assess compliance with the Foreign Corrupt Practices Act.
D) Provide a reasonable basis for an opinion on compliance with applicable laws.

Accepted Answer

Auditors consider their clients' internal control to help design further audit procedures. By understanding the internal control, auditors can identify areas where control weaknesses exist and develop audit procedures to test those areas more thoroughly. This helps them gather sufficient and appropriate evidence to form their opinion on the financial statements. While assessing inherent risk, considering internal control is one of the components, but it is not the only reason for considering internal control. Assessing compliance with specific laws, such as the Foreign Corrupt Practices Act, is outside the scope of financial statement audits, unless it has a material impact on the financial statements. Providing a reasonable basis for an opinion on compliance with applicable laws is not reliant on the consideration of internal controls.

Question 7

This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with laws and regulations:
A) Foreign Corrupt Practices Corporation.
B) Committee of Sponsoring Organizations.
C) Cohen Commission.
D) Financial Accounting Standards Board.

Accepted Answer

The Committee of Sponsoring Organizations (COSO) developed a framework that provides management with a basis to evaluate controls not only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with laws and regulations. The other organizations listed focus on other aspects of accounting and business, such as anti-bribery laws (Foreign Corrupt Practices Corporation), investigating financial institutions (Cohen Commission), and setting accounting standards (Financial Accounting Standards Board).

Question 8

Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)?
A) Its applicability is largely limited to internal auditing applications.
B) It is a 'process' effected by individuals.
C) It emphasizes the effectiveness and efficiency of operations over the reliability of financial reporting.
D) It suggests that it is important to view internal control as an end product as contrasted to a process or means to obtain an end.

Accepted Answer

The correct statement is that internal control, as defined by COSO, is a "process" effected by individuals. Choice A is incorrect because internal control is applicable to all aspects of an organization, not just internal auditing. Choice C is incorrect because COSO emphasizes the importance of both effectiveness and efficiency of operations as well as the reliability of financial reporting. Choice D is incorrect because COSO views internal control as a process or means to obtain an end, rather than an end product.

Question 9

Which of the following would be least likely to be regarded as a test of a control?
A) Tests of the additions to property by physical inspection.
B) Comparisons of the signatures on cancelled checks to the authorized check signer list.
C) Tests of signatures on purchase orders.
D) Recalculation of payroll deductions.

Accepted Answer

Tests of additions to property by physical inspection are more likely to be tests of accuracy or valuation rather than tests of a control. The other options are more directly related to testing the effectiveness of controls in place.

Question 10

Which statement is correct concerning the relevance of various types of controls to a financial statement audit?
A) An auditor may ordinarily ignore the consideration of controls when a substantive audit approach is used.
B) Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.
C) Controls over safeguarding assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant.
D) All controls are ordinarily relevant to an audit.

Accepted Answer

Controls over the reliability of financial reporting are the most directly relevant to an audit; however, other controls may also be relevant. During a financial statement audit, auditors must evaluate the design and operating effectiveness of controls that mitigate the risk of material misstatements in the financial statements. The auditor evaluates controls to determine whether testing their operating effectiveness can reduce the level of testing of substantive procedures. Substantive procedures involve examining transactions, balances, and disclosures, and it is not appropriate to ignore control considerations when using a substantive audit approach.

Question 11

Which of the following statements is correct concerning the understanding of internal control needed by auditors?
A) The auditors must understand the information system, not the accounting system.
B) The auditors must understand monitoring and all preliminary accounting controls.
C) The auditors must have a sufficient understanding to assess the risks of material misstatement.
D) The auditors must understand the control environment, risk assessment, and all control activities.

Accepted Answer

Auditors need a sufficient understanding of internal controls to assess the risks of material misstatement in the financial statements. This understanding helps them plan the audit by determining the nature, timing, and extent of audit procedures.

Question 12

When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will:
A) Be less than the preliminary assessed level of control risk.
B) Equal the preliminary assessed level of control risk.
C) Equal the actual control risk.
D) Be less than the actual control risk.

Accepted Answer

When tests of controls reveal that controls are operating as anticipated, it means that the initial assessment of control risk was accurate. Therefore, the assessed level of control risk would equal the preliminary assessed level of control risk, as the tests confirmed the auditor's initial expectations.

Question 13

Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies?
A) Salaried sales personnel.
B) Implementation of a new information system.
C) Rapid growth of the organization.
D) Corporate restructuring.

Accepted Answer

Salaried sales personnel would not typically be considered a factor indicative of increased financial reporting risk. The other options, such as implementing a new information system, rapid growth of the organization, and corporate restructuring, could all potentially increase financial reporting risk due to the changes and potential for errors or fraud to occur during the transition.

Question 14

On financial statement audits, it is required that the auditors obtain an understanding of internal control, including:
A) Its operating effectiveness.
B) Whether it has been implemented (placed in operation).
C) Performing tests of controls for all material controls.
D) Its ability to provide reasonable assurance.

Accepted Answer

Auditors are required to understand whether the internal control system has been implemented as part of their audit process. This involves assessing if the controls are in place and have been put into operation. Understanding the operating effectiveness, performing tests of controls for all material controls, and its ability to provide reasonable assurance are further steps that may be taken depending on the auditor's assessment of risk and the audit approach, but they are not required for all audits.

Question 15

A significant deficiency:
A) Differs from a material weakness in that it involves internal control over operations rather than internal control over financial reporting.
B) Involves an amount of discovered misstatements greater than the amount used as the planning measure of materiality.
C) Is identical to a material weakness except that it need not be communicated to those responsible for oversight of the company's financial reporting.
D) Is less severe than a material weakness.

Accepted Answer

A significant deficiency is less severe than a material weakness, indicating a problem in internal control that is important enough to merit attention but not as critical as a material weakness.

Question 16

Which of the following is most likely to be considered a risk assessment procedure relating to internal control?
A) Confirm accounts receivable.
B) Perform a test of a control relating to payroll.
C) Take test counts of the year-end inventory.
D) Trace a transaction through the information system relevant to financial reporting.

Accepted Answer

The answer of Which of the following is most likely...

Question 17

Which of the following is not considered one of the five major components of internal control?
A) Risk assessment.
B) Segregation of duties.
C) Control activities.
D) Monitoring.

Accepted Answer

Segregation of duties is a principle within control activities, not a separate component of internal control. The five major components are control environment, risk assessment, control activities, information and communication, and monitoring.

Question 18

The Sarbanes-Oxley Act of 2002 requires that the audit committee:
A) Annually reassess control risk using information from the CPA firm.
B) Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm.
C) Require that the company's CPA firm rotate the partner in charge of the audit.
D) Review the level of management compensation.

Accepted Answer

The Sarbanes-Oxley Act of 2002 requires that the audit committee be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm. This serves to promote independence and objectivity in the audit process. The other choices are not requirements of the act.

Question 19

Which of the following is not a component of the control environment?
A) Integrity and ethical values.
B) Risk assessment.
C) Commitment to attracting, developing, and retaining competent employees.
D) Organizational structure.

Accepted Answer

Risk assessment is not part of the control environment, but rather a component of the risk management process. The control environment includes the organization's integrity and ethical values, commitment to competency, and the overall organizational structure.

Question 20

The effectiveness of controls is not generally tested by:
A) Inspection of documents and reports.
B) Performance of analytical procedures.
C) Observation of the application of accounting policies and procedures.
D) Inquiries of appropriate client personnel.

Accepted Answer

Controls are generally tested by inspecting documents and reports, observing the application of accounting policies and procedures, and making inquiries of appropriate client personnel. Performance of analytical procedures is a substantive test procedure used to detect possible misstatements in the financial statements, not to test the effectiveness of controls.

Quiz 7: Internal Control

The provisions of the Foreign Corrupt Practices Act apply to:

The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of internal and external reporting, the effectiveness and efficiency of operations, and:

If the auditors do not perform tests of controls for certain assertions:

Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan?

Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits?

During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to:

This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with laws and regulations:

Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO) ?

Which of the following would be least likely to be regarded as a test of a control?

Which statement is correct concerning the relevance of various types of controls to a financial statement audit?

Which of the following statements is correct concerning the understanding of internal control needed by auditors?

When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will:

Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies?

On financial statement audits, it is required that the auditors obtain an understanding of internal control, including:

A significant deficiency:

Which of the following is most likely to be considered a risk assessment procedure relating to internal control?

Which of the following is not considered one of the five major components of internal control?

The Sarbanes-Oxley Act of 2002 requires that the audit committee:

Which of the following is not a component of the control environment?

The effectiveness of controls is not generally tested by: