Question 1

If controls are in place to ensure that transactions are recorded in the accounting period, this satisfies which internal control objective?
A) Timely
B) Real
C) Valued
D) Posted

Accepted Answer

The internal control objective being satisfied here is "timely," which means ensuring that transactions are recorded in the correct accounting period. This helps ensure that financial statements are accurate and can be used for decision-making purposes.

Question 2

Which of the following is an inherent limitation of internal control?
A) A control within a software program being overridden or disabled
B) Human error that results in a breakdown in internal control
C) Collusion by two or more individuals to circumvent a control
D) All of the above

Accepted Answer

All of the above are inherent limitations of internal control. Controls within software programs can be overridden or disabled by individuals who have access to them. Human error can result in a breakdown in internal control, and collusion between two or more individuals can allow them to circumvent or bypass control measures. These limitations highlight the need for ongoing monitoring and evaluation of internal control systems to identify and address weaknesses and risks.

Question 3

Checklists and preformatted questionnaires are particularly helpful in industries that the auditor may not personally be familiar with auditing.

Accepted Answer

Checklists and preformatted questionnaires are designed to guide the auditor through the audit process and ensure that all necessary steps are taken. In industries that the auditor may not be familiar with, these tools can be especially helpful in ensuring that all relevant areas are evaluated.

Question 4

The purpose of an auditor's management letter is to inform the client of the auditor's recommendations for improving its internal controls.

Accepted Answer

The auditor's management letter typically includes recommendations for improving the client's internal controls, so that the client can better prevent and detect errors and fraud in its financial statements. The letter is not a formal audit report, but rather a confidential communication between the auditor and management, intended to facilitate constructive dialogue and improvement.

Question 5

Control risk refers to the risk that the auditor's testing procedures will not be effective in detecting a material misstatement.

Accepted Answer

Control risk refers to the risk that a company's internal controls will not prevent or detect a material misstatement in its financial statements.

Question 6

Internal control is intended to provide reasonable assurance about the achievement of an entity's objectives.

Accepted Answer

Internal control systems are established by an organization to achieve its objectives in a reliable manner, and to provide reasonable assurance that these objectives will be achieved.

Question 7

Internal control weaknesses decrease the risk of material misstatements being undetected by management's processes and controls.

Accepted Answer

Internal control weaknesses increase the risk of material misstatements being undetected by management's processes and controls.

Question 8

Which of the following statements about internal control is in?
A) Internal control is a very broad concept
B) Internal control eliminates the possibility of fraud and error
C) Internal control encompasses all of the elements of an organisation
D) Internal control provides reasonable assurance about the achievement of the entity's objectives

Accepted Answer

The answer of Which of the following statements about internal...

Question 9

The internal control objective of 'valued' refers to controls in place to ensure that transactions are recorded in the accounting period.

Accepted Answer

The internal control objective of 'valued' refers to controls in place to ensure that transactions are recorded accurately and at the appropriate value in the accounting records, not specifically in a certain accounting period.

Question 10

Audit risk is the risk that an entity's internal control system will not prevent or detect material misstatements.

Accepted Answer

Audit risk is the risk that an auditor may issue an unqualified opinion on financial statements that contain a material misstatement, not specifically related to the entity's internal control system's ability to prevent or detect such misstatements.

Question 11

An internal control exception is an observed condition that provides evidence that the control being tested did not operate as intended.

Accepted Answer

An internal control exception is a deviation or instance where a control did not operate as intended, which indicates a weakness in the control system.

Question 12

The concept that no one employee should be in a position both to perpetrate and hide errors or fraud in the normal course of their duties is known as segregation of incompatible duties.

Accepted Answer

This statement correctly defines the concept of segregation of incompatible duties.

Question 13

In larger entities, there are often limitations surrounding the entity's ability to put effective internal controls in place.

Accepted Answer

The answer of In larger entities, there are often limitations...

Question 14

The internal control objective of 'classified' means there are controls in place to ensure that:
A) fictitious or duplicate transactions are not included in the books of an organisation
B) amounts are assigned to transactions
C) transactions are recorded in the accounting period
D) transactions are charged and allocated to the general ledger account

Accepted Answer

The 'classified' objective in internal control ensures that transactions are charged and allocated to the correct general ledger accounts, maintaining proper categorization and classification in financial records.

Question 15

The internal control objective of 'real' refers to controls in place to ensure that fictitious or duplicate transactions are not included in the books and records of the organisation.

Accepted Answer

The internal control objective of 'real' is to ensure the accuracy and completeness of transactions recorded in the books and records of the organisation, and to prevent the inclusion of fictitious or duplicate transactions.

Question 16

One of the elements of an entity's control environment is management's philosophy and operating style.

Accepted Answer

Management's philosophy and operating style can have a significant impact on an entity's overall control environment. This includes the tone at the top, ethical values, risk appetite, and how decisions are made and communicated throughout the organization. Therefore, it is an important element of the control environment.

Question 17

Narratives involve the auditor describing in words each step of the flow of transactions from start to finish.

Accepted Answer

Narratives are detailed descriptions of the flow of transactions, including the beginning, middle, and end of each transaction. The auditor describes each step in words to help understand the overall process and identify potential control weaknesses.

Question 18

When internal controls are effective:
A) there will be an increased reliance on substantive tests of transactions and account balances
B) control risk will also be high
C) the organisation is more likely to achieve its strategic and operating objectives
D) the organisation is less likely to achieve its strategic and operating objectives

Accepted Answer

Effective internal controls help to ensure that the organization is more likely to achieve its strategic and operating objectives. This is because effective internal controls promote efficiency, accuracy, and compliance, which are essential for achieving organizational goals. Additionally, effective internal controls also reduce the risk of fraud, error, and non-compliance, which can impede the achievement of organizational objectives. Therefore, option C is the best answer. Option A is incorrect because an increased reliance on substantive tests suggests that internal controls are not effective. Option B is incorrect because effective internal controls should decrease control risk. Option D is incorrect because effective internal controls increase the likelihood of achieving strategic and operating objectives.

Question 19

All of the following are components of internal control, except for:
A) monitoring of controls
B) the control environment
C) audit committees
D) the information system

Accepted Answer

All of the other options, monitoring of controls, the control environment, and the information system, are components of internal control, while audit committees are not. Audit committees are an oversight mechanism that oversees a company's financial reporting, internal controls, and the external auditors. While they play a role in ensuring effective internal controls, they are not a direct component of internal control.

Question 20

The inherent limitations of internal control include the possibility of collusion by two or more individuals to circumvent a control.

Accepted Answer

Internal controls are not foolproof and can be bypassed by collusion among employees. This possibility should be taken into consideration when designing and implementing internal controls.

Quiz 6: Gaining an Understanding of the Clients System of Internal Controls

If controls are in place to ensure that transactions are recorded in the accounting period, this satisfies which internal control objective?

Which of the following is an inherent limitation of internal control?