Internal Control System in an Audit of Financial Statement

Which of the following parties is responsible for establishing a company's internal controls?

• Auditors.

• Management and auditors.

• Committee of Sponsoring Organizations.

• Management.

Which of the following best describes the inherent limitations that should be recognized by an auditor when considering the potential effectiveness of internal control?

• The benefits expected to be derived from effective internal accounting control usually do not exceed the costs of such control.

• Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.

• The competence and integrity of client personnel provides an environment conducive to accounting control and provides assurance that effective control will be achieved.

• Procedures designed to assure the execution and recording of

  transactions in accordance with proper authorizations are effective against irregularities perpetrated by management.

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the

• Segregation of incompatible functions is necessary to ascertain that internal control is effective.

• Costs of internal control should not exceed the benefits expected to be derived from internal control.

• Employment of competent personnel provides assurance that the objectives of internal control will be achieved.

• Establishment and maintenance of internal control is an important responsibility of the management and not of the auditor.

Which of the following is not one of the three primary objectives of effective internal control?

• Efficiency and effectiveness of operations.

• Reliability of financial reporting.

• Compliance with laws and regulations.

• Each of the above is a primary objective of effective internal control.

Internal controls can never be considered as absolutely effective because

• Controls always have inherent weaknesses that can be exploited.

• Their effectiveness is limited by the competency and dependability of employees.

• Controls are designed to prevent and detect only material misstatements.

• None of the above.

When management is evaluating the design of internal control, management evaluates whether the control can do all but which of the following?

• Correct material misstatements.

• Detect material misstatements.

• Prevent material misstatements.

• None of the above is correct.

Auditor's tests of operating effectiveness of internal controls might include which of the following types of procedures?

• Inquiries of personnel.

• Inspection of relevant documentation.

• Reperformance of the application of controls.

• All of the above.

Which of the following activities would be least likely to strengthen a company's internal control?

• Separating accounting from other financial operations.

• Fixing responsibility for the performance of employee duties. .

• Maintaining insurance for fire and theft

• Carefully selecting and training employees.

Management must disclose material weaknesses in internal control

• Only if the auditor identifies the weakness as significant.

• Whenever the weakness is significant to overall financial reporting objectives.

• Whenever the weakness is deemed significant to a single class of transactions.

• Even if just one weakness is found.

During which part of an audit examination is the preparation of flowcharts most appropriate?

• When performing tests of controls.

• When reviewing the system of internal control.

• When evaluating the system of administrative control.

• When performing preliminary analytical procedures.