Quiz 2 Prep

Which of the following would not be considered an inherent limitation of the potential effectiveness of an entity’s internal control structure?

• Mistakes in judgment

• Management override

• Incompatible duties

• Collusion among employees

Actions, policies, and procedures that reflect the overall attitude of management, directors, and owners of the entity about internal control relate to which of the following internal control components?

• Control environment

• Information and communication

• Risk assessment

• Monitoring

Vendor account reconciliations are performed by three clerks in the accounts payable department on Friday of each week. The accounts payable supervisor reviews the completed reconciliations the following Monday to ensure they have been completed. The work performed by the supervisor is an example of which COSO component?

• Control environment

• Information and communication

• Risk assessment

• Monitoring

Which of the following is an advantage of a computer-based system for transaction processing over a manual system? A computer-based system

• does not require as stringent a set of internal controls.

• will produce a more accurate set of financial statements.

• eliminates the need to reconcile control accounts and subsidiary ledgers.

• will be more efficient in generating financial statements.

Which of the following is generally not considered a category of IT general controls?

• Controls that determine whether a vendor number matches the preapproved vendors in the vendor database

• Controls that restrict systemwide access to programs and data

• Controls that oversee the acquisition of application software

• Controls that oversee the day-to-day operation of IT applications

Which of the following is an example of an application control?

• The client uses access security software to limit access to each of the accounting applications.

• Employees are assigned a user ID and password that must be changed every quarter.

• The sales system automatically computes the total sale amount and posts the total to the sales journal file.

• Systems programmers are restricted from doing applications programming functions.

An internal control deficiency may be defined as a condition in which material misstatements would ordinarily not be timely detected by

• auditors in assisting control risk.

• the controller reconciling the general ledger.

• employees in normal course of assigned functions.

• the chief financial officer reviewing interim financial statements.

Which of the following is an example of an operation deficiency in internal control?

• The company does not have a code of conduct for employees to consider.

• The cashier has online ability to post write-offs to accounts receivable accounts.

• Clerks who conduct monthly reconciliation of intercompany accounts do not understand the nature of misstatements that could occur in those accounts.

• Management does not have a process to identify and assess risks on a recurring basis.

A material weakness in internal control represents a control deficiency that

• more than remotely adversely affects a company’s ability to initiate, authorize, record, process, or report external financial statements reliably.

• results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements.

• exists because a necessary control is missing or not properly designed.

• reduces the efficiency and effectiveness of the entity’s operations.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level (AcAR) that is substantially the same as the planned audit risk level (AAR), the auditor will

• increase inherent risk.

• increase materiality levels.

• decrease substantive testing.

• decrease planned detection risk.