Internal controls are not designed to provide reasonable assurance that:

B) embezzlement will be eliminated.

A) transactions are executed in accordance with management's authorization

C) access to assets is permitted only in accordance with management's authorization.

D) amounts recorded for assets are compared with the actual existing assets at reasonable intervals.

An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about the:

D) entity's ability to accurately process and summarize financial data.

A) efficiency of management's decision-making process.

B) appropriate prices that the entity should charge for its products.

C) methods of assigning production tasks to employees.

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:

B) management is dominated by one individual.

A) external policies established by parties outside the entity affect its accounting practices.

C) internal audit personnel have direct access to the board of directors and the entity's management.

D) the audit committee is active in overseeing the entity's financial reporting policies.

15) Management philosophy and operating style most likely would have a significant influence on an entity's control environment when:

B) the entity does not have sound personnel policies for hiring, training, and evaluating competent individuals.

A) internal audit personnel have direct access to the board of directors and the entity's management.

C) accurate management job descriptions delineate specific duties.

D) the audit committee actively oversees the financial reporting process.

Proper monitoring within an internal control framework may include all of the following except

D) the internal revenue service.

B) an effective audit committee.

An entity's control activities include all of the following except:

C) External auditor's tests of controls.

Potential benefits of an entity's controls in an IT environment include all of the following except:

B) eliminate human errors or mistakes.

A) reduction in the risk that controls will be circumvented

C) consistent application of predefined business rules.

An entity's IT infrastructure refers to

D) Data provided by the system.

Auditors are most likely to gather audit evidence solely using substantive procedures:

B) if the implemented controls are assessed as ineffective.

A) if transactions are recurring.

C) if control risk is very low.

D) if the entity has a well-designed automated system.

Proper segregation of functional responsibilities in an effective system of internal control calls for separation of the functions of:

B) authorization, recording, and custody.

A) authorization, execution, and payment.

C) custody, execution, and reporting.

D) authorization, payment, and recording.

Factors that the auditor should consider as increasing the effectiveness of the audit committee include all of the following except whether:

B) It is comprised almost exclusively of members of management, ensuring detailed knowledge of the company's operations.

A) It is independent of management.

C) It asks management difficult questions.

D) It interacts regularly with internal audit personnel.

The documentation of an auditor's understanding of internal controls:

D) can include any combination of narratives, questionnaires, or flowcharts.

B) must be exclusively in narrative, questionnaires, or flowchart form.

A well-prepared flowchart should make it easier for the auditor to:

A) prepare audit procedure manuals.

B) prepare detailed job descriptions.

D) assess the degree of accuracy of financial data.

A flowchart is most frequently used by an auditor in connection with the:

B) review of the entity's internal controls.

A) preparation of generalized computer audit programs.

C) use of statistical sampling in performing an audit.

D) performance of analytical procedures of account balances.

An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts:

B) provide a visual depiction of the entity's activities.

A) identify whether segregation of duties prevent collusion

C) indicate whether controls are operating effectively

D) reduce the need to observe the entity's employees performing routine tasks.

Which of the following audit tests would be regarded as a test of controls?

C) Tests of the signatures on canceled checks to the board of directors' authorizations

A) Tests of the specific items making up the balance in a given general ledger account.

B) Tests comparing inventory pricing to vendors' invoices.

D) Tests of the additions to property, plant, and equipment by physical inspections.

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control is suitably designed to prevent or detect material misstatements?

D) Observing the entity's personnel applying the controls.

A) Scanning the journals produced by the internal control system

B) Performing analytical procedures using data aggregated at a high level.

C) Vouching a sample of transactions directly related to the controls.

Reports on service organizations typically:

D) assess whether the service organization's controls are suitably designed to achieve internal control objectives.

A) provide reasonable assurance that their financial statements are free of material misstatements.

B) ensure that the entity will not have any misstatements in areas related to the service organization's activities.

C) ensure that the auditee is billed correctly.

General controls include all of the following except:

A) Data center and network operations controls.

D) Application system acquisition controls.

A) test to ensure that a numerical value does not exceed some predetermined value.

B) check to ensure that the value in a field falls within an allowable range of values.

C) check to ensure that the data in a field have the proper arithmetic sign.

D) check on a field to ensure that it contains either all numeric or alphabetic characters.

D) check on a field to ensure that it contains either all numeric or all alphabetic characters.

A) test to ensure that a numerical value in a field does not exceed some predetermined value.

B) check to ensure that the value in a field falls within an allowable range of values.

C) check to ensure that the data in a field have the proper arithmetic sign.

An entity's internal controls are most relevant to the auditor when the policies and procedures:

A) affect the financial statement assertions.

B) relate to management's planning decisions.

C) address management's operating decisions.

D) reflect management's philosophy and operating style.

In evaluating internal control, the auditor is basically concerned that the system provides reasonable assurance that:

B) material misstatements have been prevented, or detected and corrected.

A) operational efficiency has been achieved in accordance with management plans

C) controls have not been circumvented by collusion.

D) management cannot override the system.

The concept of reasonable assurance in the context of an entity's internal controls recognizes that:

D) the costs of some controls may be too high to implement in relation to potential benefits.

A) auditors may fail to detect material misstatements

B) proper internal controls guarantee that material misstatements will not occur.

C) proper internal controls preclude fraud.

An effective control environment:

B) creates a commitment to competence.

A) identifies and responds to business risks.

C) guarantees that all controls are followed as prescribed.

D) does not need an effective board of directors or internal audit function.

The control environment component of internal control includes all of the following except:

B) Access to computer programs.

A) Management's philosophy and operating style.

D) Human resource policies and practices.

Information and communication includes all of the following except:

C) communicating price changes to customers.

A) identifying and recording all valid transactions.

B) determining the time period in which transactions occurred.

D) properly presenting transactions and related disclosures in the financial statements.

An organizational structure is important for all of the following reasons except:

D) ensuring a proper commitment to controls.

A) ensuring proper accountability.

B) defining areas of authority.

C) creating clear lines of reporting.

The risk assessment component of internal control refers to:

C) The entity's identification and analysis of risks relevant to achievement of its objectives

A) The auditor's assessment of control risk.

B) The auditor's assessment of client risk.

D) The entity's monitoring of the potential for material misstatements.

As opposed to a manual control, an automated control:

B) should function consistently in the absence of program changes.

C) need not be tested by the auditor.

D) must be tested using the same techniques as a manual control.

An IT specialist is least likely to be necessary when:

C) the system has not changed from the prior year.

A) data are shared extensively among systems.

B) the entity participates heavily in electronic commerce.

D) significant audit evidence is in electronic form.

A substantive strategy differs from a reliance strategy in that a substantive strategy includes:

A) increased implementation of detailed tests of transactions and balances.

C) increased emphasis on verbal representations from management.

D) setting control risk at a minimum level.

Assessing control risk at a lower level most likely would involve:

B) identifying specific internal controls relevant to specific assertions

A) changing the timing of substantive procedures by omitting interim testing and performing the tests at year-end.

C) performing more extensive substantive procedures with larger sample sizes than originally planned.

D) reducing inherent risk for most of the assertions relevant to significant account balances.

In the audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure:

B) affects management's financial statement assertions.

A) reflects management's philosophy and operating style.

C) provides adequate safeguards over access to assets.

D) enhances management's decision-making processes.

It is important for the CPA to consider the competence of the entity's employees because their competence bears directly and importantly upon the:

B) achievement of the objectives of the system of internal control.

A) cost/benefit relationship of the system of internal control

C) comparison of recorded accountability with assets.

D) timing of the tests to be performed.

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Chapter 6

83 questions

The concept of internal control includes IT systems and manual systems.

The auditor must understand internal control before assessing inherent risk

The extent of an entity's use of IT can affect internal control.

One of the risks associated with internal control from IT is potential loss of data.

Internal control consists of six components.

Internal control includes monitoring of controls.

A reliance strategy is used when control risk has been set at high.

A substantive strategy is used when control risk has been set at high.

Once a level of control risk has been established, it cannot be changed.

Tests of controls must be performed if control risk is set at a lower level.

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