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Chapter 05 - Risk Assessment: Internal Control Evaluation

Chapter 05Risk Assessment: Internal Control Evaluation

Multiple Choice Questions

1. An audit team's responsibility ould not in!ludeA. "esi#nin# !lient's internal !ontrols.$. "o!umentation o% understandin# o% a !lient's internal !ontrols.C. Communi!atin# internal !ontrol de%i!ien!ies.". Assessin# the e%%e!tiveness a !lient's internal !ontrols.

&. he appropriate separation o% duties does not in!ludeA. Authori(ation to e)e!ute transa!tions.

$. Re!ordin# o% transa!tions.C. Custody o% assets involved in the transa!tions.". "ata preparation.

*. A set o% !hara!teristi!s that helps to de%ine a seriousness about employees' attitudes aboutthe !ontrol a!tivities in a !ompany is re%erred to asA. +ana#ement assertions.$. he !ontrol environment.C. Control risk assessment.

". ,un!tional responsibilities.

. Control a!tivities intended to ensure that transa!tions are re!orded in the ri#ht period aredesi#ned to a!hieve the A$ assertion o%A. /!!urren!e.$. A!!ura!y.C. aluation or allo!ation.". Cuto%%.

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5. ound internal !ontrol !an des!ribed as separatin# all o% the %olloin# duties andresponsibilities e)!ept %orA. ransa!tion authori(ation.$. Re!ordkeepin#.

C. Custody o% or dire!t a!!ess to assets.". 2irin# o% employees.

3. A%ter obtainin# an understandin# o% the entity's internal !ontrol and assessin# !ontrol riskan auditor o% a non publi! !ompany de!ided not to per%orm additional tests o% !ontrols. heauditor most likely !on!luded that theA. Additional eviden!e to support a %urther redu!tion in !ontrol risk as not !ost bene%i!ial.$. Assessed level o% inherent risk e)!eeded the assessed level o% !ontrol risk.C. Internal !ontrol stru!ture as properly desi#ned and 4usti%iably may be relied on.

". Eviden!e obtainable throu#h tests o% !ontrols ould not support an in!reased level o%!ontrol risk.

. Re#ardless o% the assessed level o% !ontrol risk an auditor o% a non publi! !ompany ouldper%orm someA. ests o% !ontrols to determine the e%%e!tiveness o% internal !ontrol poli!ies.$. Analyti!al pro!edures to veri%y the desi#n o% internal !ontrol a!tivities.C. ubstantive tests to restri!t dete!tion risk %or si#ni%i!ant transa!tion !lasses.". "ual purpose tests to evaluate both the risk o% monetary misstatement and preliminary

!ontrol risk.

6. he 7obtainin# an understandin#7 ork phase 89hase 1 o% internal !ontrol evaluationould not #ive auditors an overall a!;uaintan!e ith the !lient'sA. Control environment.$. In%ormation and !ommuni!ation system.C. Control a!tivity e%%e!tiveness.". +onitorin# a!tivities.

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eneral Control?A. Che!k di#it.$. Run-to-run totals.C. "istribution o% !omputeri(ed output.

". eparation o% duties in the I department.

10. Control stren#ths and eaknesses should be do!umented in audit do!umentationsometimes !alledA. @uestionnaires narratives and %lo!harts.$. $rid#e orkin# papers.C. Communi!ations o% si#ni%i!ant de%i!ien!ies.". Internal !ontrol letters.

11. he internal !ontrol in small business is hi#hly dependent on theA. eparation o% %un!tional responsibilities.$. Comple)ity o% the !lient's internal !ontrols.C. /ner-mana#er's !ompeten!e ethi!s and inte#rity.". $ondin# o% employees.

1&. =hi!h o% the %olloin# is not an input !ontrol a!tivity?

A. Reasonableness tests.$. Re!ord !ounts.C. ,inan!ial totals.". 2ash totals.

1*. A sales !lerk enters a !ustomer's si)-number !ustomer a!!ount. he !omputer pro#ramuses the %irst %ive numbers to !al!ulate a si)th number. his resultin# number is then!ompared to the si)th number entered by the sales !lerk. his is an e)ample o% aA. A valid !hara!ter test.

$. +issin# data test.C. Reasonableness test.". Che!k di#it.

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1. =hi!h o% the %olloin# is the least important audit reason %or the auditor's obtainin# anunderstandin# o% a !ompany's internal !ontrol?A. o serve as a basis %or !onstru!tive su##estions.$. o plan subse;uent substantive tests.

C. o identi%y types o% potential misstatements.". o !onsider %a!tors that a%%e!t the risk o% material misstatement.

15. ra!in# bills o% ladin# to sales invoi!es provides eviden!e thatA. hipments to !ustomers ere invoi!ed.$. hipments to !ustomers ere re!orded as sales.C. Re!orded sales ere shipped.". Invoi!ed sales ere re!orded as sales.

13. =hi!h o% the %olloin# !lient internal !ontrol a!tivities is not usually per%ormed in thetreasurer's department?A. eri%yin# the a!!ura!y o% !he!ks and vou!hers.$. Controllin# the mailin# o% !he!ks to vendors.C. Approvin# vendors' invoi!es %or payment.". Can!elin# payment vou!hers hen paid.

1. =hi!h o% the %olloin# audit pro!edures most likely ould provide an auditor ith themost assuran!e about the e%%e!tiveness o% the operation o% an entity's internal !ontrol?A. Con%irmation ith outside parties.$. In;uiry o% !lient personnel.C. u!!ess%ul re-per%orman!e o% the !ontrol pro!edure.". /bservation o% !lient personnel.

16. =hen obtainin# an understandin# o% an entity's internal !ontrol in a %inan!ial statementaudit an auditor is not obli#ated to

A. "etermine hether the !ontrol a!tivities have been pla!ed in operation.$. 9er%orm pro!edures to understand the desi#n o% the internal !ontrol system.C. "o!ument the understandin# o% the !ompany's internal !ontrol system.". ear!h %or si#ni%i!ant de%i!ien!ies in the operation o% the internal !ontrol system.

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&. =hen auditin# %inan!ial statements o% a private !ompany the minimum ork an auditormust per%orm in !onne!tion ith a !ompany's internal !ontrol is best des!ribed by hi!h o%the %olloin# statements:A. 9er%orm e)haustive tests o% a!!ountin# !ontrols and evaluate the !ompany's !ontrol system

e%%e!tiveness.$. "etermine hether the !ompany's !ontrol poli!ies are desi#ned ell enou#h to preventmaterial errors.C. 9repare auditin# orkin# papers do!umentin# the understandin# o% the !ompany's internal!ontrol.". "esi#n pro!edures to sear!h %or si#ni%i!ant de%i!ien!ies in the a!tual operation o% the!ompany's internal !ontrol.

&5. =hi!h o% the %olloin# ould likely be !lassi%ied as a material eakness?

A. Absen!e o% appropriate separation o% duties.$. Absen!e o% appropriate revies and approvals o% transa!tions.C. Eviden!e o% %ailure o% !ontrol a!tivities.". Ine%%e!tive oversi#ht o% the %inan!ial reportin# pro!ess by the !ompany's audit !ommittee.

&3. I% a !ontrol total ere to be !omputed on ea!h o% the %olloin# data items hi!h ouldbest be identi%ied as a hash total %or a payroll I appli!ation?A. 2ours orked.$. otal debits and total !redits.

C. Bet pay.". "epartment numbers.

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&. >enerally a!!epted auditin# standards 8>AA #ive auditors !onsiderable dis!retion tode!ide the amount o% ork re;uired to satis%y auditin# standards #uidin# internal !ontrolevaluation and related audit plannin#. =hi!h o% the des!riptions belo best e)presses theminimum amount o% ork permitted by >AA %or nonpubli! !ompanies?

A. "o not obtain an understandin# o% !lient environment a!!ountin# or !ontrol a!tivities. "onot do!ument the de!ision to assess !ontrol risk at ma)imum. 9er%orm 100 substantive auditon all %inan!ial statement transa!tions and balan!es.$. /btain an understandin# o% !lient environment a!!ountin# and !ontrol a!tivities."o!ument the de!ision to assess !ontrol risk at ma)imum. 9er%orm an e)tensive but not 100substantive audit on %inan!ial statement transa!tions and balan!es.C. /btain an understandin# o% !lient environment a!!ountin# and !ontrol a!tivities andper%orm detail tests o% !ontrols. "o!ument the de!ision to assess !ontrol risk belo thema)imum. 9er%orm restri!ted substantive audit on %inan!ial statement transa!tions andbalan!es !onsiderin# the !ontrol risk assessment.". /btain an understandin# o% !lient environment a!!ountin# and !ontrol a!tivities and

per%orm detail tests o% !ontrols. "o!ument the de!ision to assess !ontrol risk at (ero. 9er%ormno substantive audit on %inan!ial statement transa!tions and balan!es sin!e (ero !ontrol riskmeans that no errors or %raud !an rea!h the a!!ounts.

&6. 9roper separation o% duties redu!es the opportunities to allo persons to be in positions tobothA. Dournali(e entries and prepare %inan!ial statements.$. Re!ord !ash re!eipts and !ash disbursements.C. Establish internal !ontrols and authori(e transa!tions.

". 9erpetuate and !on!eal errors and %raud.

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*0. =hi!h o% the %olloin# is a step in an auditor's de!ision to assess !ontrol risk at belo thema)imum?A. Apply analyti!al pro!edures to both %inan!ial data and non%inan!ial in%ormation to dete!t!onditions that may indi!ate eak !ontrols.

$. 9er%orm tests o% details o% transa!tions and a!!ount balan!es to identi%y potential errors and%raud.C. Identi%y spe!i%i! internal !ontrol poli!ies and a!tivities that are likely to dete!t or preventmaterial misstatements.". "o!ument that the additional audit e%%ort to per%orm tests o% !ontrols e)!eeds the potentialredu!tion in substantive testin#.

*1. =hi!h o% the %olloin# is not an ob4e!tive o% internal !ontrols over %inan!ial reportin# asde%ined by the arbanes-/)ley A!t?

A. 9oli!ies and pro!edures that pertain to the maintenan!e o% re!ords that in reasonable detaila!!urately and %airly re%le!t the transa!tions and dispositions o% the assets o% the re#istrant.$. 9oli!ies and pro!edures that provide reasonable assuran!e that transa!tions are re!orded asne!essary to permit preparation o% %inan!ial statements in a!!ordan!e ith #enerally a!!epteda!!ountin# prin!iples and re!eipts and e)penditures o% the re#istrant are bein# made only ina!!ordan!e ith authori(ations o% mana#ement and dire!tors o% the re#istrant.C. 9oli!ies and pro!edures that provide reasonable assuran!e re#ardin# the !omplian!e ithappli!able las and re#ulations.". 9oli!ies and pro!edures that provide reasonable assuran!e re#ardin# prevention or timelydete!tion o% unauthori(ed a!;uisition use or disposition o% the re#istrant's assets that !ouldhave a material e%%e!t on the %inan!ial statements.

*&. =hi!h o% the %olloin# most likely ould not be !onsidered an inherent limitation o% thepotential e%%e!tiveness o% an entity's internal !ontrols?A. In!ompatible duties.$. +ana#ement override.C. +istakes in 4ud#ment.". Collusion amon# employees.

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**. As part o% understandin# the internal !ontrol an auditor is not re;uired toA. Consider %a!tors that a%%e!t the risk o% material misstatement.$. As!ertain hether internal !ontrol poli!ies and a!tivities have been pla!ed in operation.C. Identi%y the types o% potential misstatements that !an o!!ur.

". /btain knoled#e about the operatin# e%%e!tiveness o% the !lient's internal !ontrola!tivities.

*. he primary ob4e!tive o% pro!edures per%ormed to obtain an understandin# o% the entity'sinternal !ontrol is to provide an auditor ithA. noled#e ne!essary %or audit plannin#.$. Evidential matter to use in assessin# inherent risk.C. A basis %or modi%yin# tests o% !ontrols.". An evaluation o% the !onsisten!y o% appli!ation o% mana#ement's poli!ies.

*5. he overall attitude and aareness o% an entity's board o% dire!tors !on!ernin# theimportan!e o% the !lient's internal !ontrol usually is re%le!ted in itsA. Computer-based !ontrol a!tivities.$. ystem o% separation o% duties.C. Control environment.". a%e#uards over a!!ess to assets.

*3. A%ter obtainin# an understandin# o% the internal !ontrols and assessin# !ontrol risk on theaudit o% a non publi! !ompany an auditor de!ided to per%orm tests o% !ontrols. he auditormost likely de!ided thatA. It ould be e%%i!ient to per%orm tests o% !ontrols that ould result in a redu!tion in plannedsubstantive tests.$. Additional eviden!e to support a %urther redu!tion in !ontrol risk is not available.C. An in!rease in the assessed level o% !ontrol risk is 4usti%ied %or !ertain %inan!ial statementassertions.". here ere many internal !ontrol eaknesses that !ould allo errors to enter thea!!ountin# system.

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*. In an audit o% %inan!ial statements o% a non publi! !ompany in a!!ordan!e ith #enerallya!!epted auditin# standards an auditor is re;uired toA. "o!ument the auditor's understandin# o% the entity's internal !ontrol.$. ear!h %or si#ni%i!ant de%i!ien!ies in the operation o% the internal !ontrols.

C. 9er%orm tests o% !ontrols to evaluate the e%%e!tiveness o% the entity's a!!ountin# system.". "etermine hether !ontrol a!tivities are suitably desi#ned to prevent or dete!t materialmisstatements.

*6. In testin# !ontrol a!tivities an auditor ordinarily sele!ts %rom a variety o% te!hni;uesin!ludin#A. In;uiry and analyti!al pro!edures.$. Reper%orman!e and observation.C. Comparison and !on%irmation.

". Inspe!tion and veri%i!ation.

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1. +ana#ement's report on internal !ontrols must in!lude ea!h o% the %olloin# e)!eptA. A statement that mana#ement is responsible %or establishin# and maintainin# ade;uateinternal !ontrol over %inan!ial reportin#.$. A statement identi%yin# the %rameork mana#ement uses to evaluate the e%%e!tiveness o%

the !ompany's internal !ontrol.C. A statement providin# mana#ement's assessment o% the e%%e!tiveness o% the !ompany'sinternal !ontrol.". A statement providin# mana#ement's evaluation o% the !ompany's !ontrol environment.

&. =hi!h o% the %olloin# areas !an e)ternal auditors rely on internal auditors' ork inauditin# internal !ontrols?A. Evaluation o% the auditin# environment.$. imited do!umentation and testin# o% internal !ontrol a!tivities.

C. All testin# o% the operatin# e%%e!tiveness o% internal !ontrol a!tivities.". As the prin!iple eviden!e %or the e)ternal auditors' opinion.

*. he most important %undamental !omponent o% an entity's internal !ontrol isRe%er o: 05-*A. E%%e!tiveness and e%%i!ien!y o% operations.$. 9eople ho operate the !ontrol system.C. Reliability o% %inan!ial reportin#.". Complian!e ith appli!able las and re#ulations.

. he primary purpose %or obtainin# an understandin# o% a non publi! audit !lient's internal!ontrol is toRe%er o: 05-*A. 9rovide a basis %or makin# !onstru!tive su##estions in a mana#ement letter.$. "etermine the nature timin# and e)tent o% tests to be per%ormed in the audit.C. /btain su%%i!ient appropriate audit eviden!e to a%%ord a reasonable basis %or an opinion onthe %inan!ial statements under e)amination.". 9rovide in%ormation %or a !ommuni!ation o% internal !ontrol-related matters to

mana#ement.

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5. E%%e!tiveness o% audit pro!edures ould be redu!ed byRe%er o: 05-*A. ele!tin# lar#er sample si(es %or audit.$. 9er%ormin# audit pro!edures at the %is!al year-end date as opposed to the interim period.

C. "e!idin# to obtain e)ternal eviden!e instead o% internal eviden!e.". 9er%ormin# pro!edures durin# the interim period as opposed to at the %is!al year-end date.

3. ,inan!ial totals !an be used %orRe%er o: 05-*A. Input !ontrols.$. 9ro!essin# !ontrols.C. /utput !ontrols.". All o% the above.

. =hi!h o% the %olloin# is an appli!ation !ontrol?Re%er o: 05-*A. o!ked doors to the !entral server.$. Chan#e !ontrols over ne pro#rams.C. $a!kup !ontrols.". An output !ontrol department that ensures that reports #o to authori(ed re!ipients.

6. =hi!h o% the %olloin# is a preventive !ontrol?Re%er o: 05-*A. A re!on!iliation o% a bank a!!ount.$. Internal auditors re!al!ulatin# a sample o% payroll entries.C. eparation o% duties beteen the payroll and personnel departments.". Fse o% hash totals %or the payroll input sheet.

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5*. A !lient's %inan!ial !ontrol a!tivity isRe%er o: 05-*A. An a!tion taken by auditors to obtain eviden!e.$. An a!tion taken by !lient personnel %or the purpose o% preventin# dete!tin# and !orre!tin#

errors and %rauds in transa!tions to eliminate or miti#ate risks identi%ied by the !ompany.C. A method %or re!ordin# summari(in# and reportin# %inan!ial in%ormation.". he %un!tionin# o% the board o% dire!tors in support o% its audit !ommittee.

5. =hen plannin# an audit o% internal !ontrols underAS 5 the audit team shouldRe%er o: 05-*A. Identi%y si#ni%i!ant a!!ounts lo!ations and assertions.$. Condu!t a alkthrou#h o% the internal !ontrol pro!ess.C. +ake in;uiries o% employees re#ardin# the e)isten!e o% !ontrol a!tivities.

". Re-per%orm !ontrol a!tivities per%ormed by !lient employees to determine theire%%e!tiveness.

55. A material eakness is a situation in hi!hRe%er o: 05-*A. It is probable that an immaterial %inan!ial statement misstatement ould not be dete!ted ona timely basis$. here is a remote likelihood that a material misstatement ould be dete!ted on a timelybasis.

C. It is reasonably possible that a material misstatement ould not be dete!ted on a timelybasis.". It is reasonably possible that an immaterial misstatement ould not be dete!ted on a timelybasis.

53. otals o% amounts in !omputer-re!orded data %ields that are not usually added but are usedonly %or data pro!essin# !ontrol purposes are !alledRe%er o: 05-*A. Re!ord totals.

$. 2ash totals.C. 9ro!essin# data totals.". ,ield totals.

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5. =hi!h o% the %olloin# does nota!!urately summari(e auditors' re;uirements re#ardin#internal !ontrol?

Re%er o: 05-*A. /ption A$. /ption $C. /ption C

". /ption "

56.AS 5re;uires auditors o% publi! !ompanies to audit internal !ontrols overRe%er o: 05-*A. /perations.$. Complian!e ith re#ulations.C. ,inan!ial reportin#.". All o% the above.

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30.AS 5re;uires auditors to testRe%er o: 05-*A. /peratin# e%%e!tiveness only.$. "esi#n e%%e!tiveness only.

C. $oth operatin# and desi#n e%%e!tiveness.". Beither operatin# nor desi#n e%%e!tiveness.

31. =hi!h o% the %olloin# ould probably notbe !onsidered an indi!ation o% a materialeakness?Re%er o: 05-*A. Eviden!e o% a material misstatement.$. Ine%%e!tive oversi#ht by the audit !ommittee.C. An immaterial %raud !ommitted by senior mana#ement.

". /verprodu!tion by the manu%a!turin# plant.

3&. =hi!h report ould not be appropriate %or a publi! a!!ountin# %irm to provide on%inan!ial reportin# !ontrols?Re%er o: 05-*A. Fn;uali%iedGno material eaknesses %ound.$. "is!laimer o% opinionGunable to per%orm all ne!essary pro!edures.C. "is!laimer o% opinionGsi#ni%i!ant de%i!ien!ies e)ist.". AdverseGmaterial eaknesses e)ist.

3*. he purpose o% separatin# the duties o% hirin# personnel and distributin# payroll !he!ks isto separate theRe%er o: 05-*A. Authori(ation o% transa!tions %rom the !ustody o% related assets.$. /perational responsibility %rom the re!ord-keepin# responsibility.C. 2uman resour!es %un!tion %rom the !ontrollership %un!tion.". Administrative !ontrols %rom the internal a!!ountin# !ontrols.

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3. =hi!h o% the %olloin# statements is nottrue ith respe!t to the auditors' report oninternal !ontrol over %inan!ial reportin#?Re%er o: 05-*A. he report ill be dated as o% the balan!e sheet date.

$. he report ill e)press an opinion on the e%%e!tiveness o% internal !ontrol over %inan!ialreportin#.C. I% one or more material eaknesses e)ist the auditor ill issue an adverse opinion.". he report may be presented ith the report on the entity's %inan!ial statements as a!ombined report.

35. I% the auditors en!ounter a si#ni%i!ant s!ope limitation in evaluatin# a publi! !ompany'sinternal !ontrol over %inan!ial reportin# hi!h o% the %olloin# types o% opinions on thee%%e!tiveness o% the !ompany's internal !ontrol over %inan!ial reportin# ould be appropriate?

Re%er o: 05-*A. Fn;uali%ied opinion or adverse opinion.$. @uali%ied opinion or adverse opinion.C. Fn;uali%ied opinion or dis!laimer o% opinion.". "is!laimer o% opinion.

33. =hi!h o% the %olloin# in%ormation ould be in!luded in the introdu!tory para#raph o%the auditors' report on internal !ontrol over %inan!ial reportin# i% the report is presentedseparately %rom the auditors' report on the entity's %inan!ial statements?

Re%er o: 05-*A. he %a!t that the auditors !ondu!ted an audit o% the entity's %inan!ial statements.$. he de%inition o% a material eakness in internal !ontrol over %inan!ial reportin#.C. tatements identi%yin# the responsibility o% the auditors and mana#ement %or internal!ontrol over %inan!ial reportin#.". A re%eren!e to the auditors' report and opinion on the entity's %inan!ial statements.

@uestion also %ound in tudy >uide

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3. =hi!h o% the %olloin# is not one o% C//'s ob4e!tives %or internal !ontrols?A. E%%i!ien!y and e%%e!tiveness o% operations.$. Reliability o% %inan!ial reportin#.C. +a)imi(ation o% pro%it.

". Complian!e ith appli!able las and re#ulations.

36. =hi!h o% the %olloin# is not one o% the elements o% the !ontrol environment?A. 9ro!ess %or re!ordin# transa!tions and preparin# %inan!ial statements.$. 9resen!e o% an internal auditin# %un!tion.C. A !ompany's or#ani(ational stru!ture.". +ethods o% assi#nin# authority and responsibility.

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&. A!!ountin# %or the numeri!al se;uen!e o% shippin# do!uments is a !ontrol pro!eduredesi#ned to a!hieve the internal !ontrol ob4e!tive o%A. alidity.$. Completeness.

C. A!!ountin#.". A!!ura!y.

*. Auditors obtain an understandin# o% the internal !ontrol throu#h all o% the %olloin#e)!eptA. 9revious e)perien!e ith the !ompany.$. Responses to in;uiries dire!ted to !lient personnel.C. A substantive testin# audit plan.". A 7alk-throu#h7 o% one or more transa!tions.

. he most e%%i!ient means o% #atherin# eviden!e about the internal !ontrol is to !ondu!t a%ormal intervie ith knoled#eable mana#ers andA. =rite a narrative des!ription o% ea!h important !ontrol.$. 9repare a %lo!hart illustratin# the internal !ontrol.C. 9repare a ell inde)ed %ile o% audit do!umentation.". Fse an internal !ontrol ;uestionnaire.

5. he %ive internal !ontrol !omponents do not in!ludeA. Control a!tivities.$. Risk assessment.C. +onitorin#.". Control risk.

3. A !omputeri(ed a!!ountin# system ould not in!lude hi!h o% the %olloin# amon# thepro!essin# !ontrol a!tivities?

A. imit and reasonableness tests.$. ,ile and operator !ontrols.C. +aster %ile !han#es.". Run-to-run total.

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. i#ni%i!ant de%i!ien!ies are de%ined as !onditions thatA. Could adversely a%%e!t the or#ani(ation's ability to initiate re!ord pro!ess and report%inan!ial data in the %inan!ial statements.$. Results in a reasonable possibility that a material misstatement e)ists in %inan!ial

statements.C. E)ists hen the desi#n or operation o% a !ontrol does not allo the !ompany's mana#ementor employees to dete!t or prevent misstatements in a timely %ashion.". Relates to either a ne!essary !ontrol that is missin# or an e)istin# !ontrol that is so poorlydesi#ned that it %ails to satis%y the !ontrol's ob4e!tive.

6.AS 5re;uires the audit team to do all the %olloin# e)!eptA. Evaluate the severity o% ea!h !ontrol de%i!ien!y that !omes to his or her attention.$. "o!ument the pro!ess used to determine si#ni%i!ant a!!ounts and dis!losures and ma4or

!lasses o% transa!tions.C. est all internal !ontrols in the !ompany.".AS 5re;uires all the above.

Matching Questions

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60. ,or ea!h o% the des!riptions belo mat!h the !orre!t !ontrol A to >.

1. se;uen!e tests9ro#rammed tests to ensure that illo#i!al

!onditions do not o!!ur. HHHH

&. limitreasonablenesstests

est that !he!ks data %ields %or appropriateplus or minus. HHHH

*. !he!k di#itest that !he!ks data %ields to see i% any are

blank. HHHH

. missin# data testsAn e)tra number ta##ed on to the end o% a

basi! identi%i!ation. HHHH

5. valid si#n testest that !an !he!k %or missin# do!uments in

a prenumbered series. HHHH

True / False Questions

@uestion also ,ound in tudy >uide

61. he primary reason %or !ondu!tin# an evaluation o% a !ompany's internal !ontrol is toprovide a basis %or !ommuni!atin# si#ni%i!ant de%i!ien!ies.rue ,alse

6&. he audit task o% !ontrol risk assessment involves %indin# out hat the !ompany does toprevent dete!t and !orre!t errors and %raud.rue ,alse

6*. he audit team is responsible %or the !lient's internal !ontrol.rue ,alse

6. he attitudes o% mana#ers and dire!tors are probably the most pervasive in%luen!es on the!ontrol environment.rue ,alse

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65. he most important %eature o% an internal !ontrol system is the people ho make thesystem ork.rue ,alse

63. A !ontrol a!tivity is an a!tion taken to prevent dete!t and !orre!t errors and %rauds intransa!tions.rue ,alse

6. he C// report indi!ates that internal !ontrol should be !onsidered a pro!ess not anend in itsel%.rue ,alse

66. Auditors o% publi! !ompanies do not need to determine the ;uality o% a !lient's internal!ontrolJ they only need to kno enou#h to plan the audit ork.rue ,alse

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uide

10. HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH are the set o%poli!ies and pro!edures that are desi#ned to insure that transa!tions are re!orded properly.HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

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105. HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH in internal!ontrol are matters the auditors believe should be !ommuni!ated to the !lients' audit!ommittee.HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

103. he audit team is responsible %or desi#nin# an evaluation o%HHHHHHHHHHHHHHHHHHHHHHHHHHHHH internal !ontrol systems andHHHHHHHHHHHHHHHHHHHHHHHHHHHHH the !ontrol HHHHHHHHHHHHHHHHHHHHHHHHHHHHH o% thatsystem.HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

10. he C// report identi%ies the ob4e!tives to be a!hieved by internal !ontrol as 81e%%e!tiveness and e%%i!ien!y o% HHHHHHHHHHHHHHHHHHHHHHHHHHHHH 8& reliability o%HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH and 8* !omplian!eith HHHHHHHHHHHHHHHHHHHHHHHHHHHHH and HHHHHHHHHHHHHHHHHHHHHHHHHHHHH.HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

106. HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH are spe!i%i!a!tions taken by a !lient's mana#ement and employees to help ensure that mana#ementdire!tives are !arried out.

HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

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111. In !onne!tion ith !ontrol a!tivities used in a !lient's internal !ontrol system aHHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH is a tally o% thenumber o% transa!tions submitted at a parti!ular time and it is used to determine hether theproper number as pro!essed in a data !onversion or !omputer a!!ountin# appli!ation.


11&. Control a!tivities in a !omputeri(ed a!!ountin# system may be !lassi%ied into to types--HHHHHHHHHHHHHHHHHHHHHHHHHHHHH !ontrols and HHHHHHHHHHHHHHHHHHHHHHHHHHHHH!ontrols.HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

11*. i#ni%i!ant de%i!ien!ies in internal !ontrol also in!lude the more serious !ondition !alleda HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH.HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

11. o redu!e the !ontrol risk level to a lo level auditors must determine 81 theHHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH o% !ompany!omplian!e ith !ontrol poli!ies and 8& the HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH o% !ompany !omplian!e.HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

115. Auditors per%orm HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH to determine hoell the !ompany's !ontrols a!tually %un!tioned durin# the period under audit.HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

113. he !on!ept o% HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH

re!o#ni(es that the !ost o% an entity's internal !ontrol should not e)!eed the bene%its that aree)pe!ted to be derived.HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

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11. In #atherin# eviden!e about the !lient's internal !ontrol auditors may use a 8nHHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH hi!h is a !he!klist o% internal !ontrol related;uestions.


116. HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH redu!e opportunities %or a person to be in a position toperpetrate and !on!eal errors and %rauds hen per%ormin# their normal duties.HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

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1&*. A material eakness results in a HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH that a HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH ould not be prevented or dete!ted on a timely basis.HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

Essa! Questions

1&. =hat is the di%%eren!e beteen an in%ormation te!hnolo#y #eneral !ontrol and anin%ormation te!hnolo#y appli!ation !ontrol?

1&5. =hat is the di%%eren!e beteen an internal !ontrol's desi#n e%%e!tiveness and itsoperatin# e%%e!tiveness?

1&3. ist several elements o% a !ompany's !ontrol environment.

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1&. ist and e)plain brie%ly the phases o% an internal !ontrol evaluation.

1&6. =hat are some o% the problems in establishin# an internal !ontrol system in smallbusiness?

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1*0. E)plain the di%%erent opinions that auditors !an issue %or an entity's internal !ontrol over%inan!ial reportin#.

1*1. Auditors are re;uired to obtain a su%%i!ient understandin# o% an entity's internal !ontrol.his understandin# is re;uired by the per%orman!e prin!iple o% >AA.Re;uired: A. =hat are some o% the #oals 8purposes %or !ondu!tin# an evaluation o% anentity's internal !ontrol?$. =hat audit ork is re;uired %or an auditor to assess !ontrol risk belo the 7ma)imum7

level?C. hould auditors alays try to obtain enou#h eviden!e to assess !ontrol risk belo the7ma)imum7 level? E)plain.

1*&. =hat are the si) steps auditors o% publi! !ompanies should use to audit internal !ontrolover %inan!ial reportin# 8IC/,R?

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1**. =hat !onstitutes a material eakness?

1*. =hat is the di%%eren!e beteen a si#ni%i!ant de%i!ien!y and a material eakness?

@uestion is also ,ound in tudy >uide

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1*5. Ea!h o% the %ive !ases illustrates spe!i%i! !ontrol a!tivities %rom a !lient's revenue !y!le8a!!ounts re!eivablesales. ,or ea!h o% the pro!edures 8a identi%y hi!h mana#ementassertions apply and 8b hat potential !ate#ory o% errors and %rauds !an be prevented.

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Chapter 05 Risk Assessment: Internal Control Evaluation Anser ey

Multiple Choice Questions

1. An audit team's responsibility ould not in!ludeA""esi#nin# !lient's internal !ontrols.$."o!umentation o% understandin# o% a !lient's internal !ontrols.C.Communi!atin# internal !ontrol de%i!ien!ies.".Assessin# the e%%e!tiveness a !lient's internal !ontrols.

/ri#inal

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: !no"ledge

#i$$iculty: %edium

&. he appropriate separation o% duties does not in!ludeA.Authori(ation to e)e!ute transa!tions.$.Re!ordin# o% transa!tions.

C.Custody o% assets involved in the transa!tions.#""ata preparation.

/ri#inal


#i$$iculty: &asy

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*. A set o% !hara!teristi!s that helps to de%ine a seriousness about employees' attitudes aboutthe !ontrol a!tivities in a !ompany is re%erred to asA.+ana#ement assertions."he !ontrol environment.

C.Control risk assessment.".,un!tional responsibilities.

/ri#inal


#i$$iculty: &asy

. Control a!tivities intended to ensure that transa!tions are re!orded in the ri#ht period aredesi#ned to a!hieve the A$ assertion o%A./!!urren!e.$.A!!ura!y.C.aluation or allo!ation.#"Cuto%%.

/ri#inal


#i$$iculty: &asy

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5. ound internal !ontrol !an des!ribed as separatin# all o% the %olloin# duties andresponsibilities e)!ept %orA.ransa!tion authori(ation.$.Re!ordkeepin#.

C.Custody o% or dire!t a!!ess to assets.#"2irin# o% employees.

/ri#inal


#i$$iculty: %edium

3. A%ter obtainin# an understandin# o% the entity's internal !ontrol and assessin# !ontrol riskan auditor o% a non publi! !ompany de!ided not to per%orm additional tests o% !ontrols. heauditor most likely !on!luded that theA"Additional eviden!e to support a %urther redu!tion in !ontrol risk as not !ost bene%i!ial.$.Assessed level o% inherent risk e)!eeded the assessed level o% !ontrol risk.C.Internal !ontrol stru!ture as properly desi#ned and 4usti%iably may be relied on.".Eviden!e obtainable throu#h tests o% !ontrols ould not support an in!reased level o%!ontrol risk.

AIC9A

AACSB: AnalyticAICPA BB: Resource %anagementAICPA FN: Ris' AnalysisBlooms: A((lication

#i$$iculty: )ard

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. Re#ardless o% the assessed level o% !ontrol risk an auditor o% a non publi! !ompany ouldper%orm someA.ests o% !ontrols to determine the e%%e!tiveness o% internal !ontrol poli!ies.$.Analyti!al pro!edures to veri%y the desi#n o% internal !ontrol a!tivities.

C"ubstantive tests to restri!t dete!tion risk %or si#ni%i!ant transa!tion !lasses."."ual purpose tests to evaluate both the risk o% monetary misstatement and preliminary!ontrol risk.

AIC9A

AACSB: AnalyticAICPA BB: LegalAICPA FN: Ris' AnalysisBlooms: !no"ledge

#i$$iculty: )ard

6. he 7obtainin# an understandin#7 ork phase 89hase 1 o% internal !ontrol evaluationould not #ive auditors an overall a!;uaintan!e ith the !lient'sA.Control environment.$.In%ormation and !ommuni!ation system.C"Control a!tivity e%%e!tiveness.".+onitorin# a!tivities.

/ri#inal


#i$$iculty: %edium

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eneral Control?A.Che!k di#it.$.Run-to-run totals.C."istribution o% !omputeri(ed output.

#"eparation o% duties in the I department.

/ri#inal

AACSB: *echnologyAICPA BB: Le+eraging *echnologyAICPA FN: Le+eraging *echnologyBlooms: !no"ledge

#i$$iculty: &asy

10. Control stren#ths and eaknesses should be do!umented in audit do!umentationsometimes !alledA.@uestionnaires narratives and %lo!harts."$rid#e orkin# papers.C.Communi!ations o% si#ni%i!ant de%i!ien!ies.".Internal !ontrol letters.

/ri#inal

AACSB: Analytic

AICPA BB: LegalAICPA FN: ResearchBlooms: !no"ledge

#i$$iculty: %edium

11. he internal !ontrol in small business is hi#hly dependent on theA.eparation o% %un!tional responsibilities.$.Comple)ity o% the !lient's internal !ontrols.C"/ner-mana#er's !ompeten!e ethi!s and inte#rity.".$ondin# o% employees.

/ri#inal


#i$$iculty: %edium

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1&. =hi!h o% the %olloin# is not an input !ontrol a!tivity?A"Reasonableness tests.$.Re!ord !ounts.C.,inan!ial totals.

".2ash totals.

/ri#inal


#i$$iculty: %edium

1*. A sales !lerk enters a !ustomer's si)-number !ustomer a!!ount. he !omputer pro#ramuses the %irst %ive numbers to !al!ulate a si)th number. his resultin# number is then!ompared to the si)th number entered by the sales !lerk. his is an e)ample o% aA.A valid !hara!ter test.$.+issin# data test.C.Reasonableness test.#"Che!k di#it.

/ri#inal


#i$$iculty: %edium

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1. =hi!h o% the %olloin# is the least important audit reason %or the auditor's obtainin# anunderstandin# o% a !ompany's internal !ontrol?A"o serve as a basis %or !onstru!tive su##estions.$.o plan subse;uent substantive tests.

C.o identi%y types o% potential misstatements.".o !onsider %a!tors that a%%e!t the risk o% material misstatement.

/ri#inal

AACSB: AnalyticAICPA BB: LegalAICPA FN: Ris' AnalysisBlooms: Com(rehension

#i$$iculty: %edium

15. ra!in# bills o% ladin# to sales invoi!es provides eviden!e thatA"hipments to !ustomers ere invoi!ed.$.hipments to !ustomers ere re!orded as sales.C.Re!orded sales ere shipped.".Invoi!ed sales ere re!orded as sales.

/ri#inal

AACSB: Analytic

AICPA BB: Critical *hin'ingAICPA FN: #ecision %a'ingBlooms: !no"ledge

#i$$iculty: %edium

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13. =hi!h o% the %olloin# !lient internal !ontrol a!tivities is not usually per%ormed in thetreasurer's department?A.eri%yin# the a!!ura!y o% !he!ks and vou!hers.$.Controllin# the mailin# o% !he!ks to vendors.

C"Approvin# vendors' invoi!es %or payment.".Can!elin# payment vou!hers hen paid.

/ri#inal

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: A((lication

#i$$iculty: %edium

1. =hi!h o% the %olloin# audit pro!edures most likely ould provide an auditor ith themost assuran!e about the e%%e!tiveness o% the operation o% an entity's internal !ontrol?A.Con%irmation ith outside parties.$.In;uiry o% !lient personnel.C"u!!ess%ul re-per%orman!e o% the !ontrol pro!edure."./bservation o% !lient personnel.

/ri#inal


#i$$iculty: %edium

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16. =hen obtainin# an understandin# o% an entity's internal !ontrol in a %inan!ial statementaudit an auditor is not obli#ated toA."etermine hether the !ontrol a!tivities have been pla!ed in operation.$.9er%orm pro!edures to understand the desi#n o% the internal !ontrol system.

C."o!ument the understandin# o% the !ompany's internal !ontrol system.#"ear!h %or si#ni%i!ant de%i!ien!ies in the operation o% the internal !ontrol system.

/ri#inal


#i$$iculty: %edium

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&0. I% auditors assess !ontrol risk at the ma)imum level they ill tend toA.9er%orm a #reat deal o% additional tests o% !ontrols."9er%orm a #reat deal o% substantive testin# durin# the audit.C.9er%orm substantive tests at an interim date.

".9er%orm more audit pro!edures usin# internal eviden!e.

/ri#inal

AACSB: AnalyticAICPA BB: LegalAICPA FN: Ris' AnalysisBlooms: A((lication

#i$$iculty: &asy

&1. he ultimate purpose o% assessin# !ontrol risk is to !ontribute to the auditor's evaluation o%theA.,a!tors that raise doubts about the auditability o% the %inan!ial statements.$./peratin# e%%e!tiveness o% internal !ontrol poli!ies and pro!edures.C"Risk that material misstatements e)ist in the %inan!ial statements.".9ossibility that the nature and e)tent o% substantive tests may be redu!ed.

AIC9A

AACSB: Analytic

AICPA BB: LegalAICPA FN: Ris' AnalysisBlooms: !no"ledge

#i$$iculty: %edium

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&&. =hen the audit team in!reases the planned assessed level o% !ontrol risk be!ause !ertain!ontrol a!tivities ere determined to be ine%%e!tive the audit team ould most likely in!reasetheA"E)tent o% tests o% details.

$.evel o% inherent risk.C.E)tent o% tests o% !ontrols.".evel o% dete!tion risk.

AIC9A


#i$$iculty: %edium

&*. In !omputer systems the in%ormation te!hnolo#y #eneral !ontrols 8I>C ould notin!ludeA"9ro!essin# !ontrol a!tivities.$.eparation o% various !omputer system %un!tions.C."o!umentation o% the data pro!essin# system.".Control over physi!al a!!ess to !omputer hardare.

/ri#inal


#i$$iculty: %edium

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&3. I% a !ontrol total ere to be !omputed on ea!h o% the %olloin# data items hi!h ouldbest be identi%ied as a hash total %or a payroll I appli!ation?A.2ours orked.$.otal debits and total !redits.

C.Bet pay.#""epartment numbers.

AIC9A


#i$$iculty: %edium

&. >enerally a!!epted auditin# standards 8>AA #ive auditors !onsiderable dis!retion tode!ide the amount o% ork re;uired to satis%y auditin# standards #uidin# internal !ontrolevaluation and related audit plannin#. =hi!h o% the des!riptions belo best e)presses theminimum amount o% ork permitted by >AA %or nonpubli! !ompanies?A."o not obtain an understandin# o% !lient environment a!!ountin# or !ontrol a!tivities. "onot do!ument the de!ision to assess !ontrol risk at ma)imum. 9er%orm 100 substantive auditon all %inan!ial statement transa!tions and balan!es."/btain an understandin# o% !lient environment a!!ountin# and !ontrol a!tivities."o!ument the de!ision to assess !ontrol risk at ma)imum. 9er%orm an e)tensive but not 100substantive audit on %inan!ial statement transa!tions and balan!es.

C./btain an understandin# o% !lient environment a!!ountin# and !ontrol a!tivities andper%orm detail tests o% !ontrols. "o!ument the de!ision to assess !ontrol risk belo thema)imum. 9er%orm restri!ted substantive audit on %inan!ial statement transa!tions andbalan!es !onsiderin# the !ontrol risk assessment."./btain an understandin# o% !lient environment a!!ountin# and !ontrol a!tivities andper%orm detail tests o% !ontrols. "o!ument the de!ision to assess !ontrol risk at (ero. 9er%ormno substantive audit on %inan!ial statement transa!tions and balan!es sin!e (ero !ontrol riskmeans that no errors or %raud !an rea!h the a!!ounts.

/ri#inal


#i$$iculty: %edium

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&6. 9roper separation o% duties redu!es the opportunities to allo persons to be in positions tobothA.Dournali(e entries and prepare %inan!ial statements.$.Re!ord !ash re!eipts and !ash disbursements.

C.Establish internal !ontrols and authori(e transa!tions.#"9erpetuate and !on!eal errors and %raud.

AIC9A


#i$$iculty: %edium

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*0. =hi!h o% the %olloin# is a step in an auditor's de!ision to assess !ontrol risk at belo thema)imum?A.Apply analyti!al pro!edures to both %inan!ial data and non%inan!ial in%ormation to dete!t!onditions that may indi!ate eak !ontrols.

$.9er%orm tests o% details o% transa!tions and a!!ount balan!es to identi%y potential errors and%raud.C"Identi%y spe!i%i! internal !ontrol poli!ies and a!tivities that are likely to dete!t or preventmaterial misstatements."."o!ument that the additional audit e%%ort to per%orm tests o% !ontrols e)!eeds the potentialredu!tion in substantive testin#.

AIC9A

AACSB: Analytic

AICPA BB: LegalAICPA FN: Ris' AnalysisBlooms: !no"ledge

#i$$iculty: )ard

*1. =hi!h o% the %olloin# is not an ob4e!tive o% internal !ontrols over %inan!ial reportin# asde%ined by the arbanes-/)ley A!t?A.9oli!ies and pro!edures that pertain to the maintenan!e o% re!ords that in reasonable detaila!!urately and %airly re%le!t the transa!tions and dispositions o% the assets o% the re#istrant.$.9oli!ies and pro!edures that provide reasonable assuran!e that transa!tions are re!orded asne!essary to permit preparation o% %inan!ial statements in a!!ordan!e ith #enerally a!!epted

a!!ountin# prin!iples and re!eipts and e)penditures o% the re#istrant are bein# made only ina!!ordan!e ith authori(ations o% mana#ement and dire!tors o% the re#istrant.C"9oli!ies and pro!edures that provide reasonable assuran!e re#ardin# the !omplian!e ithappli!able las and re#ulations.".9oli!ies and pro!edures that provide reasonable assuran!e re#ardin# prevention or timelydete!tion o% unauthori(ed a!;uisition use or disposition o% the re#istrant's assets that !ouldhave a material e%%e!t on the %inan!ial statements.

AIC9A


#i$$iculty: %edium

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*&. =hi!h o% the %olloin# most likely ould not be !onsidered an inherent limitation o% thepotential e%%e!tiveness o% an entity's internal !ontrols?A"In!ompatible duties.$.+ana#ement override.

C.+istakes in 4ud#ment.".Collusion amon# employees.

AIC9A

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: Com(rehension

#i$$iculty: )ard

**. As part o% understandin# the internal !ontrol an auditor is not re;uired toA.Consider %a!tors that a%%e!t the risk o% material misstatement.$.As!ertain hether internal !ontrol poli!ies and a!tivities have been pla!ed in operation.C.Identi%y the types o% potential misstatements that !an o!!ur.#"/btain knoled#e about the operatin# e%%e!tiveness o% the !lient's internal !ontrola!tivities.

AIC9A


#i$$iculty: %edium

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*. he primary ob4e!tive o% pro!edures per%ormed to obtain an understandin# o% the entity'sinternal !ontrol is to provide an auditor ithA"noled#e ne!essary %or audit plannin#.$.Evidential matter to use in assessin# inherent risk.

C.A basis %or modi%yin# tests o% !ontrols.".An evaluation o% the !onsisten!y o% appli!ation o% mana#ement's poli!ies.

AIC9A


#i$$iculty: %edium

*5. he overall attitude and aareness o% an entity's board o% dire!tors !on!ernin# theimportan!e o% the !lient's internal !ontrol usually is re%le!ted in itsA.Computer-based !ontrol a!tivities.$.ystem o% separation o% duties.C"Control environment.".a%e#uards over a!!ess to assets.

AIC9A


#i$$iculty: &asy

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*3. A%ter obtainin# an understandin# o% the internal !ontrols and assessin# !ontrol risk on theaudit o% a non publi! !ompany an auditor de!ided to per%orm tests o% !ontrols. he auditormost likely de!ided thatA"It ould be e%%i!ient to per%orm tests o% !ontrols that ould result in a redu!tion in planned

substantive tests.$.Additional eviden!e to support a %urther redu!tion in !ontrol risk is not available.C.An in!rease in the assessed level o% !ontrol risk is 4usti%ied %or !ertain %inan!ial statementassertions.".here ere many internal !ontrol eaknesses that !ould allo errors to enter thea!!ountin# system.

AIC9A

AACSB: Analytic

AICPA BB: Critical *hin'ingAICPA FN: Ris' AnalysisBlooms: A((lication

#i$$iculty: %edium

*. In an audit o% %inan!ial statements o% a non publi! !ompany in a!!ordan!e ith #enerallya!!epted auditin# standards an auditor is re;uired toA""o!ument the auditor's understandin# o% the entity's internal !ontrol.$.ear!h %or si#ni%i!ant de%i!ien!ies in the operation o% the internal !ontrols.C.9er%orm tests o% !ontrols to evaluate the e%%e!tiveness o% the entity's a!!ountin# system."."etermine hether !ontrol a!tivities are suitably desi#ned to prevent or dete!t material

misstatements.

AIC9A


#i$$iculty: %edium

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*6. In testin# !ontrol a!tivities an auditor ordinarily sele!ts %rom a variety o% te!hni;uesin!ludin#A.In;uiry and analyti!al pro!edures."Reper%orman!e and observation.

C.Comparison and !on%irmation.".Inspe!tion and veri%i!ation.

/ri#inal


#i$$iculty: %edium

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0. A report on internal !ontrol e%%e!tiveness by the mana#ement team o% publi! !ompanies isre;uired byA"he arbanes-/)ley A!t o% &00&.$.he 9CA/$.

C.he AIC9A."./nly auditors are re;uired to report on internal !ontrol e%%e!tiveness.

/ri#inal


#i$$iculty: %edium

1. +ana#ement's report on internal !ontrols must in!lude ea!h o% the %olloin# e)!eptA.A statement that mana#ement is responsible %or establishin# and maintainin# ade;uateinternal !ontrol over %inan!ial reportin#.$.A statement identi%yin# the %rameork mana#ement uses to evaluate the e%%e!tiveness o%the !ompany's internal !ontrol.C.A statement providin# mana#ement's assessment o% the e%%e!tiveness o% the !ompany'sinternal !ontrol.#"A statement providin# mana#ement's evaluation o% the !ompany's !ontrol environment.

/ri#inal

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: Communication

#i$$iculty: %edium

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&. =hi!h o% the %olloin# areas !an e)ternal auditors rely on internal auditors' ork inauditin# internal !ontrols?A.Evaluation o% the auditin# environment."imited do!umentation and testin# o% internal !ontrol a!tivities.

C.All testin# o% the operatin# e%%e!tiveness o% internal !ontrol a!tivities.".As the prin!iple eviden!e %or the e)ternal auditors' opinion.

/ri#inal


#i$$iculty: %edium

*. he most important %undamental !omponent o% an entity's internal !ontrol isRe%er o: 05-*A.E%%e!tiveness and e%%i!ien!y o% operations."9eople ho operate the !ontrol system.C.Reliability o% %inan!ial reportin#.".Complian!e ith appli!able las and re#ulations.

/ri#inal


#i$$iculty: &asy

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. he primary purpose %or obtainin# an understandin# o% a non publi! audit !lient's internal!ontrol is toRe%er o: 05-*A.9rovide a basis %or makin# !onstru!tive su##estions in a mana#ement letter.

""etermine the nature timin# and e)tent o% tests to be per%ormed in the audit.C./btain su%%i!ient appropriate audit eviden!e to a%%ord a reasonable basis %or an opinion onthe %inan!ial statements under e)amination.".9rovide in%ormation %or a !ommuni!ation o% internal !ontrol-related matters tomana#ement.

/ri#inal

AACSB: AnalyticAICPA BB: Legal

AICPA FN: ResearchBlooms: !no"ledge#i$$iculty: %edium

5. E%%e!tiveness o% audit pro!edures ould be redu!ed byRe%er o: 05-*A.ele!tin# lar#er sample si(es %or audit.$.9er%ormin# audit pro!edures at the %is!al year-end date as opposed to the interim period.C."e!idin# to obtain e)ternal eviden!e instead o% internal eviden!e.#"9er%ormin# pro!edures durin# the interim period as opposed to at the %is!al year-end date.

/ri#inal


#i$$iculty: &asy

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3. ,inan!ial totals !an be used %orRe%er o: 05-*A.Input !ontrols.$.9ro!essin# !ontrols.

C./utput !ontrols.#"All o% the above.

/ri#inal


#i$$iculty: %edium

. =hi!h o% the %olloin# is an appli!ation !ontrol?Re%er o: 05-*A.o!ked doors to the !entral server.$.Chan#e !ontrols over ne pro#rams.C.$a!kup !ontrols.#"An output !ontrol department that ensures that reports #o to authori(ed re!ipients.

/ri#inal

AACSB: *echnologyAICPA BB: Le+eraging *echnologyAICPA FN: Le+eraging *echnologyBlooms: A((lication

#i$$iculty: %edium

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6. =hi!h o% the %olloin# is a preventive !ontrol?Re%er o: 05-*A.A re!on!iliation o% a bank a!!ount.$.Internal auditors re!al!ulatin# a sample o% payroll entries.

C"eparation o% duties beteen the payroll and personnel departments.".Fse o% hash totals %or the payroll input sheet.

/ri#inal


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50. =hi!h o% the %olloin# is a devi!e desi#ned to help the audit team obtain eviden!e aboutthe a!!ountin# and !ontrol a!tivities o% an audit !lient?Re%er o: 05-*A.A narrative memorandum des!ribin# the !ontrol system.

"An internal !ontrol ;uestionnaire.C.A %lo!hart o% the do!uments and pro!edures used by the !ompany.".All o% the above.

/ri#inal


#i$$iculty: &asy

51. A brid#e orkpaper shos the !onne!tion beteenRe%er o: 05-*A"Control evaluation %indin#s and subse;uent audit pro!edures.$.+ana#ement ob4e!tives and a!!ountin# system pro!edures.C.+ana#ement ob4e!tives and entity !ontrol a!tivities.".,inan!ial statement assertions and tests o% !ontrols.

/ri#inal


#i$$iculty: %edium

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5&. ests o% !ontrols in a >AA audit are re;uired %orRe%er o: 05-*A./btainin# eviden!e about the %inan!ial statement assertions.$.A!!omplishin# !ontrol over the o!!urren!e o% re!orded transa!tions.

C.Applyin# analyti!al pro!edures to %inan!ial statement balan!es.#"/btainin# eviden!e about the operatin# e%%e!tiveness o% !lient !ontrol a!tivities.

/ri#inal


#i$$iculty: &asy

5*. A !lient's %inan!ial !ontrol a!tivity isRe%er o: 05-*A.An a!tion taken by auditors to obtain eviden!e."An a!tion taken by !lient personnel %or the purpose o% preventin# dete!tin# and !orre!tin#errors and %rauds in transa!tions to eliminate or miti#ate risks identi%ied by the !ompany.C.A method %or re!ordin# summari(in# and reportin# %inan!ial in%ormation.".he %un!tionin# o% the board o% dire!tors in support o% its audit !ommittee.

/ri#inal


#i$$iculty: %edium

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5. =hen plannin# an audit o% internal !ontrols underAS 5 the audit team shouldRe%er o: 05-*A"Identi%y si#ni%i!ant a!!ounts lo!ations and assertions.$.Condu!t a alkthrou#h o% the internal !ontrol pro!ess.

C.+ake in;uiries o% employees re#ardin# the e)isten!e o% !ontrol a!tivities.".Re-per%orm !ontrol a!tivities per%ormed by !lient employees to determine theire%%e!tiveness.

/ri#inal


#i$$iculty: %edium

55. A material eakness is a situation in hi!hRe%er o: 05-*A.It is probable that an immaterial %inan!ial statement misstatement ould not be dete!ted ona timely basis$.here is a remote likelihood that a material misstatement ould be dete!ted on a timelybasis.C"It is reasonably possible that a material misstatement ould not be dete!ted on a timelybasis.".It is reasonably possible that an immaterial misstatement ould not be dete!ted on a timely

basis.

/ri#inal


#i$$iculty: %edium

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53. otals o% amounts in !omputer-re!orded data %ields that are not usually added but are usedonly %or data pro!essin# !ontrol purposes are !alledRe%er o: 05-*A.Re!ord totals.

"2ash totals.C.9ro!essin# data totals.".,ield totals.

/ri#inal


#i$$iculty: )ard

5. =hi!h o% the %olloin# does nota!!urately summari(e auditors' re;uirements re#ardin#internal !ontrol?

Re%er o: 05-*A./ption A$./ption $C./ption C#"/ption "

/ri#inal


#i$$iculty: )ard

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56.AS 5re;uires auditors o% publi! !ompanies to audit internal !ontrols overRe%er o: 05-*A./perations.$.Complian!e ith re#ulations.

C",inan!ial reportin#.".All o% the above.

/ri#inal


#i$$iculty: &asy

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30.AS 5re;uires auditors to testRe%er o: 05-*A./peratin# e%%e!tiveness only.$."esi#n e%%e!tiveness only.

C"$oth operatin# and desi#n e%%e!tiveness.".Beither operatin# nor desi#n e%%e!tiveness.

/ri#inal


#i$$iculty: &asy

31. =hi!h o% the %olloin# ould probably notbe !onsidered an indi!ation o% a materialeakness?Re%er o: 05-*A.Eviden!e o% a material misstatement.$.Ine%%e!tive oversi#ht by the audit !ommittee.C.An immaterial %raud !ommitted by senior mana#ement.#"/verprodu!tion by the manu%a!turin# plant.

/ri#inal


#i$$iculty: %edium

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3&. =hi!h report ould not be appropriate %or a publi! a!!ountin# %irm to provide on%inan!ial reportin# !ontrols?Re%er o: 05-*A.Fn;uali%iedGno material eaknesses %ound.

$."is!laimer o% opinionGunable to per%orm all ne!essary pro!edures.C""is!laimer o% opinionGsi#ni%i!ant de%i!ien!ies e)ist.".AdverseGmaterial eaknesses e)ist.

/ri#inal

AACSB: CommunicationAICPA BB: LegalAICPA FN: ResearchBlooms: !no"ledge

#i$$iculty: &asy

3*. he purpose o% separatin# the duties o% hirin# personnel and distributin# payroll !he!ks isto separate theRe%er o: 05-*A"Authori(ation o% transa!tions %rom the !ustody o% related assets.$./perational responsibility %rom the re!ord-keepin# responsibility.C.2uman resour!es %un!tion %rom the !ontrollership %un!tion.".Administrative !ontrols %rom the internal a!!ountin# !ontrols.

AIC9A adapted


#i$$iculty: &asy

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3. =hi!h o% the %olloin# statements is nottrue ith respe!t to the auditors' report oninternal !ontrol over %inan!ial reportin#?Re%er o: 05-*A"he report ill be dated as o% the balan!e sheet date.

$.he report ill e)press an opinion on the e%%e!tiveness o% internal !ontrol over %inan!ialreportin#.C.I% one or more material eaknesses e)ist the auditor ill issue an adverse opinion.".he report may be presented ith the report on the entity's %inan!ial statements as a!ombined report.

/ri#inal

AACSB: CommunicationAICPA BB: Legal

AICPA FN: ResearchBlooms: !no"ledge#i$$iculty: )ard

35. I% the auditors en!ounter a si#ni%i!ant s!ope limitation in evaluatin# a publi! !ompany'sinternal !ontrol over %inan!ial reportin# hi!h o% the %olloin# types o% opinions on thee%%e!tiveness o% the !ompany's internal !ontrol over %inan!ial reportin# ould be appropriate?Re%er o: 05-*A.Fn;uali%ied opinion or adverse opinion.$.@uali%ied opinion or adverse opinion.C.Fn;uali%ied opinion or dis!laimer o% opinion.

#""is!laimer o% opinion.

/ri#inal

AACSB: CommunicationAICPA BB: LegalAICPA FN: ResearchBlooms: A((lication

#i$$iculty: %edium

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33. =hi!h o% the %olloin# in%ormation ould be in!luded in the introdu!tory para#raph o%the auditors' report on internal !ontrol over %inan!ial reportin# i% the report is presentedseparately %rom the auditors' report on the entity's %inan!ial statements?Re%er o: 05-*

A.he %a!t that the auditors !ondu!ted an audit o% the entity's %inan!ial statements.$.he de%inition o% a material eakness in internal !ontrol over %inan!ial reportin#.C"tatements identi%yin# the responsibility o% the auditors and mana#ement %or internal!ontrol over %inan!ial reportin#.".A re%eren!e to the auditors' report and opinion on the entity's %inan!ial statements.

/ri#inal

AACSB: CommunicationAICPA BB: Legal

AICPA FN: ResearchBlooms: !no"ledge#i$$iculty: )ard

@uestion also %ound in tudy >uide

3. =hi!h o% the %olloin# is not one o% C//'s ob4e!tives %or internal !ontrols?A.E%%i!ien!y and e%%e!tiveness o% operations.$.Reliability o% %inan!ial reportin#.

C"+a)imi(ation o% pro%it.".Complian!e ith appli!able las and re#ulations.

/ri#inal


#i$$iculty: &asy

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36. =hi!h o% the %olloin# is not one o% the elements o% the !ontrol environment?A"9ro!ess %or re!ordin# transa!tions and preparin# %inan!ial statements.$.9resen!e o% an internal auditin# %un!tion.C.A !ompany's or#ani(ational stru!ture.

".+ethods o% assi#nin# authority and responsibility.

/ri#inal


#i$$iculty: %edium

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1. An a!tion taken to prevent dete!t and !orre!t errors and %rauds in transa!tions is re%erredto as aA.Control ob4e!tive.$.Risk assessment.

C."ual-purpose test.#"Control a!tivity.

/ri#inal


#i$$iculty: &asy

&. A!!ountin# %or the numeri!al se;uen!e o% shippin# do!uments is a !ontrol pro!eduredesi#ned to a!hieve the internal !ontrol ob4e!tive o%A.alidity."Completeness.C.A!!ountin#.".A!!ura!y.

/ri#inal

AACSB: AnalyticAICPA BB: LegalAICPA FN: ResearchBlooms: Com(rehension

#i$$iculty: &asy

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*. Auditors obtain an understandin# o% the internal !ontrol throu#h all o% the %olloin#e)!eptA.9revious e)perien!e ith the !ompany.$.Responses to in;uiries dire!ted to !lient personnel.

C"A substantive testin# audit plan.".A 7alk-throu#h7 o% one or more transa!tions.

/ri#inal


#i$$iculty: %edium

. he most e%%i!ient means o% #atherin# eviden!e about the internal !ontrol is to !ondu!t a%ormal intervie ith knoled#eable mana#ers andA.=rite a narrative des!ription o% ea!h important !ontrol.$.9repare a %lo!hart illustratin# the internal !ontrol.C.9repare a ell inde)ed %ile o% audit do!umentation.#"Fse an internal !ontrol ;uestionnaire.

/ri#inal


#i$$iculty: %edium

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5. he %ive internal !ontrol !omponents do not in!ludeA.Control a!tivities.$.Risk assessment.C.+onitorin#.

#"Control risk.

/ri#inal


#i$$iculty: &asy

3. A !omputeri(ed a!!ountin# system ould not in!lude hi!h o% the %olloin# amon# thepro!essin# !ontrol a!tivities?A.imit and reasonableness tests.$.,ile and operator !ontrols.C"+aster %ile !han#es.".Run-to-run total.

/ri#inal

AACSB: *echnology

AICPA BB: Le+eraging *echnologyAICPA FN: Le+eraging *echnologyBlooms: !no"ledge

#i$$iculty: %edium

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. i#ni%i!ant de%i!ien!ies are de%ined as !onditions thatA"Could adversely a%%e!t the or#ani(ation's ability to initiate re!ord pro!ess and report%inan!ial data in the %inan!ial statements.$.Results in a reasonable possibility that a material misstatement e)ists in %inan!ial

statements.C.E)ists hen the desi#n or operation o% a !ontrol does not allo the !ompany's mana#ementor employees to dete!t or prevent misstatements in a timely %ashion.".Relates to either a ne!essary !ontrol that is missin# or an e)istin# !ontrol that is so poorlydesi#ned that it %ails to satis%y the !ontrol's ob4e!tive.

/ri#inal

AACSB: AnalyticAICPA BB: Legal

AICPA FN: ResearchBlooms: !no"ledge#i$$iculty: %edium

6.AS 5re;uires the audit team to do all the %olloin# e)!eptA.Evaluate the severity o% ea!h !ontrol de%i!ien!y that !omes to his or her attention.$."o!ument the pro!ess used to determine si#ni%i!ant a!!ounts and dis!losures and ma4or!lasses o% transa!tions.C"est all internal !ontrols in the !ompany.".AS 5re;uires all the above.

/ri#inal


#i$$iculty: %edium

Matching Questions

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.

1. se;uen!e tests9ro#rammed tests to ensure that illo#i!al

!onditions do not o!!ur. $&. limitreasonablenesstests

est that !he!ks data %ields %or appropriate plusor minus. 5

*. !he!k di#itest that !he!ks data %ields to see i% any are

blank. &

. missin# data tests An e)tra number ta##ed on to the end o% a basi!identi%i!ation. '

5. valid si#n testest that !an !he!k %or missin# do!uments in a

prenumbered series. %

AACSB: *echnologyAICPA BB: Le+eraging *echnologyAICPA FN: Le+eraging *echnologyBlooms: A((lication

#i$$iculty: )ard

True / False Questions

@uestion also ,ound in tudy >uide

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61. he primary reason %or !ondu!tin# an evaluation o% a !ompany's internal !ontrol is toprovide a basis %or !ommuni!atin# si#ni%i!ant de%i!ien!ies.FA()E

6&. he audit task o% !ontrol risk assessment involves %indin# out hat the !ompany does toprevent dete!t and !orre!t errors and %raud.TR*E

6*. he audit team is responsible %or the !lient's internal !ontrol.FA()E

6. he attitudes o% mana#ers and dire!tors are probably the most pervasive in%luen!es on the!ontrol environment.TR*E

65. he most important %eature o% an internal !ontrol system is the people ho make thesystem ork.TR*E

63. A !ontrol a!tivity is an a!tion taken to prevent dete!t and !orre!t errors and %rauds intransa!tions.TR*E

6. he C// report indi!ates that internal !ontrol should be !onsidered a pro!ess not anend in itsel%.

TR*E

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66. Auditors o% publi! !ompanies do not need to determine the ;uality o% a !lient's internal!ontrolJ they only need to kno enou#h to plan the audit ork.FA()E

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10&. he auditor's opinion on internal !ontrol underAS 5relates only to !ontrols e)istin# atthe end o% the year.TR*E

10*. Auditors should be#in their evaluation o% internal !ontrols over %inan!ial reportin# on abottom-up basisGstartin# ith the a!!ount level assertion and orkin# up to entity-level!ontrols.FA()E

Fill in the lank Questions

@uestions also ,ound in tudy >uide

10. HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH are the set o%poli!ies and pro!edures that are desi#ned to insure that transa!tions are re!orded properly.Control activities

105. HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH in internal!ontrol are matters the auditors believe should be !ommuni!ated to the !lients' audit!ommittee.)igni+icant ,e+iciencies

103. he audit team is responsible %or desi#nin# an evaluation o%HHHHHHHHHHHHHHHHHHHHHHHHHHHHH internal !ontrol systems andHHHHHHHHHHHHHHHHHHHHHHHHHHHHH the !ontrol HHHHHHHHHHHHHHHHHHHHHHHHHHHHH o% thatsystem.

e-isting. assessing. risk

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10. he C// report identi%ies the ob4e!tives to be a!hieved by internal !ontrol as 81e%%e!tiveness and e%%i!ien!y o% HHHHHHHHHHHHHHHHHHHHHHHHHHHHH 8& reliability o%HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH and 8* !omplian!eith HHHHHHHHHHHHHHHHHHHHHHHHHHHHH and HHHHHHHHHHHHHHHHHHHHHHHHHHHHH.

operations. +inancial reporting. las. regulations

106. HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH are spe!i%i!a!tions taken by a !lient's mana#ement and employees to help ensure that mana#ementdire!tives are !arried out.Control activities

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11*. i#ni%i!ant de%i!ien!ies in internal !ontrol also in!lude the more serious !ondition !alleda HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH.material eakness

11. o redu!e the !ontrol risk level to a lo level auditors must determine 81 theHHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH o% !ompany!omplian!e ith !ontrol poli!ies and 8& the HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH o% !ompany !omplian!e.re2uire, ,egree. actual ,egree

115. Auditors per%orm HHHHHHHHHHHHHHHHHHHHHHHHHHHHH

HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH to determine hoell the !ompany's !ontrols a!tually %un!tioned durin# the period under audit.tests o+ controls

113. he !on!ept o% HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHHre!o#ni(es that the !ost o% an entity's internal !ontrol should not e)!eed the bene%its that aree)pe!ted to be derived.reasona1le assurance

11. In #atherin# eviden!e about the !lient's internal !ontrol auditors may use a 8nHHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH hi!h is a !he!klist o% internal !ontrol related;uestions.internal control 2uestionnaire

116. HHHHHHHHHHHHHHHHHHHHHHHHHHHHH HHHHHHHHHHHHHHHHHHHHHHHHHHHHH

HHHHHHHHHHHHHHHHHHHHHHHHHHHHH redu!e opportunities %or a person to be in a position toperpetrate and !on!eal errors and %rauds hen per%ormin# their normal duties.)eparation o+ ,uties

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1&. =hat is the di%%eren!e beteen an in%ormation te!hnolo#y #eneral !ontrol and anin%ormation te!hnolo#y appli!ation !ontrol?

An in+ormation technolog! general controlis used to help !ontrol the entire !omputin#

environment %or an or#ani(ation. ,or e)ample most or#ani(ations re;uire passord a!!ess tolo# into the !omputin# environment. An in+ormation technolog! application controlis a!omputeri(ed !ontrol pro!edure that is desi#ned to a!!omplish some type o% !ontrol ob4e!tiveithin a !ompany's overall system o% internal !ontrol. ,or e)ample a !ompany's a!!ountsre!eivable system may have an appli!ation !ontrol that automati!ally !he!ks a !ustomer's!redit limit be%ore a ne sales order is approved. In order to %un!tion properly an in%ormationte!hnolo#y appli!ation level te!hnolo#y !ontrol is dependent on e%%e!tive in%ormationte!hnolo#y #eneral !ontrols.

AACSB: *echnology

AICPA BB: Le+eraging *echnologyAICPA FN: Le+eraging *echnologyBlooms: !no"ledge

#i$$iculty: %edium

1&5. =hat is the di%%eren!e beteen an internal !ontrol's desi#n e%%e!tiveness and itsoperatin# e%%e!tiveness?

#esign e++ectivenessdetermines hether the !ontrols over %inan!ial reportin# i$ o(eratinge$$ecti+ely ould be e)pe!ted to prevent or dete!t errors or %raud that !ould result in amaterial %inan!ial misstatement. 4perating e++ectivenessis hether the !ontrol is o(erating

as designedand hether the person per%ormin# the !ontrol possesses the ne!essary authorityand ;uali%i!ations to per%orm the !ontrol e%%e!tively.


#i$$iculty: %edium

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1&3. ist several elements o% a !ompany's !ontrol environment.

ome o% the elements o% a !ontrol environment in!lude:K +ana#ement's philosophy and operatin# style.

K Company or#ani(ation stru!ture.K ,un!tionin# o% the board o% dire!tors parti!ularly its audit !ommittee.K +ethods o% assi#nin# authority and responsibility.K +ana#ement's monitorin# methods in!ludin# internal auditin#.K 9ersonnel poli!ies and pra!ti!es.K E)ternal in%luen!es.


#i$$iculty: %edium

1&. ist and e)plain brie%ly the phases o% an internal !ontrol evaluation.

9hase 1: Fnderstandin# and do!ument the !lient's internal !ontrol stru!ture. his phasein!ludes a #eneral knoled#e o% the !ontrol environment in!ludin# the identi%i!ation o% entitylevel !ontrols. In addition the auditor should #ain an understandin# o% the %lo o%transa!tions throu#h the a!!ountin# system and do!ument this understandin# usin# a;uestionnaire narrative des!riptions and perhaps %lo!harts.9hase &: Assessin# the !ontrol risk on a preliminary basis. At this point o% the pro!ess the

stren#ths and eaknesses o% the system are analy(ed and should be do!umented in a brid#eorkpaper. A preliminary assessment o% internal !ontrols is !ompleted. At this point ade!ision is made as to hi!h !ontrols are #oin# tested and a re;uired de#ree o% !omplian!e isdetermined.9hase *: 9er%ormin# tests o% !ontrols audit pro!edures and reassess !ontrol risk. =hen theaudit team determines that a spe!i%i! !ontrol a!tivity !ould have a si#ni%i!ant e%%e!t inredu!in# !ontrol risk to a lo level %or a spe!i%i! assertion they per%orm test o% that !ontrola!tivity to obtain spe!i%i! audit eviden!e about the e%%e!tiveness o% the desi#n or operation o%that !ontrol a!tivity. At this point the a!tual de#ree o% !omplian!e is !ompared ith there;uired de#ree o% !omplian!e. he audit team then must determine the %inal assessment o%!ontrol risk and then determine hether any !han#es to the substantive testin# plan must be

made.


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1&6. =hat are some o% the problems in establishin# an internal !ontrol system in smallbusiness?

Internal !ontrol problems in small business ould in!lude:

A. eparation o% %un!tional responsibilities ould be di%%i!ult be!ause o% the small number o%employees.$. he oner mana#er has to assume a #reater role to oversee and supervise authori(ationre!ordkeepin# and !ustodial %un!tions.C. he oner mana#er must be dili#ent !ompetent and have a hi#h de#ree o% inte#rity.

AACSB: AnalyticAICPA BB: Critical *hin'ingAICPA FN: Ris' AnalysisBlooms: A((lication

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1*0. E)plain the di%%erent opinions that auditors !an issue %or an entity's internal !ontrol over%inan!ial reportin#.

Auditors !an issue the %olloin# opinions %or an audit o% an entity's internal !ontrol over

%inan!ial reportin#:,n-uali$ied. Bo material eaknesses e)ist.

#isclaimer.he audit team !annot per%orm all o% the pro!edures !onsidered ne!essary andthere%ore !annot issue an opinion.

Ad+erse o(inion. /ne or more material eaknesses e)ist.

AACSB: CommunicationAICPA BB: LegalAICPA FN: ResearchBlooms: !no"ledge

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1*1. Auditors are re;uired to obtain a su%%i!ient understandin# o% an entity's internal !ontrol.his understandin# is re;uired by the per%orman!e prin!iple o% >AA.Re;uired: A. =hat are some o% the #oals 8purposes %or !ondu!tin# an evaluation o% anentity's internal !ontrol?

$. =hat audit ork is re;uired %or an auditor to assess !ontrol risk belo the 7ma)imum7level?C. hould auditors alays try to obtain enou#h eviden!e to assess !ontrol risk belo the7ma)imum7 level? E)plain.

A. he audit team has to primary reasons %or !ondu!tin# an evaluation o% an entity's internal!ontrol. ,irst arbanes-/)ley re;uires an audit o% the e%%e!tiveness o% internal !ontrol that isan inte#rated part o% the %inan!ial statement audit %or publi!ly traded !ompanies. he se!ondreason %or evaluatin# an entity's internal !ontrol is to !omply ith the per%orman!e prin!ipleo% >AA: o assess the risk o% material misstatement to #ive the auditors a basis %or plannin#the audit and determinin# the nature timingand e/tento% audit pro!edures %or the

substantive audit plan. he audit team assesses !ontrol risk.$. I% auditors assess !ontrol risk as 7ma)imum7 or 100 per!ent 8i.e. poor !ontrol they illtend to per%orm a #reat deal o% substantive pro!edures ith lar#e sample si(es 8 e/tent at ornear the entity's %is!al year end 8timing usin# pro!edures desi#ned to obtain hi#h-;ualitye)ternal eviden!e 8nature. /n the other hand i% auditors assess !ontrol risk as 7lo7 usuallyaround 10 to &0 per!ent 8i.e. e%%e!tive !ontrol they !an per%orm %eer substantivepro!edures ith smaller sample si(es 8e/tent at an interim date be%ore the entity's %is!al yearend 8timing usin# a mi)ture o% pro!edures desi#ned to obtain hi#h-;uality e)ternal eviden!eand loer-;uality internal eviden!e 8nature. /% !ourse auditors may assess !ontrol riskbeteen 7lo7 and 7ma)imum7 8e.#. 7moderate7 7hi#h7 or 7sli#htly belo ma)imum7 andad4ust the substantive pro!edures a!!ordin#ly.

C. Bo. here may be o!!asions hen the audit team !hooses to test everythin# substantivelyrather than relyin# on internal !ontrols to redu!e substantive testin#. ,or e)ample %or %i)edassets there are usually a small number o% very material transa!tions. estin# !ontrols ouldnot be e%%i!ient i% the audit team is #oin# to e)amine every transa!tion anyay.


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1*&. =hat are the si) steps auditors o% publi! !ompanies should use to audit internal !ontrolover %inan!ial reportin# 8IC/,R?

1. 9lannin# the en#a#ement

&. Fsin# a top-don approa!h to #ain an understandin#*. estin# !ontrols. Evaluatin# !ontrol de%i!ien!ies5. =rappin# up: %ormin# an opinion on the e%%e!tiveness o% internal !ontrol over %inan!ialreportin#3. Reportin# on internal !ontrol


#i$$iculty: %edium

1**. =hat !onstitutes a material eakness?

A material eaknessin internal !ontrol is de%ined as a de%i!ien!y or !ombination o%de%i!ien!ies that results in a reasona0le (ossi0ilitythat a material misstatementould not beprevented or dete!ted on a timely basis. he %olloin# !ir!umstan!es should be re#arded asstron# indi!ators that a material eakness e)ists:

Restatement o% previously issued %inan!ial statements to re%le!t the !orre!tion o% amisstatement.

Eviden!e o% material misstatements 8!au#ht by the audit team that ere not prevented ordete!ted by the !lient's internal !ontrols.

Ine%%e!tive oversi#ht o% the %inan!ial reportin# pro!ess by the entity's audit !ommittee.

Indi!ation o% %raud 8either material or immaterial by senior mana#ement.


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1*. =hat is the di%%eren!e beteen a si#ni%i!ant de%i!ien!y and a material eakness?

he di%%eren!e beteen a si#ni%i!ant de%i!ien!y and a material eakness is the 81 li'elihoodand 8& materialitythat a potential 8or a!tual misstatement ould not be dete!ted on a timely

basis.


#i$$iculty: %edium

@uestion is also ,ound in tudy >uide

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1*5. Ea!h o% the %ive !ases illustrates spe!i%i! !ontrol a!tivities %rom a !lient's revenue !y!le8a!!ounts re!eivablesales. ,or ea!h o% the pro!edures 8a identi%y hi!h mana#ementassertions apply and 8b hat potential !ate#ory o% errors and %rauds !an be prevented.


409 Chapter 5

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