Audit Test Bank Chap10

7/25/2019 Audit Test Bank Chap10

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Auditing and Assurance Services, 15e (Arens)

Chapter 10 Internal Control, Control Risk, and Section 404 Audits

Learning !"ective 10#11) $hich o% the %ollo&ing is not one o% the three pri'ar o!"ectives o% e%%ective internal control

A) Relia!ilit o% %inancial reporting

*) +%%icienc and e%%ectiveness o% operations

C) Co'pliance &ith la&s and regulations

D) Assurance of elimination of business riskAns&er -

.) $hich o% 'anage'ent/s assertions &ith respect to i'ple'enting internal controls is the auditor

pri'aril concerned

A) +%%icienc o% operations

B) Reliability of financial reportingC) +%%ectiveness o% operations

-) Co'pliance &ith applica!le la&s and regulations

Ans&er *

) Internal controlsA) are i'ple'ented ! and are the responsi!ilit o% the auditors

B) consist of policies and procedures designed to provide reasonable assurance

that the company achieves its objectives and goals.

C) guarantee that the co'pan co'plies &ith all la&s and regulations

-) onl appl to S+C co'panies

Ans&er *

4) Internal controls are not designed to provide reasona!le assurance that

A) all frauds will be detected.

*) transactions are e2ecuted in accordance &ith 'anage'ent/s authori3ation

C) the co'pan/s resources are used e%%icientl and e%%ectivel

-) co'pan personnel co'pl &ith applica!le rules and regulations

Ans&er A

5) -escri!e each o% the three !road o!"ectives 'anage'ent tpicall has %or internal control $ith

&hich o% these o!"ectives is the auditor pri'aril concerned

Ans&er he three o!"ectives are

Relia!ilit o% %inancial reporting anage'ent has !oth a legal and pro%essional

responsi!ilit to !e sure that the in%or'ation is %airl presented in according &ith reportingre6uire'ents such as 7S 8AA9 and I:RS


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+%%icienc and e%%ectiveness o% operations Controls &ithin an organi3ation are 'eant to

encourage e%%icient and e%%ective use o% its resources to opti'i3e the co'pan/s goals

Co'pliance &ith la&s and regulations 9u!lic, non#pu!lic, and not#%or#pro%it organi3ations are

re6uired to %ollo& 'an la&s and regulations So'e relate to accounting onl indirectl, such as

environ'ental protection and civil rights la&s thers are closel related to accounting, such asinco'e ta2 regulations and anti#%raud legal provisions

he auditor/s %ocus in !oth the audit o% %inancial state'ents and the audit o% internal controls is on

the controls over the relia!ilit o% %inancial reporting plus those controls over operations and

co'pliance &ith la&s and regulations that could 'ateriall a%%ect %inancial reporting er's

hree !road o!"ectives 'anage'ent has %or internal control

;) Section 404 o% the Sar!anes#2le Act re6uires that pu!lic co'panies issue an internal control

report

A) True


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) he 9CA* places responsi!ilit %or the relia!ilit o% internal controls over the %inancial

reporting process on

") managementAns&er C

4) $hich o% the %ollo&ing parties provides an assess'ent o% the e%%ectiveness o% internal control

over %inancial reporting %or pu!lic co'panies

Ans&er A

5) An act o% t&o or 'ore e'ploees to steal assets and cover their the%t ! 'isstating the

accounting records &ould !e re%erred to as

A) collusion.

Ans&er A

;) Sar!anes#2le re6uires 'anage'ent to issue an internal control report that includes t&o

speci%ic ite's $hich o% the %ollo&ing is one o% these t&o re6uire'entsA) A statement that management is responsible for establishing and maintaining an

ade#uate internal control structure and procedures for financial reporting

Ans&er A


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Ans&er C

>) he auditors pri'ar purpose in auditing the client/s sste' o% internal control over %inancial

reporting isA) to prevent %raudulent %inancial state'ents %ro' !eing issued to the pu!lic

B) to evaluate the effectiveness of the company$s internal controls over all relevant

assertions in the financial statements.

C) to report to 'anage'ent that the internal controls are e%%ective in preventing 'isstate'ents

%ro' appearing on the %inancial state'ents

-) to e%%icientl conduct the Audit o% :inancial State'ents

Ans&er *

10) anage'ent 'ust disclose 'aterial &eaknesses in internal control in its audit report

A) &henever the &eakness is dee'ed signi%icant to a single class o% transactions

*) &henever the &eakness is signi%icant to overall %inancial reporting o!"ectives

") if the weakness e%ists at the end of the year.

-) onl i% the auditor identi%ies the &eakness as signi%icant

Ans&er C

11) In per%or'ing the audit o% internal control over %inancial reporting the auditor e'phasi3es

internal control over class o% transactions !ecause

A) the accuracy of accounting system outputs depends heavily on the accuracy of inputsand processing.Ans&er A

1.) Internal controls can never !e regarded as co'pletel e%%ective +ven i% co'pan personnel

could design an ideal sste', its e%%ectiveness depends on the

A) ade6uac o% the co'puter sste'

*) proper i'ple'entation ! 'anage'ent

C) a!ilit o% the internal audit sta%% to 'aintain it

D) competency and dependability of the people using it.

Ans&er -

1) $hen considering internal controls, an i'portant point to consider is that

A) auditors can ignore controls a%%ecting internal 'anage'ent in%or'ation

B) auditors are concerned with the client$s internal controls over the safeguarding of

assets if they affect the financial statements.

C) 'anage'ent is responsi!le %or understanding and testing internal control over %inancial

reporting

-) co'panies 'ust use the CS %ra'e&ork to esta!lish internal controlsAns&er *


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14) % the %ollo&ing state'ents a!out internal controls, &hich one is least likel to !e correct

A) ?o one person should !e responsi!le %or the custodial responsi!ilit and the recordingresponsi!ilit %or an asset

*) ransactions 'ust !e properl authori3ed !e%ore such transactions are processed

C) *ecause o% the cost#!ene%it relationship, a client 'a appl controls on a test !asis

D) "ontrol procedures reasonably ensure that collusion among employees cannot

occur.

Ans&er -

15) he Sar!anes#2le Act re6uires

A) all public companies to issue reports on internal controls.

*) all pu!lic co'panies to de%ine ade6uate internal controls

C) the auditor o% pu!lic co'panies to design e%%ective internal controls

-) the auditor o% pu!lic co'panies to &ithdra& %ro' an engage'ent i% internal controls are &eak

Ans&er A

1;) he %inancial state'ents 'a not correctl re%lect accounting %ra'e&orks such as 8AA9 or

I:RS i% the

A) controls a%%ecting the relia!ilit o% %inancial reporting are inade6uate*) co'pan/s controls do not pro'ote e%%icienc

C) co'pan/s controls do not pro'ote e%%ectiveness

-) co'pan/s controls do not pro'ote co'pliance &ith applica!le rules and regulations

Ans&er A

1


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1>) $hen a co'pan designs and i'ple'ents internal controls, cost o% the controls is not a valid

consideration

*) :alseAns&er *

.0) Reasona!le assurance allo&s %or

A) lo& likelihood that 'aterial 'isstate'ents &ill not !e prevented or detected ! internal

controls

*) no likelihood that 'aterial 'isstate'ents &ill not !e prevented or detected ! internal control

C) 'oderate likelihood that 'aterial 'isstate'ents &ill not !e prevented or detected ! internal

control

-) high likelihood that 'aterial 'isstate'ents &ill not !e prevented or detected ! internal

control

Ans&er A

.1) $hich o% the %ollo&ing is 'ost correct regarding the re6uire'ents under Section 404 o% the

Sar!anes 2le Act

A) he audits o% internal control and the %inancial state'ents provide reasona!le assurance as to

'isstate'ents*) he audit o% internal control provides a!solute assurance o% 'isstate'ent

C) he audit o% %inancial state'ents provides a!solute assurance o% 'isstate'ent

-) he audits o% internal control and the %inancial state'ents provide a!solute assurance as to

'isstate'ents

Ans&er A

..) o issue a report on internal control over %inancial reporting %or a pu!lic co'pan, an auditor

'ust

A) evaluate 'anage'ent/s assess'ent process

*) independentl assess the design and operating e%%ectiveness o% internal control

C) evaluate 'anage'ent/s assess'ent process and independentl assess the design and operating

e%%ectiveness o% internal control

-) test controls over signi%icant account !alances

Ans&er C

Learning !"ective 10#


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1) $hich o% the %ollo&ing activities &ould !e least likel to strengthen a co'pan/s internal

control

A) Separating

accounting %ro'other %inancial

operations

*) aintaining insurance %or %ire and the%t

C) :i2ing responsi!ilit %or the per%or'ance o% e'ploee duties

-) Care%ull selecting and training e'ploees

Ans&er *

.) $hich o% the %ollo&ing co'ponents o% the control environ'ent de%ine the e2isting lines o%

responsi!ilit and authorit

A) rgani3ational structure

*) anage'ent philosoph and operating stle

C) @u'an resource policies and practices

-) anage'ent integrit and ethical values

Ans&er A

) $hich o% the %ollo&ing %actors 'a increase risks to an organi3ation

Ans&er A

4) $hich o% the %ollo&ing state'ents is 'ost correct &ith respect to separation o% duties

A) A person &ho has te'porar or per'anent custod o% an asset should account %or that asset

*) +'ploees &ho authori3e transactions should not have custod o% related assets

C) +'ploees &ho open cash receipts should record the a'ounts in the su!sidiar ledgers

-) +'ploees &ho authori3e transactions should have recording responsi!ilit %or these

transactions

Ans&er *


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5) Authori3ations can !e either general or speci%ic $hich o% the %ollo&ing is not an e2a'ple o% a

general authori3ationA) Auto'atic reorder points %or ra& 'aterials inventor

*) A sales 'anager/s authori3ation %or a sales return

C) Credit li'its %or various classes o% custo'ers

-) A sales price list %or 'erchandise

Ans&er *

;) $hich o% the %ollo&ing is correct &ith respect to the design and use o% !usiness docu'ents

A) he docu'ents should !e in paper %or'at

*) -ocu'ents should !e designed %or a single purposes to avoid con%usion in their use

C) -ocu'ents should !e designed to !e understanda!le onl ! those &ho use the'

-) -ocu'ents should !e prenu'!ered consecutivel to %acilitate control over 'issing docu'ents

Ans&er -


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>) $hich o% the %ollo&ing !est descri!es an entit/s accounting in%or'ation and co''unication

sste'

Ans&er -

10) An audit procedure that &ould 'ost likel !e used ! an auditor in per%or'ing tests o% control

procedures in &hich the segregation o% %unctions and that leaves no BauditB trail is

A) inspection

*) o!servation

C) reper%or'ance

-) reconciliation

Ans&er *

11) Internal controls nor'all include procedures designed to provide reasona!le assurance that

A) e'ploees act &ith integrit &hen per%or'ing their assigned tasks

*) transactions are e2ecuted in accordance &ith 'anage'ent/s authori3ation

C) decision processes leading to 'anage'ent/s authori3ation o% transactions are sound

-) collusive activities &ould !e detected ! segregation o% e'ploee duties

Ans&er *

1.) $hich o% the

%ollo&ing is not one

o% the

su!co'ponents o% the control environ'ent

A) anage'ent/s philosoph and operating stle

*) rgani3ational structure

C) Ade6uate separation o% duties

-) Co''it'ent to co'petence

Ans&er C

1) It is i'portant %or the C9A to consider the co'petence o% the clients/ personnel !ecause their


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1=) o pro'ote operational e%%icienc, the internal audit depart'ent &ould ideall report toA) line 'anage'ent

*) 9CA*

C) Chie% Accounting %%icer

-) audit co''ittee

Ans&er -

1>) @anlon Corp 'aintains a large internal audit sta%% that reports directl to the accounting

depart'ent Audit reports prepared ! the internal auditors indicate that the sste' is %unctioning

as it should and that the accounting records are relia!le An independent auditor &ill pro!a!l

A) eli'inate tests o% controls

*) increase the depth o% the stud and evaluation o% ad'inistrative controls

C) avoid duplicating the &ork per%or'ed ! the internal audit sta%%

-) place li'ited reliance on the &ork per%or'ed ! the internal audit sta%%

Ans&er -

.0) +2ternal %inancial state'ent auditors 'ust o!tain evidence regarding &hat attri!utes o% aninternal audit (IA) depart'ent i% the e2ternal auditors intend to rel on IA/s &ork

A) Integrit

*) !"ectivit

C) Co'petence

-) All o% the a!ove

Ans&er -

.1) o o!tain an understanding o% an entit/s control environ'ent, an auditor should concentrate

on the su!stance o% 'anage'ent/s policies and procedures rather than their %or' !ecause

A) 'anage'ent 'a esta!lish appropriate policies and procedures !ut not act on the'

*) the !oard o% directors 'a not !e a&are o% 'anage'ent/s attitude to&ard the control

environ'ent

C) the auditor 'a !elieve that the policies and procedures are inappropriate %or that particular

entit

-) the policies and procedures 'a !e so &eak that no reliance is conte'plated ! the auditor

Ans&er A

..) Control activities help assure that the necessar actions are taken to address risks to the


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achieve'ent o% the co'pan/s o!"ectives List the %ive tpes o% control activities

Ans&er

1 Ade6uate separation o% duties

. 9roper authori3ation o% transactions and activities

Ade6uate docu'ents and records4 9hsical control over assets and records

5 Independent checks on per%or'ance

.) Certain principles dictate the proper design and use o% docu'ents and records *rie%l

descri!e several o% these principles

Ans&er

-ocu'ents should !e prenu'!ered consecutivel to %acilitate control over 'issing docu'ents

and as an aid in locating docu'ents &hen the are needed at a later date

-ocu'ents and records should !e prepared at the ti'e a transaction takes place, or as soon as

possi!le therea%ter, to 'ini'i3e ti'ing errors

-ocu'ents and records should !e designed %or 'ultiple uses, &hen possi!le, to 'ini'i3e the

nu'!er o% di%%erent %or's :or e2a'ple, a properl designed and used shipping docu'ent can !e

the !asis %or releasing goods %ro' storage to the shipping depart'ent, in%or'ing !illing o% the

6uantit o% goods to !ill to the custo'er and the appropriate !illing date, and updating the

perpetual inventor records

-ocu'ents and records should !e constructed in a 'anner that encourages correct preparation

his can !e done ! providing internal checks &ithin the %or' or record :or

e2a'ple, co'puter screen pro'pts 'a %orce online data entr o% critical in%or'ation !e%ore therecord is electronicall routed %or authori3ations and approvals Si'ilarl, screen controls can

validate the in%or'ation entered, such as &hen an invalid general ledger account nu'!er is

auto'aticall re"ected &hen the account nu'!er does not 'atch the chart o% accounts 'aster %ile

.4) anage'ent/s identi%ication and analsis o% risk is an ongoing process and is a critical

co'ponent o% e%%ective internal control An i'portant %irst step is %or 'anage'ent to identi%

%actors that 'a increase risk Identi% at least %ive %actors, o!serva!le ! 'anage'ent, &hich

'a lead to increased risk in a tpical !usiness organi3ation

Ans&er

here are 'an %actors that 'a lead to increased risk in an organi3ation So'e e2a'ples include

%ailure to 'eet prior o!"ectives,

6ualit o% personnel,

geographic dispersion o% co'pan operations,

signi%icance and co'ple2it o% core !usiness processes,

introduction o% ne& in%or'ation technologies

entrance o% ne& co'petitors and,

econo'ic do&nturns

.5) Separation o% duties is essential in preventing errors and intentional 'isstate'ents on the


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%inancial state'ents List !elo& the %our general guidelines

Ans&er

1 Separation o% custod o% the assets %ro' accounting

. Separation o% the authori3ation o% transactions %ro' custod o% related assets

Separation o% operational responsi!ilit %ro' record keeping responsi!ilit4 Separation o% I duties %ro' user depart'ents

.;) In developing an understanding o% the client/s accounting in%or'ation sste' the auditor

%ollo&s a se6uential process -escri!e the process !elo&

Ans&er

1 a"or classes o% transactions o% the entit

. @o& these transactions are initiated and recorded

$hat accounting records e2ist and their nature

4 @o& the sste' captures other events that are signi%icant to the %inancial state'ents

5 he nature and details o% the %inancial reporting process %ollo&ed

.


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integrit and ethical values

co''it'ent to co'petence

!oard o% director or audit co''ittee participation

'anage'ent/s philosoph and operating stle

organi3ational structurehu'an resource policies and practices

.>) List the three steps in 'anage'ent/s assess'ent o% risk and then list t&o o% the categories o%

'anage'ent assertions that 'ust !e satis%ied during the risk assess'ent process

Ans&er

he steps taken ! 'anage'ent in the risk assess'ent process are

identi% the %actors a%%ecting risk

assess the signi%icance o% risks and likelihood o% occurrence

deter'ine actions necessar to 'anage the risks

he categories o% 'anage'ent assertions that 'ust !e satis%ied are

assertions a!out classes o% transactions and other events

assertions a!out account !alances

assertions a!out presentation and disclosure

0) Control activities are a su!co'ponent o% the in%or'ation and co''unication co'ponent o%

internal control

*) :alseAns&er *

1) Ade6uate docu'ents and records is a su!co'ponent o% the control environ'ent

*) :alse

.) he chart o% accounts is help%ul in preventing classi%ication errors i% it accuratel descri!es

&hich tpe o% transaction should !e in each account

A) rue

) Auditing standards prohi!it reliance on the &ork o% internal auditors due to the lack o%

independence o% the internal auditors

*) :alse

4) I% an auditor &ishes to rel on the &ork o% internal auditors (IA), the auditor 'ust o!tainsatis%actor evidence related to the IA/s co'petence, integrit, and o!"ectivit


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A) rue

Learning !"ective 10#4

1) $hen the auditor atte'pts to understand the operation o% the accounting sste' ! tracing a

%e& transactions through the accounting sste', the auditor is said to !e

A) tracing

*) vouching

C) per%or'ing a &alk#through

-) testing controls

Ans&er C

.) he purpose o% phase in the Bprocess %or understanding internal control and assessing control

riskB is to

A) design, per%or' and evaluate tests o% controls

*) o!tain and docu'ent an understanding o% internal control design an operation

C) assess control risk

-) decide planned detection risk and su!stantive tests

Ans&er A

) ?arratives, %lo&charts, and internal control 6uestionnaires are three co''on 'ethods o%A) testing the internal controls

*) docu'enting the auditor/s understanding o% internal controls

C) designing the audit 'anual and procedures

-) docu'enting the auditor/s understanding o% a client/s organi3ational structure

Ans&er *

4) $hen dealing &ith the docu'entation o% internal control

A) in a narrative, 'ost 6uestions si'pl re6uire a BesB or BnoB response

*) 6uestionnaires o%%er use%ul checklists to re'ind the auditor o% the 'an di%%erent tpes o%

internal controls that should e2ist

C) 6uestionnaires and %lo&charts should not !e used together

-) %lo&charts %ail to sho& the segregation o% duties in the co'pan

Ans&er *


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5) Audit evidence regarding the separation o% duties is nor'all !est o!tained !

A) preparing %lo&charts o% operational processes

*) preparing narratives o% operational processesC) o!servation o% e'ploees appling control activities

-) in6uiries o% e'ploees appling control activities

Ans&er C

;) $alkthroughs co'!ine o!servation, inspection, and in6uir to assure that the controls designed

! 'anage'ent have !een i'ple'ented

A) rue

) $hen docu'enting their understanding o% a client/s internal controls, auditors are re6uired to

use narratives

*) :alse

Learning !"ective 10#5

1) he person responsi!le %or reconciling sales invoices to custo'er orders does not access to the

co'pan/s 'aster price list in order to correctl co'pute sales his is an e2a'ple o% a(n)

A) operating de%icienc

*) design de%icienc

C) training de%icienc

-) 'anage'ent de%iciencAns&er *


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.) Eou are per%or'ing the audit o% internal control %or Cli%ton Co'pan $hich o% the %ollo&ing

&ould represent a 'aterial &eakness in internal controlA) he co'pan/s audit co''ittee has e2perienced unusual turnover o% 'e'!ers

*) he co'pan/s C: &as indicted %or e'!e33ling %ro' the co'pan

C) *ank reconciliations are done 'onthl

-) he C+ retired a%ter t&ent ears o% service to the co'pan

Ans&er *

) he e'ploee in charge o% authori3ing credit to the co'pan/s custo'ers does not %ull

understand the concept o% credit risk his lack o% kno&ledge &ould constitute

A) a de%icienc in operation o% internal controls

*) a de%icienc in design o% internal controls

C) a de%icienc o% 'anage'ent

-) not constitute a de%icienc

Ans&er A

4) $hen assessing &hether the %inancial state'ents are audita!le, the auditor 'ust consider

A) that the integrit o% 'anage'ent and the ade6uac o% accounting records are the t&o pri'ar

%actors deter'ining audita!ilit*) that the integrit o% 'anage'ent and the ade6uac o% risk 'anage'ent are the t&o pri'ar

%actors deter'ining audita!ilit

C) that i% all o% the transaction in%or'ation is availa!le onl in electronic %or' &ithout a visi!le

audit trail, the co'pan cannot !e audited

-) the control risk !e%ore deter'ining i% the entit is audita!le

Ans&er A

5) nce auditors deter'ine that entit level controls are designed and placed in the operation the

A) 'ake a preli'inar assess'ent %or each transaction#related audit o!"ective %or each 'a"or tpe

o% transaction

*) 'ake a preli'inar assess'ent o% control risk

C) o!tain an understanding o% the design and i'ple'entation o% internal control

-) prepare audit docu'entation in order to opine on the co'pan/s internal control sste'

Ans&er A

;) $hich o% the %ollo&ing is the correct de%inition o% Bcontrol de%iciencB

A) A control de%icienc e2ists i% the design or operation o% controls does not per'it co'panpersonnel to prevent or detect 'isstate'ents on a ti'el !asis


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*) A control de%icienc e2ists i% one or 'ore de%iciencies e2ist that adversel a%%ect a co'pan/s

a!ilit to prepare e2ternal %inancial state'ents relia!l

C) A control de%icienc e2ists i% the design or operation o% controls results in a 'ore than re'ote

likelihood that controls &ill not prevent or detect 'isstate'ents

-) A control de%icienc e2ists i% the design or operation o% controls results in a 'ore than pro!a!lelikelihood that controls &ill prevent or detect 'isstate'ents

Ans&er A


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*) !oth signi%icant de%iciencies and 'aterial &eaknesses in internal control to those charged &ith

governance

C) an signi%icant de%iciencies in internal control to those charged &ith governance using a

'anage'ent letter

-) issues regarding internal control to those charged &ith governance in &riting &ithin >0 das%ollo&ing the audit report release

Ans&er *

10) *e%ore 'aking the %inal assess'ent o% internal control at the end o% an integrated audit, the

auditor 'ust

Ans&er A

11) Signi%icant de%iciencies and 'aterial &eaknesses in internal control o% a pu!lic co'pan 'ust

!e reported in &riting to &hich o% the %ollo&ing

A) 9u!lic Co'pan Accounting versight *oard

*) e'!ers o% 'anage'ent &ho are responsi!le %or the related area o% the co'panC) Audit co''ittee o% the co'pan/s !oard o% directors and to 'anage'ent

-) AIC9A

Ans&er C

1.) Signi%icant de%iciencies are 'atters that co'e to an auditor/s attention and should !e

co''unicated to an entit/s audit co''ittee !ecause the represent

A) 'aterial %rauds perpetrated ! high#level 'anage'ent

*) internal control de%iciencies that could adversel a%%ect a co'pan/s a!ilit to initiate, record,

process, or report e2ternal %inancial state'ents relia!l

C) %lagrant violations o% the entit/s docu'ented con%lict#o%#interest policies

-) intentional atte'pts ! client personnel to li'it the scope o% the auditor/s %ield &ork Ans&er

*

1) @o& 'ust signi%icant de%iciencies and 'aterial &eaknesses !e co''unicated to those charged


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&ith governance

A) +ither oral or &ritten co''unication is accepta!le

*) ral co''unication is re6uired

C) $ritten co''unication is re6uired

-) $ritten co''unication is re6uired %or 'aterial &eaknesses, !ut oral co''unication is allo&ed%or signi%icant de%iciencies

Ans&er C

14) A %ive#step approach can !e used to identi% de%iciencies, signi%icant de%iciencies, and 'aterial

&eaknesses he %irst step in this approach is

A) identi% the a!sence o% ke controls

*) consider the possi!ilit o% co'pensating controls

C) deter'ine potential 'isstate'ents that could result

-) identi% e2isting controls

Ans&er -

15) $hen assessing control risk

A) 'an auditors use actuarial ta!les to assist in the control risk assess'ent process

*) each control can !e used to satis% onl one audit o!"ective

C) 'an auditors use a control risk 'atri2 to assist in the control risk assess'ent process

-) all controls, including ke controls, should !e considered

Ans&er C

1;) $hen a co'pensating control e2ists, the a!sence o% a ke controlA) is no longer a concern !ecause there is no longer a signi%icant de%icienc or 'aterial &eakness

*) is still a 'a"or concern to the auditor

C) could cause a 'aterial loss, so it 'ust !e tested using su!stantive procedures

-) is 'agni%ied and 'ust !e re'oved %ro' the sa'pling process and e2a'ined in its entiret

Ans&er A

1


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their assigned %unctions

A signiFcant deFcienc e2ists i% one or 'ore control deFciencies e2ist that is less severe than a

'aterial &eakness !ut i'portant enough to 'erit attention ! those responsi!le %or oversight o%

the co'pan/s %inancial state'ents

A 'aterial &eakness e2ists i% a signiFcant deFcienc, ! itsel%, or in co'!ination &ith othersigniFcant deFciencies, results in a reasona!le possi!ilit that internal control &ill not prevent or

detect 'aterial Fnancial state'ent 'isstate'ents on a ti'el !asis

1>) -escri!e the auditor/s responsi!ilities related to re6uired co''unications !et&een the auditor

and those charged &ith governance (re'ove auditor co''ittee) regarding internal control

Ans&er he auditor 'ust co''unicate signiFcant deFciencies and 'aterial &eaknesses in

&riting to those charged &ith governance as soon as the !eco'e a&are o% their e2istence he

co''unication is usuall addressed to the audit co''ittee and to 'anage'ent i'el

co''unications 'a provide 'anage'ent an opportunit to address control deFciencies !e%ore

'anage'ent/s report on internal control 'ust !e issued In so'e instances, deFciencies can !e

corrected su%%icientl earl such that !oth 'anage'ent and the auditor can conclude that controls

are operating e%%ectivel as o% the !alance sheet date hese co''unications 'ust !e 'ade no

later than ;0 das %ollo&ing the audit report release

.0) he te2t suggested a %ive#step approach to identi% de%iciencies, signi%icant de%iciencies, and

'aterial &eaknesses -escri!e this approach

Ans&er1 Identi% e2isting controls *ecause deFciencies and 'aterial &eaknesses are the a!sence o%

ade6uate controls, the auditor 'ust %irst kno& &hich controls e2ist

. Identi% the a!sence o% ke controls Internal control 6uestionnaires, Go&charts, and

&alkthroughs are use%ul tools to identi% &here controls are lacking and the likelihood o%

'isstate'ent is there%ore increased

Consider the possi!ilit o% co'pensating controls A co'pensating control is one else&here in

the sste' that o%%sets the a!sence o% a ke control $hen a co'pensating control e2ists, there is

no longer a signiFcant deFcienc or 'aterial &eakness

4 -ecide &hether there is a signiFcant deFcienc or 'aterial &eakness he likelihood o%

'isstate'ents and their 'aterialit are used to evaluate i% there are signiFcant deFciencies or

'aterial &eaknesses

5 -eter'ine potential 'isstate'ents that could result his step is intended to identi% speciFc

'isstate'ents that are likel to result !ecause o% the signiFcant deFcienc or 'aterial &eakness

he i'portance o% a signiFcant deFcienc or 'aterial &eakness is directl related to the likelihood

and 'aterialit o% potential 'isstate'ents

.1) he assess'ent o% control risk is the 'easure o% the auditor/s e2pectation that internal controls&ill prevent 'aterial 'isstate'ents %ro' occurring or detect and correct the' i% the have


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occurred

A) rue

Learning !"ective 10#;

1) I% the results o% tests o% controls support the design and operations o% controls as e2pected, the

auditor uses DDDDDDDD control risk as the preli'inar assess'ent

A) a lo&er

*) the sa'e

C) a higher

-) either a lo&er or higher

Ans&er *

.) An auditor is likel to use %our tpes o% procedures to support the operating e%%ectiveness o%

internal controls $hich o% the %ollo&ing &ould generall not !e used

A) ake in6uiries o% appropriate client personnel

*) +2a'ine docu'ents, records, and reports

C) Reper%or' client procedures

-) Inspect design docu'ents

Ans&er -

) $hich o% the %ollo&ing represents a correct state'ent regarding internal control testing

A) $hen auditors plan to use evidence a!out the operating e%%ectiveness o% internal control

contained in prior audits, auditing standards re6uire tests o% the controls/ e%%ectiveness at least

ever other ear

*) he greater the risk, the less audit evidence the auditor should o!tain that controls are operating

e%%ectivel

C) he auditor uses control risk assess'ent and results o% tests o% controls to deter'ine planned

detection risk and the related su!stantive tests %or the %inancial state'ent audit

-) esting o% internal controls can onl !e per%or'ed ! the auditor at the end o% the %iscal ear

Ans&er C

4) In evaluating the operational e%%ectiveness o% internal controls the auditor is likel to use %our

tpes o% audit procedures List the procedures !elo&

Ans&er

ake in6uiries o% appropriate client personnel+2a'ine docu'ents, records, and reports


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!serve control#related activities

Reper%or' client procedures

5) he procedures to o!tain an understanding o% internal control are onl applied &hen the

assessed control risk is high*) :alse

Ans&er *

;) Controls that are applied throughout the accounting period 'ust !e tested !oth at an interi'

date and then again on the !alance sheet date

*) :alse

Ans&er *

Learning !"ective 10#

Audit Test Bank Chap10

Documents

Transcript of Audit Test Bank Chap10