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Exam Questions - Internal Control
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2012-07-09 16:27:58
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internal control
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Audit 2 - Internal Control
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Exam Questions - Internal Control

  1. In reporting on an entity's internal control structure over financial reporting, a practitioner should include a paragraph that describes the 
    A) Inherent limitations of any internal control structure. 
    B) Documentary evidence regarding the control environment factors. 
    C) Potential benefits from the practitioner's suggested improvements.
    D) Changes in the internal control structure since the prior report. 
    A) Inherent limitations of any internal control structure.
    (this multiple choice question has been scrambled)
  2. An auditor uses the knowledge provided by the understanding of internal control and the assessed level of control risk primarily to 
    A) Determine whether procedures and records concerning the safeguarding of assets are reliable. 
    B) Determine the nature, timing, and extent of substantive tests for financial statement assertions. 
    C) Ascertain whether the opportunities to allow any person to both perpetrate and conceal
    D) Modify the initial assessments of inherent risk and preliminary judgments about materiality levels. 
    B) Determine the nature, timing, and extent of substantive tests for financial statement assertions.
    (this multiple choice question has been scrambled)
  3. The auditor should use the risk assessment to determine 
    A) Whether to accept the engagement. 
    B) The type of ‘opinion’ to issue in the Audit Report. 
    C) The nature, timing, and extent of further audit procedures to be performed.
    D) The size of the audit team. 
    C) The nature, timing, and extent of further audit procedures to be performed.
    (this multiple choice question has been scrambled)
  4. After obtaining an understanding of an entity's internal control and assessing control risk, an auditor may next:
     
    A) Perform tests of controls to verify management's assertions that are embodied in the financial statements. 
    B) Apply analytical procedures as substantive tests to validate the assessed level of control risk. 
    C) Consider whether evidential matter is available to support a further reduction in the assessed level of control risk.
    D) Evaluate whether the internal control structure policies and procedures detected material misstatements in the financial statements. 
    C) Consider whether evidential matter is available to support a further reduction in the assessed level of control risk.
    (this multiple choice question has been scrambled)
  5. Which of the following is not a component of an entity's internal control? 
    A) The control environment. 
    B) Risk assessment. 
    C) Control risk.
    D) Information and communication. 
    C) Control risk.
    (this multiple choice question has been scrambled)
  6. Which of the following is responsible for establishing internal controls for a public company? 
    A) Management. 
    B) Management and auditors. 
    C) Financial statement auditors.
    D) Committee on Sponsoring Organizations. 
    A) Management.
    (this multiple choice question has been scrambled)
  7. The auditor's study of a public company's internal control is:

    A) Recommended by the AICPA. 
    B) Required by GAAS. 
    C) Required by the Sarbanes-Oxley Act.
    D) Required by the AICPA. 
    C) Required by the Sarbanes-Oxley Act.
    (this multiple choice question has been scrambled)
  8. The auditor's study of a private company's internal control is: 
    A) Recommended by the AICPA. 
    B) Required by GAAS. 
    C) Required by GAAP.
    D) Required by the AICPA. 
    B) Required by GAAS.
    (this multiple choice question has been scrambled)
  9. Which of management's concerns with respect to implementing internal controls is the auditor primarily concerned? 
    A) Reliability of financial reporting. 
    B) Efficiency of operations.
    C) Effectiveness of operations.
    D) Compliance with applicable laws and regulations. 
    A) Reliability of financial reporting.
    (this multiple choice question has been scrambled)
  10. When an auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be:
    A) Testing controls. 
    B) Vouching. 
    C) Performing a walkthrough.
    D) Tracing. 
    C) Performing a walkthrough.
    (this multiple choice question has been scrambled)
  11. The primary emphasis by auditors by auditor when assessing internal control is on controls over:
    A) Account balances. 
    B) Classes of transactions. 
    C) Both A and B, because they vary from client to client.
    D) Both A and B, because they are equally important. 
    B) Classes of transactions.
    (this multiple choice question has been scrambled)
  12. Which section of the Sarbanes-Oxley Act requires management to issue an internal control report? 
    A) 202 
    B) 203 
    C) 404
    D) 408 
    C) 404
    (this multiple choice question has been scrambled)
  13. Narrative, flowcharts, and internal control questionnaires are three common methods of:
    A) Documenting the auditor's understanding of internal controls. 
    B) Designing the audit manual and procedures. 
    C) Documenting the auditor's understanding of the client's organizational structure.
    D) Testing the internal controls. 
    A) Documenting the auditor's understanding of internal controls.
    (this multiple choice question has been scrambled)
  14. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the: 
    A) Human resources function from the controllership function. 
    B) Administrative controls from the internal accounting controls. 
    C) Operational responsibility from the record keeping responsibility.
    D) Authorization of transactions from the custody of related assets. 
    D) Authorization of transactions from the custody of related assets.
    (this multiple choice question has been scrambled)
  15. The primary purpose of an auditor's consideration of internal control is to provide a basis for:
    A) Determining whether procedures and records that are concerned with the safeguarding of assets are reliable.
    B) Constructive suggestions to clients concerning improvements in internal control. 
    C) To express an opinion.
    D) Determining the nature, extent, and timing of audit tests to be applied. 
    D) Determining the nature, extent, and timing of audit tests to be applied.
    (this multiple choice question has been scrambled)
  16. In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would:
    A) Perform test counts of inventory during the entity's physical count. 
    B) Analyze inventory turnover statistics to identify slow-moving and obsolete items. 
    C) Analyze monthly production reports to identify variances and unusual transactions.
    D) Review the entity's descriptions of inventory policies and procedures. 
    D) Review the entity's descriptions of inventory policies and procedures.
    (this multiple choice question has been scrambled)
  17. The auditor who becomes aware of a reportable condition in internal control is required to communicate this to the:

    A) Senior management and board of directors. 
    B) Board of directors and internal auditors. 
    C) Audit committee or its equivalent.
    D) Internal auditors and senior management. 
    C) Audit committee or its equivalent.
    (this multiple choice question has been scrambled)
  18. After obtaining an understanding of internal control and assessing control risk, an auditor decides to perform tests of controls. The auditor most likely decided that:
    A) It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. 
    B) There were many internal control structure weaknesses that could allow errors in the accounting systems. 
    C) An increase in the assessed level of control risk is justified for certain financial statement assertions.
    D) Additional evidence to support a further reduction in control risk is not available. 
    A) It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.
    (this multiple choice question has been scrambled)
  19. Equipment acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control procedure that provides for 
    A) Investigation of current-year equipment acquisitions with prior-year equipment acquisitions. 
    B) Investigation of variances within a formal budgeting system. 
    C) Study of error response procedures by general accounting.
    D) Study of formal procedures for handling cash receipts. 
    B) Investigation of variances within a formal budgeting system.
    (this multiple choice question has been scrambled)
  20. In planning an audit, the auditor's knowledge about the design of relevant internal control policies and procedures should be used to:
    A) Determine whether controls have been circumvented by collusion. 
    B) Document the assessed level of control risk. 
    C) Identify the types of potential misstatements that could occur.
    D) Assess the operational efficiency of the internal control structure. 
    C) Identify the types of potential misstatements that could occur.
    (this multiple choice question has been scrambled)
  21. When considering internal control, an auditor must be aware of the concept of reasonable assurance, which recognizes that: 
    A) The employment of competent personnel provides assurance that the objectives of internal control will be achieved. 
    B) The establishment and maintenance of internal control is an important responsibility of the management and not of the auditor. 
    C) The segregation of incompatible functions is necessary to obtain assurance that the internal control is effective.
    D) The cost of internal control should not exceed the benefits expected to be derived from internal control. 
    D) The cost of internal control should not exceed the benefits expected to be derived from internal control.
    (this multiple choice question has been scrambled)
  22. A flowchart is most frequently used by an auditor in connection with the 
    A) Use of statistical sampling in performing an audit. 
    B) Performance of analytical review procedures of account balances. 
    C) Preparation of generalized computer audit programs.
    D) Documentation of the client's internal control procedures. 
    D) Documentation of the client's internal control procedures.
    (this multiple choice question has been scrambled)
  23. Which of the following is not a component of an entity's internal control? 
    A) Control environment.
    B) Control activity. 
    C) Information and communication.
    D) Control risk. 
    D) Control risk.
    (this multiple choice question has been scrambled)
  24. In the early stages of an audit engagement, the independent CPA must obtain a general understanding of internal control.  Which of the following is not studied as part of that step in the audit process? 
    A) Control environment 
    B) Risk assessment 
    C) Internal independence
    D) Control activities 
    C) Internal independence
    (this multiple choice question has been scrambled)
  25. The seven factors of the control environment are 

    A) I - Integrity and ethical values C - Commitment to competence H - Human resource policies and practices A - Assignment of authority and responsibility M - Management's philosophy and operating style B - Board of directors or audit committee participation O - Organization 
    B) I - Integrity and ethical values C - Compensation level and schedule H - Human resource policies and practices A - Acceptance of accountability M - Management's education and experience B - Board of directors or audit committee participation O - Organization 
    C) I - Integrity, trust and respect C - Commitment to management goals H - Hiring practices and procedures A - Allotment of resources M - Management's philosophy and operating style B - Board of directors decision making style O - Organization
    D) I - Issue resolution and problem solving techniques C - Commitment to competence H - Human resource policies and practices A - Access to systems and data M - Management style and structure B - Board of directors or audit committee participation O - Organization 
    A) I - Integrity and ethical values C - Commitment to competence H - Human resource policies and practices A - Assignment of authority and responsibility M - Management's philosophy and operating style B - Board of directors or audit committee participation O - Organization
    (this multiple choice question has been scrambled)
  26. Regarding internal control system failures.  Even the best designed control systems are subject to failure due to:
    A) Human error, lack of experience, poor training and unethical behavior 
    B) Board of Director authorizations, management override, white collar crime and faulty judgment 
    C) Greed, envy, gluttony and pride
    D) Human error, faulty judgment, collusion and management override 
    D) Human error, faulty judgment, collusion and management override
    (this multiple choice question has been scrambled)
  27. An auditor must make an assessment of control risk as part of the process to determine how much substantive testing must be done to reduce overall audit risk to an acceptably low level.   Which of the following is not one of the five components that make up internal control? 
    A) Checks and balances 
    B) Monitoring 
    C) Risk assessment
    D) Control environment 
    A) Checks and balances
    (this multiple choice question has been scrambled)
  28. Significant deficiencies are matters that come to an auditor's attention and should be communicated to an entity's audit committee because they represent: 
    A) Intentional attempts by the client personnel to limit the scope of the auditor's fieldwork. 
    B) Flagrant violations of the entity's documented conflict-of-interest policies. 
    C) Internal control deficiencies that could adversely affect a company's ability to initiate, record, process, or report external financial statements reliably.
    D) Material fraud perpetrated by high-level management. 
    C) Internal control deficiencies that could adversely affect a company's ability to initiate, record, process, or report external financial statements reliably.
    (this multiple choice question has been scrambled)
  29. How must significant deficiencies and material weaknesses be communicated to those charged with governance? 
    A) Oral communication is required. 
    B) Written communication is required. 
    C) Either oral or written communication is acceptable. 
    D) None of the above is correct.
    B) Written communication is required. 
    (this multiple choice question has been scrambled)
  30. Significant deficiencies and material weaknesses in internal control of a public company must be reported to which of the following? 
    A) Members of management who are responsible for the related area of the company. 
    B) Audit Committee of the company's board of directors. 
    C) The Public Company Accounting Oversight Board. 
    D) None of the above is correct.
    B) Audit Committee of the company's board of directors. 
    (this multiple choice question has been scrambled)
  31. Which of the following is true regarding significant deficiencies and material weaknesses? 
    A) Auditors must search for them. 
    B) They must be disclosed in footnotes. 
    C) They must be included in the financial statements.
    D) Auditors must communicate them to the audit committee. 
    D) Auditors must communicate them to the audit committee. 
    (this multiple choice question has been scrambled)
  32. Which of the following statements is correct concerning control deficiencies in an audit? 
    A) An auditor may report that no significant deficiencies were noted during the audit. 
    B) An auditor may communicate deficiencies during an audit or after the audit's completion. 
    C) All significant deficiencies are also considered to be material weaknesses.
    D) An auditor is required to search control deficiencies during an audit. 
    B) An auditor may communicate deficiencies during an audit or after the audit's completion. 
    (this multiple choice question has been scrambled)
  33. Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to management and those in charged with governance? 
    A) Management's failure to renegotiate unfavorable long-term purchase commitments. 
    B) Recurring operating losses that may indicate going concern problems. 
    C) Management's current plans to reduce its ownership equity in the entity.
    D) Evidence of a lack of objectivity by those responsible for accounting decisions. 
    D) Evidence of a lack of objectivity by those responsible for accounting decisions. 
    (this multiple choice question has been scrambled)
  34. In identifying matters to be communicated to those individuals charged with governance of an audit client, an auditor most likely would ask management about which of the following? 
    A) The turnover in the accounting department was unusually high. 
    B) It consulted with another CPA about accounting matters. 
    C) It agreed with the auditor’s assessed level of control risk.
    D) There were any subsequent events of which the auditor was unaware. 
    B) It consulted with another CPA about accounting matters. 
    (this multiple choice question has been scrambled)
  35. The Sarbanes-Oxley Act requires:
    A) All public companies to define adequate internal controls.
    B) The auditor of public companies to design effective internal control over financial reporting. 
    C) All public companies to issue an internal control report. 
    D) All of the above.
    C) All public companies to issue an internal control report. 
    (this multiple choice question has been scrambled)
  36. Management must disclose material weaknesses in internal control: 
    A) Only if the auditor discloses the weakness as significant. 
    B) Whenever the weakness is significant to the overall financial reporting objectives. 
    C) If the weakness exists at the end of the year.
    D) Whenever the weakness is deemed significant to a single class of transactions. 
    C) If the weakness exists at the end of the year.
    (this multiple choice question has been scrambled)
  37. Internal control reports issued by public companies must identify the framework used to evaluate the effectiveness of internal control. Which of the following is the most common framework in the US? 
    A) Internal Control--Integrated Framework - COSO. 
    B) Enterprise Internal Control--COSO. 
    C) There is no common framework used in the US.
    D) Effective Internal Control Framework--AICPA. 
    A) Internal Control--Integrated Framework - COSO. 
    (this multiple choice question has been scrambled)
  38. An independent auditor is performing an audit of a company's internal control in connection with its financial reporting under the standards of the Public Company Accounting Oversight Board (PCAOB). A control deficiency has been uncovered. What are the two possible types of control deficiencies? 
    A) Current and noncurrent.
    B) Design and operations.
    C) General and application.
    D) Computer and manual. 
    B) Design and operations.
    (this multiple choice question has been scrambled)
  39. An example of an internal control weakness is to assign to a department supervisor the responsibility for: 
    A) Reviewing and approving time reports for subordinate employees. 
    B) Distributing payroll checks to subordinate employees. 
    C) Initiating requests for salary adjustments for subordinate employees.
    D) Authorizing payroll checks for terminated employees. 
    B) Distributing payroll checks to subordinate employees. 
    (this multiple choice question has been scrambled)
  40. Which of the following procedures most likely would be considered a weakness in an entity's internal controls over payroll? 
    A) Payroll checks are prepared by the payroll department and signed by the treasurer. 
    B) A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary. 
    C) The personnel department sends employees' termination notices to the payroll department.
    D) The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department. 
    D) The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department. 
    (this multiple choice question has been scrambled)
  41. A weakness in internal control over recording retirements of equipment may cause an auditor to:
    A) Trace additions to the 
    B) Select certain items of equipment from the accounting records and locate them in the plant. 
    C) Inspect certain items of equipment in the plant and trace those items to the accounting records.
    D) Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year. 
    B) Select certain items of equipment from the accounting records and locate them in the plant. 
    (this multiple choice question has been scrambled)
  42. In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to:
    A) Determine whether control procedures are suitably designed to prevent or detect material misstatements. 
    B) Perform tests of controls to evaluate the effectiveness of the entity's accounting system. 
    C) Document the auditor's understanding of the entity's internal control structure.
    D) Search for significant deficiencies in the operation of the internal control structure. 
    C) Document the auditor's understanding of the entity's internal control structure.
    (this multiple choice question has been scrambled)
  43. Reportable conditions are matters that come to an auditor's attention, which should be communicated to an entity's audit committee because they represent:
    A) Off-balance sheet transactions that are not fully disclosed in the financial statements. 
    B) Conditions which may result in a disclaimer of an opinion on the financial statements. 
    C) Material irregularities or illegal acts perpetrated by high-level management.
    D) Significant deficiencies in the design or operation of the internal control structure 
    D) Significant deficiencies in the design or operation of the internal control structure 
    (this multiple choice question has been scrambled)
  44. Which of the following statements is correct concerning reportable conditions in an audit? 
    A) Reportable conditions generally lead to an adverse audit opinion. 
    B) An auditor is required to search for reportable conditions during an audit. 
    C) An auditor may communicate reportable conditions during an audit or after the audit's completion.
    D) All reportable conditions are also considered to be material weaknesses. 
    C) An auditor may communicate reportable conditions during an audit or after the audit's completion.
    (this multiple choice question has been scrambled)
  45. Which of the following conditions is necessary for a practitioner to accept an attest engagement to examine and report on an entity's internal control structure over financial reporting? 
    A) Management presents its written assertion about the effectiveness of the internal control structure. 
    B) The practitioner is a continuing auditor who previously has audited the entity's financial statements. 
    C) The practitioner is hired by the audit committee to specifically audit internal control in accordance with generally accepted auditing standards.
    D) The practitioner anticipates relying on the entity's internal control structure in a financial statement audit. 
    A) Management presents its written assertion about the effectiveness of the internal control structure. 
    (this multiple choice question has been scrambled)
  46. Which of the following is an inherent limitation in internal control? 
    A) Incompatible duties. 
    B) Lack of segregation of duties.
    C) Lack of an audit committee.
    D) Faulty human judgment. 
    D) Faulty human judgment. 
    (this multiple choice question has been scrambled)
  47. The Venthura Corporation is a privately held company that is being auditing by the independent firm of Smith and Rapunzel CPAs.  In assessing control risk, the auditors become aware of a significant deficiency in the company’s internal control.  What should the auditors do as a result? 
    A) Provide a qualified audit opinion. 
    B) Release a formal report to the stockholders and any other member of the public who are directly involved with the company. 
    C) Switch the audit to a review because sufficient evidence for an opinion cannot be obtained.
    D) Issue a written report describing the problem to the board of directors and the management of the company. 
    D) Issue a written report describing the problem to the board of directors and the management of the company.
    (this multiple choice question has been scrambled)
  48. When management is evaluating the design of internal control, management evaluates whether the control can do all but which of the following? 
    A) Correct material misstatements. 
    B) Prevent material misstatements. 
    C) Detect material misstatements. 
    D) None of the above is correct.
    A) Correct material misstatements. 
    (this multiple choice question has been scrambled)
  49. Which of the following may increase risk to an organization? 
    A) Quality of personnel. 
    B) Presence of new informatin technologies. 
    C) Geographic dispersion of the company operations. 
    D) All of the above.
    D) All of the above.
  50. Risk assessment for financial reporting is management's process for identifying, analyzing, and responding to risks relevant to the preparation of financial statements in conformity with 
    A) Generally Accepted Accounting Standards 
    B) Generally Accepted Auditing Standards. 
    C) Generally Accepted Accounting Principles
    D) PCAOB Auditing Standards. 
    C) Generally Accepted Accounting Principles
    (this multiple choice question has been scrambled)
  51. An auditor is currently assessing control risk and finds that it is lower than had been anticipated. How does this discovery impact the work of the auditor? 
    A) The acceptable level of audit risk can be raised. 
    B) The acceptable level of inherent risk can be lowered. 
    C) The acceptable level of detection risk can be raised.
    D) The acceptable level of audit risk can be lowered. 
    C) The acceptable level of detection risk can be raised.
    (this multiple choice question has been scrambled)
  52. A(n) ___________ deficiency exists if a necessary control is missing or not properly formulated. 
    A) Design. 
    B) Operation. 
    C) Control.
    D) Significant. 
    A) Design. 
    (this multiple choice question has been scrambled)
  53. Risk assessment involves considering threats to the organization's objectives in the areas of 
    A) Marketing, financial reporting and compliance. 
    B) Operations, financial reporting and compliance with laws and regulations. 
    C) Compliance with laws and regulations, operations and performance.
    D) Financial reporting, performance and marketing. 
    B) Operations, financial reporting and compliance with laws and regulations. 
    (this multiple choice question has been scrambled)
  54. To obtain an understanding of the entity and its environment, including its internal control, the auditor should perform each of the following risk assessment procedures except: 
    A) Inquiries of management and others within the entity. 
    B) Analytical procedures. 
    C) Observation and inspection.
    D) Attribute sampling. 
    D) Attribute sampling. 
    (this multiple choice question has been scrambled)
  55. An auditor uses the assessed level of control risk to 
    A) Determine the acceptable level of detection risk for financial statement assertions. 
    B) Evaluate the effectiveness of the entity's internal control policies and procedures. 
    C) Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.
    D) Identify transactions and account balances where inherent risk is at the maximum. 
    A) Determine the acceptable level of detection risk for financial statement assertions. 
    (this multiple choice question has been scrambled)
  56. When an auditor increases the assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the 
    A) Tests of controls. 
    B) Extent of tests of details. 
    C) Population size.
    D) Tolerable risk. 
    B) Extent of tests of details. 
    (this multiple choice question has been scrambled)
  57. In assessing control risk for purchases, an auditor compares a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? 
    A) Valuation or allocation. 
    B) Rights and Obligations 
    C) Completeness.
    D) Existence or occurrence. 
    D) Existence or occurrence. 
    (this multiple choice question has been scrambled)
  58. When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs. 
    A) Analytical procedures for current year property and equipment transactions. 
    B) Tests of controls and extensive tests of property and equipment balances at the end of the year. 
    C) Analytical procedures for property and equipment balances at the end of the year.
    D) Tests of controls and limited tests of current year property and equipment transactions. 
    D) Tests of controls and limited tests of current year property and equipment transactions. 
    (this multiple choice question has been scrambled)
  59. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that 
    A) Material misstatements may exist in the financial statements. 
    B) Entity policies may be overridden by senior management. 
    C) Tests of controls may fail to identify procedures relevant to assertions.
    D) Specified controls requiring segregation of duties may be circumvented by collusion. 
    A) Material misstatements may exist in the financial statements. 
    (this multiple choice question has been scrambled)
  60. When control risk is assessed as being low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and 
    A) Recalculating payroll accruals. 
    B) Observing the distribution of paychecks. 
    C) Inspecting payroll tax returns.
    D) Footing and cross footing the payroll register. 
    A) Recalculating payroll accruals. 
    (this multiple choice question has been scrambled)
  61. An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible for 
    A) Comparing payroll registers with original batch transmittal data. 
    B) Authorizing payroll rate changes for all employees. 
    C) Hiring all subordinate payroll department employees.
    D) Examining authorization forms for new employees. 
    B) Authorizing payroll rate changes for all employees. 
    (this multiple choice question has been scrambled)
  62. Which of the following is a control procedure that most likely could help prevent employee payroll fraud? 
    A) The personnel department promptly sends employee termination notices to the payroll supervisor. 
    B) Total hours used for determination of gross pay are calculated by the payroll supervisor. 
    C) Employees who distribute payroll checks forward unclaimed payroll checks to the absent employees' supervisors.
    D) Salary rates resulting from new hires are approved by the payroll supervisor. 
    A) The personnel department promptly sends employee termination notices to the payroll supervisor. 
    (this multiple choice question has been scrambled)
  63. Which of the following internal control activities most likely would justify a reduced assessed level of control risk concerning plant and equipment acquisitions? 
    A) Periodic physical inspection of plant and equipment by the internal audit staff. 
    B) Comparison of current-year plant and equipment account balances with prior-year actual balances. 
    C) Approval of periodic depreciation entries by a supervisor independent of the accounting department.
    D) The review of prenumbered purchase orders to detect unrecorded trade-ins. 
    A) Periodic physical inspection of plant and equipment by the internal audit staff. 
    (this multiple choice question has been scrambled)
  64. In assessing control risk, the auditor starts by learning the design of the control system and then considers whether to perform tests of individual controls. If the design of the control system is viewed as weak, which of the following is most likely to be true? 
    A) The auditor will be likely to test the controls because of the weakness. 
    B) The auditor is likely to do additional substantive testing. 
    C) An unqualified opinion cannot be issued.
    D) The auditor will likely reduce the assessment of inherent risk. 
    B) The auditor is likely to do additional substantive testing. 
    (this multiple choice question has been scrambled)
  65. An independent CPA is assessing the level of control risk present at a company that is currently being audited. This company has an internal audit department and the independent CPA is evaluating the objectivity of that department. Which of the following is a sign that the department has proper objectivity? 
    A) The size of the department has grown from 7 people to 19 over the last three years. 
    B) In order to be promoted within this department, the employee must have become a CPA. 
    C) The head of the department had seven years of experience with an international accounting firm before taking this position with the company.
    D) The head of the department meets privately with the chair of the board of directors each quarter. 
    D) The head of the department meets privately with the chair of the board of directors each quarter. 
    (this multiple choice question has been scrambled)
  66. One of the components of internal control that an independent auditor must come to understand about each audit client is “information and communication.” What is meant by this term? 
    A) The ability of the management of the company to communicate its priorities to the appropriate staff levels within the organization. 
    B) The ability of the accounting system to generate reliable information and convey it in a timely manner to those parties within the organization that need it. 
    C) The ability of the internal auditor to communicate information about the various systems to people within the organization at an appropriate level of authority.
    D) The ability of employees in a company to warn the independent auditor of fraudulent actions within the organization. 
    B) The ability of the accounting system to generate reliable information and convey it in a timely manner to those parties within the organization that need it. 
    (this multiple choice question has been scrambled)
  67. A CPA firm is performing an audit engagement and it currently beginning to assess the amount of control risk.   Which of the following is not viewed as one of the components of a company’s internal control? 
    A) Control environment 
    B) Risk assessment 
    C) Design and formulation
    D) Control activities 
    C) Design and formulation
    (this multiple choice question has been scrambled)
  68. A CPA firm is beginning the audit of Panasian Corporation.  One of the staff auditors has been assigned to gain and then document her understanding of the internal controls designed to be in place in the company’s payroll system.  At the end of the day, the staff auditor has created a series of flowcharts, questionnaires, and narrative descriptions based on the understanding she has obtained.   Which of the following is correct? 
    A) The questionnaire approach is preferred. 
    B) The flowchart approach is preferred. 
    C) She only needed to use one of these techniques.
    D) She was correct in using all three of these techniques to fulfill this assignment. 
    C) She only needed to use one of these techniques.
    (this multiple choice question has been scrambled)
  69. The firm of Martin & Lawrence, CPAs is undertaking the financial statement audit of GigantoCorp, which outsources its payroll processing to HR Specialist Company.  Martin & Lawrence are considering the internal controls of HR Specialist Company in the assessment of control risk in the audit of GigantoCorp.  Tommy, Lee, & Jones, CPAs is the auditor of HR Specialist Company and has recently issued a report detailing HR Specialist Company's procedures and policies for payroll processing services, which it has provided to Martin & Lawrence.  Martin & Lawrence should:  
    A) Assess control risk at the maximum level, as Martin & Lawrence have no firsthand knowledge of the controls of HR Specialist Company 
    B) Perform tests of controls at HR Specialist Company 
    C) Make appropriate inquiries to assess the professional reputation of Tommy, Lee, & Jones
    D) Refer to Tommy, Lee, & Jones in the audit opinion if its report is relied upon in the assessment of control risk 
    C) Make appropriate inquiries to assess the professional reputation of Tommy, Lee, & Jones
    (this multiple choice question has been scrambled)
  70. Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions? 
    A) Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal. 
    B) Inquire about the entity's credit granting policies and the consistent application of credit checks. 
    C) Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.
    D) Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list. 
    A) Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal. 
    (this multiple choice question has been scrambled)
  71. Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of 
    A) Presentation and disclosure. 
    B) Existence or occurrence. 
    C) Valuation or allocation.
    D) Completeness. 
    D) Completeness. 
    (this multiple choice question has been scrambled)
  72. Internal control procedures are strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the 
    A) Purchasing agent. 
    B) Accounts payable department. 
    C) Department that initiated the requisition.
    D) Receiving department. 
    D) Receiving department. 
    (this multiple choice question has been scrambled)
  73. While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record 
    A) Sales returns. 
    B) Sales. 
    C) Purchase discounts.
    D) Purchase returns. 
    A) Sales returns. 
    (this multiple choice question has been scrambled)
  74. To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the 
    A) Terms of the open purchase orders. 
    B) Purchase cut-off procedures. 
    C) Contractual commitments made by the purchasing department.
    D) Purchase invoices received on or around year-end. 
    B) Purchase cut-off procedures. 
    (this multiple choice question has been scrambled)
  75. Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process? 
    A) Parallel simulation. 
    B) Generalized audit software programming. 
    C) Integrated test facility.
    D) Test data approach. 
    C) Integrated test facility.
    (this multiple choice question has been scrambled)
  76. An auditor most likely would introduce test data into a computerized payroll system to test internal controls related to the 
    A) Early cashing of payroll checks by employees. 
    B) Proper approval of overtime by supervisors. 
    C) Discovery of invalid employee I.D. numbers.
    D) Existence of unclaimed payroll checks held by supervisors. 
    C) Discovery of invalid employee I.D. numbers.
    (this multiple choice question has been scrambled)
  77. An auditor who is testing EDP controls in a payroll system would most likely use test data that contain conditions such as 
    A) Deductions not authorized by employees. 
    B) Overtime not approved by supervisors. 
    C) Time tickets with invalid job numbers.
    D) Payroll checks with unauthorized signatures. 
    C) Time tickets with invalid job numbers.
    (this multiple choice question has been scrambled)
  78. Processing data through the use of simulated files provides an auditor with information about the operating effectiveness of control policies and procedures. One of the techniques involved in this approach makes use of 
    A) Program code checking.
    B) An integrated test facility. 
    C) Controlled reprocessing.
    D) Input validation. 
    B) An integrated test facility. 
    (this multiple choice question has been scrambled)
  79. An effective system of control procedures over the payroll function would include:
    A) Preparation of payroll transaction journal entries by an employee who reports to the supervisor of the personnel department. 
    B) Verification of agreement of job time tickets with employee clock card hours by a payroll department employee. 
    C) Reconciliation of totals on job time tickets with job reports by employees responsible for those specific jobs.
    D) Custody of rate authorization records by the supervisor of the payroll department. 
    B) Verification of agreement of job time tickets with employee clock card hours by a payroll department employee. 
    (this multiple choice question has been scrambled)
  80. For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to 
    A) The treasurer's department. 
    B) General accounting. 
    C) The internal accounting department.
    D) Payroll accounting. 
    B) General accounting. 
    (this multiple choice question has been scrambled)
  81. In a well-designed internal control system, the same employee may be permitted to 
    A) Mail signed checks and also cancel supporting documents. 
    B) Prepare receiving reports and also approve purchase orders. 
    C) Mail signed checks and also prepare bank reconciliations.
    D) Approve vouchers for payment and also have access to unused purchase orders. 
    A) Mail signed checks and also cancel supporting documents. 
    (this multiple choice question has been scrambled)
  82. Epptons, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. The internal control structure at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Epptons would most likely 
    A) Send negative confirmation requests. 
    B) Send positive confirmation requests. 
    C) Examine evidence of subsequent cash receipts.
    D) Inspect the internal records such as copies of the tax invoices that were mailed to the residents. 
    B) Send positive confirmation requests
    (this multiple choice question has been scrambled)
  83. Effective internal control over purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has 
    A) The authority to make purchases of requisitioned materials and services. 
    B) A direct reporting responsibility to the controller of the organization. 
    C) The ability to prepare payment vouchers based on the information on a vendor's invoice.
    D) The responsibility of reviewing purchase orders issued by user departments. 
    A) The authority to make purchases of requisitioned materials and services. 
    (this multiple choice question has been scrambled)
  84. Which of the following internal controls most likely would reduce the risk of diversion of customers receipts by an entity's employees? 
    A) A bank lockbox system. 
    B) Prenumbered remittance advices. 
    C) Daily deposit of cash receipts.
    D) Monthly bank reconciliations. 
    A) A bank lockbox system. 
    (this multiple choice question has been scrambled)
  85. Which of the following would most likely be an internal control procedure designed to detect errors and irregularities concerning the custody of inventory? 
    A) Periodic reconciliation of work in process with job cost sheets. 
    B) Independent comparisons of finished goods records with counts of goods on hand. 
    C) Segregation of the functions between general accounting and cost accounting.
    D) Approval of inventory journal entries by the storekeeper. 
    B) Independent comparisons of finished goods records with counts of goods on hand. 
    (this multiple choice question has been scrambled)
  86. An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? 
    A) Select and examine canceled checks and ascertain that the related vouchers are dated no earlier than the checks. 
    B) Select and examine vouchers and ascertain that the related canceled checks are dated no earlier than the vouchers. 
    C) Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.
    D) Select and examine vouchers and ascertain that the related canceled checks are dated no later than the vouchers. 
    C) Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.
    (this multiple choice question has been scrambled)
  87. Tests of controls may include which of the following types of evidence? 
    A) Inquiry.
     )B Observation. 
    C) Inspection. 
    D) All of the above.
    D) All of the above.
  88. An increased extent of the tests of controls is most likely to occur when 
    A) It is a first-time audit. 
    B) Controls are ineffective and the preliminary control risk assessment is high. 
    C) The auditor is performing a fraud audit.
    D) Controls are effective and the preliminary control risk assessment is low. 
    D) Controls are effective and the preliminary control risk assessment is low. 
    (this multiple choice question has been scrambled)
  89. Which of the following best describes proper internal control over payroll? 
    A) The payment of cash to employees should be replaced with payment by checks. 
    B) The confidentiality of employee payroll data should be carefully protected to prevent fraud. 
    C) The preparation of the payroll must be under the control of the personnel department.
    D) The duties of hiring, payroll computation, and payment to employees should be segregated. 
    D) The duties of hiring, payroll computation, and payment to employees should be segregated. 
    (this multiple choice question has been scrambled)
  90. Transaction authorization within an organization may be either specific or general. An example of a specific transaction authorization is the 
    A) Setting of automatic reorder points for material or merchandise. 
    B) Approval of a detailed construction budget for a warehouse. 
    C) Establishment of sales prices for products to be sold to any customer.
    D) Establishment of requirements to be met in determining a customer's credit limits. 
    B) Approval of a detailed construction budget for a warehouse. 
    (this multiple choice question has been scrambled)
  91. Which of the following internal control activities most likely would prevent direct labor hours from being charged to manufacturing overhead? 
    A) Use of time tickets to record actual labor worked on production orders. 
    B) Periodic independent counts of work in process for comparison to recorded amounts. 
    C) Reconciliation of work-in-process inventory with periodic cost budgets.
    D) Comparison of daily journal entries with approved production orders. 
    A) Use of time tickets to record actual labor worked on production orders. 
    (this multiple choice question has been scrambled)
  92. Which of the following is ordinarily considered a test of controls? 
    A) Send confirmation letters to banks. 
    B) Count and list cash on hand. 
    C) Obtain or prepare reconciliations of bank accounts as of the balance sheet date.
    D) Examine signatures on checks. 
    D) Examine signatures on checks. 
    (this multiple choice question has been scrambled)
  93. An auditor compares data for a sample of employees in a payroll register to approved clock card data to provide assurance that 
    A) Internal controls relating to unclaimed payroll checks are operating effectively. 
    B) Segregation of duties exist between the preparation and distribution of the payroll. 
    C) Employees work the number of hours for which they are paid.
    D) Payments to employees are computed at authorized rates. 
    C) Employees work the number of hours for which they are paid.
    (this multiple choice question has been scrambled)
  94. An auditor would consider internal control over a client's payroll procedures to be ineffective if the payroll department supervisor is responsible for 
    A) Updating employee earnings records. 
    B) Hiring subordinate payroll department employees. 
    C) Having custody over unclaimed paychecks.
    D) Applying pay rates to time tickets. 
    C) Having custody over unclaimed paychecks.
    (this multiple choice question has been scrambled)
  95. Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department? 
    A) Canceling supporting documentation after payment. 
    B) Signing the voucher for payment by an authorized person. 
    C) Comparing the vendor's invoice with the receiving report.
    D) Verifying the mathematical accuracy of the vendor's invoice. 
    A) Canceling supporting documentation after payment. 
    (this multiple choice question has been scrambled)
  96. Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? 
    A) Compare the accounts receivable ledger to daily sales summaries. 
    B) Examine shipping documents for matching sales invoices. 
    C) Scan the sales journal for sequential and unusual entries.
    D) Inspect unused sales invoices for consecutive prenumbering. 
    B) Examine shipping documents for matching sales invoices. 
    (this multiple choice question has been scrambled)
  97. Which of the following internal control procedures is not usually performed in the vouchers payable department? 
    A) Approving vouchers for payment by having an authorized employee sign the vouchers. 
    B) Indicating the asset and expense accounts to be debited. 
    C) Accounting for unused prenumbered purchase orders and receiving reports.
    D) Matching the vendor's invoice with the related receiving report. 
    C) Accounting for unused prenumbered purchase orders and receiving reports.
    (this multiple choice question has been scrambled)
  98. Internal control over cash receipts is weakened when an employee who receives customer mail receipts also 
    A) Prepares bank deposit slips for all mail receipts. 
    B) Maintains a petty cash fund. 
    C) Records credits to individual accounts receivable.
    D) Prepares initial cash receipts records. 
    C) Records credits to individual accounts receivable.
    (this multiple choice question has been scrambled)
  99. Xavier, CPA is currently auditing the financial statements of the Polk Corporation. At the moment, Xavier is assessing the control risk surrounding the recognition of sales revenue. The CPA has become concerned that revenues are understated. The CPA thinks the company may be shipping merchandise to false customers with no sales invoice (or other record) being prepared. If true, company employees are using this scheme to steal goods from the company. In assessing the possibility of this problem, which of the following is the auditor most likely to do? 
    A) Take a sample of sales invoices and match those documents to the appropriate bill of lading or other shipping document. 
    B) Take a sample of receiving reports and match those documents to the appropriate sales invoice. 
    C) Take a sample of bills of lading (or other shipping document) and match those documents to the appropriate sales invoice.
    D) Take a sample of cash receipts and match those payments to the appropriate sales invoice. 
    C) Take a sample of bills of lading (or other shipping document) and match those documents to the appropriate sales invoice.
    (this multiple choice question has been scrambled)
  100. A CPA is performing an audit examination of Malfoy, Inc. The CPA has already done the work necessary to gain a general understanding of the company’s internal control. The CPA is now looking at the internal control policies and procedures within the accounting system specifically for accounts receivable. The CPA has decided to perform test of controls in this area. Which of the following is least likely to be true? 
    A) The system contains an excess number of possible problems so that testing is required. 
    B) The internal control system appears to be well designed. 
    C) The CPA hopes to reduce overall audit time.
    D) The CPA hopes to reduce the necessary amount of substantive testing. 
    A) The system contains an excess number of possible problems so that testing is required. 
    (this multiple choice question has been scrambled)
  101. A customer buys some furniture from a company and must be billed for the $879 sales price.  The company’s billings department prepares a sales invoice which is properly approved.  Which of the following statements is not true? 
    A) The billings department retains a copy for its records. 
    B) The inventory management department gets a copy to update the perpetual records. 
    C) The accounts receivable department is sent a copy.
    D) The customer receives a copy. 
    B) The inventory management department gets a copy to update the perpetual records. 
    (this multiple choice question has been scrambled)
  102. The Waynesboro Corporation has recently installed a new computer payroll processing program.  Before the program is used to compute actual payroll checks for the employees, test data is going to be run through the computer to see how it would be processed.  Which of the following is least likely to be tested in this manner? 
    A) Two checks requested for the same employee 
    B) A check requested for an employee who quit two months earlier. 
    C) A check requested for an employee paid an hourly rate of $12 per hour.
    D) A check requested for an employee working more than 60 hours per week. 
    C) A check requested for an employee paid an hourly rate of $12 per hour.
    (this multiple choice question has been scrambled)
  103. Jane Simpson works for Shadowline Corporation and is paid $30 per hour.  She typically works 28 hours per week but always reports that she works 32 hours per week so that she can receive additional wages from the company.   Which of the following internal control activities is most likely to prevent this type of theft? 
    A) The company’s payroll program is tested each month with test data to ensure that it operates properly. 
    B) A separate paymaster delivers the checks each pay period to Jane Simpson after verifying her identity. 
    C) Any paychecks that are printed but not picked up must be turned over to an independent group for subsequent handling.
    D) The supervisor for Jane Simpson must review her time sheet each period and indicate approval. 
    D) The supervisor for Jane Simpson must review her time sheet each period and indicate approval. 
    (this multiple choice question has been scrambled)