Audit-MC-Ch5

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Seifer
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141375
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Audit-MC-Ch5
Updated:
2012-03-22 14:23:42
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Auditing Chapter Risk Assessment Internal Control Evaluation
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Risk Assessment: Internal Control Evaluation
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  1. The mos important fundamental component of an entity's control is

    a) Effectiveness and efficiency of operations

    b) People who operate the control system

    c) reliability of financial reporting

    d) Compliance wiht applicable laws and regulations
    b) "People" is the most important fundamental component

    a. Incorrect - Effectiveness and efficiency is an objectives category, not a fundamental component

    c). incorrect - Reliability of financial reporting is an objectives category, not a fundamental component

    d. Incorrect - Compliance with laws and regulations is an objectives category, not a fundamental component
  2. 5.40 The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to

    a) Provide a basis for making constructive suggestions in a managment letter

    b) Determine the nature, timing, and extent of tests to be be performed in the audit

    c) Obtain sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements under examination

    d) Provide information for a communicaiton of intenral control related matters to management
    b) These are auditor's responsibilities under GAAS

    a. incorrect - Managment letter suggestions are a secondary purpose

    c. Incorrect - this does not only relate to internal control

    d. Incorrect - Communication of control-related matters is a secondary purpose
  3. 5.41 Effectiveness of audit procedures would be reduced by

    a) Selecting larger sample sizes for audit

    b) Performing audit procedures at the fiscal year-end date, as opposed to the interim period

    c) Deciding to obtain external evidence instead of interrnal evidence

    d) Performing procedures during the interim period, as opposed to at the fiscal year-end date
    D) Performing procedures at an interim date is less effective

    a. Incorrect - Larger sample sized expand audit procedures

    b. Incorrect - Performing procedures at year end instead of at interim generally represent stricter application

    c. Incorrect - External evidence represents stricter application
  4. 5.42 Financial totals can be used for

    a) Input controls

    b) Processing controls

    c) Output controls

    d) All of the above
    D) Financial totals can be used as input, processing, and output controls
  5. 5.43 Which of the following is an application control?

    a) Locked doors to the central server

    b) Change controls over new programs

    c) Backup controls

    d) An output control department that ensures that reports go to authorized recipients
    d) This is an output control

    a. Incorrect - this is a general control that secures the hardware

    b. Incorrect - This is a general control over software changes

    c. Incorrect - this is a general control for all data
  6. 5.44 Which of the following is a preventative control?

    a) A reconciliation of a bank account

    b) Internal auditors recalculating a sample of payroll entries

    c) Separation of duties betweeen the payroll and personnel departments

    d) Use of hash totals for the payroll input sheet
    c) This is a preventative Control - the others are Detective Controls

    • a. incorrect - this is a detective control
    • b. incorrect - this is a detective control
    • d. incorrect - this is a detective control
  7. 5.45 In most audits of large entities, control risk assessment contributes to audit efficiency, which means that

    a) the cost of substantive procedures will exceed the cost of control evaluation work

    b) Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs

    c) The cost of control evaluation work will exceed the cost of substantive procedures

    d) Auditors will be able to reduce the cost of substantive procedures by an amount less than the cost of tests of controls
    B. Correct - The substantive testing cost savings exceeds teh control evaluation cost

    a. Incorrect - the absolute amount of cost is irrelevant. Year-end substantive work usually costs more than control evaluation work

    c. Incorrect - Whether the cost of control work exceeds (or does not exceed) the cost of year-end work is irrelevant. Efficiency relates to the cost that can be saved as a result of control evaluation work.

    d. Incorrect - Efficiency is not achieved by cost reductions being less than control work cost
  8. 5.46. Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client?
    B. Correct - The ICQ is a device for collecting evidence in the form of answers to control questions

    a. Incorrect - the narrative is the documentation result of obtaining evidence

    c. Incorrect - A flowchard is teh documentation result of obtaining evidence

    d. Incorrect - Only the ICQ aids in obtaining the evidence
  9. 5.46Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client?

    a) A narrative memorandum describing the control system

    b) An internal control questionnaire

    c) A flowchart of the documents and procedures used by the company

    d) all of the above
    b) The ICQ is a device for collecting evidence in the form of answers to control questions
  10. A bridge workpaper shows the connection between

    a) Control evaluation findings and subsequent audit procedures

    b) Management objectives and accounting system procedures

    c) Managment objectives and entity control activities

    d) Financial statement assertions and tests of controls
    a) The bridge working paper connects control evaluation findings of strengths to test of control activitites for testing the strengths, and control evaulation findings of weakness to suggestions for substantive procedures

    b. Inccorect - Management objectives are only implicit in the bridge working paper

    c. Incorrect - Management objectives are only implicit in the bridge working papper

    d. Incorrect - Assertions are related directly to substantive procedures and not to test of control activities
  11. Tests of controls in GAAS audit are required for

    a) obtaining evidence about the financial statement assertions

    b) Accomplishing control over the occurence of recorded transactions

    c) Applying analytical procedures to financial statement balances

    d) obtaining evidence aout the operating effectiveness of client control activities
    d) Tests of controls produce the evidence about actual operation of company control activities

    a. Incorrect - Sustantive procedures produce evidence about financial statement assertions

    b. Incorrect - Company control activities accomplish company management objectives

    c. Incorrect - Analytical review is not accomplished with test of control activities
  12. A client's financial control activity is

    a) An action taken by auditors to obtain evidence

    b) An action taken by client peronnel for the purpose of prevening, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company

    c) A method for recording, summarizng, and reporting financial information

    d) The functioning of the board of directors in support of its audit compliance
    b) The is one general way to define the purpose of control activities

    a. incorrect - This describes an audit procedure

    c. Incorrect - This is a definiton of an accounting system

    d. Incorrect - This is a description of one of the elements of the control environment
  13. When planning an audit of internal controls under AS 5, the audit team should

    a) identify significant accounts, locations, and assertions

    b) Conduct a walkthrough of the internal control process

    c) Make inquireis of employees regarding the existence of control activities

    d) Reperform control activities performed by client employees to determine their effectiveness
    a) The audit team identifies significant accounts, locations, and assertions in the planning stage of an integrated audit

    b. Incorrect - the audit team conducts a walkthrough of the internal control process when gaining an understanding of the company's internal controls

    c. Incorrect - the audit team makes inquiries of employees regarding the existence of control activities when gaining an understanding of the company's internal control

    d. Incorrect - the audit tema reperforms control activities performed by client employees to determine their effectiveness when testing the effectiveness of the company's internal control
  14. A material weakness is a situation in which

    a) IT is probably that an immaterial financial stateme nmisstatement would not be detected on a timely basis

    b) There is a remote likelihood that a material misstatement would not be detected on a timely basis

    c) It is reasonably possible that a material misstatement would not be detected on a timely basis

    d) IT is reasonable possible that an immaterial misstatement would not be detected on a timely basis
    c) A material weakness in internal control is defined as a deficiency, or combinaiton of deficiencies, that results in a reasonable possibility that a material misstatment would not be prevented or detected on a timely basis
  15. Totals of amounts in computer-recorded data fields that are not usually added but are used only for data processing control purposes are called

    a) Record totals

    b) Hash totals

    c) Processing data totals

    d) Field totals
    b) Hash totals involve non dollar totals

    a. Incorrect - Record totals suggest dollar amounts

    c. Incorrect - Data totals suggest dollar amounts

    d. Incorrect - field totals suggest dollar amounts
  16. AS 5 requires auditors of public companies to audit internal control over

    a) operations

    b) Compliance with regulations

    c) Financial reporting

    d) All of the above
    c) AS 5 applies to financial reporting controls only
  17. AS 5 requires auditors to test

    a) Operating effectivness only

    b) Design effectiveness only

    c) Both operating and design effectiveness

    d) Netiher operating nor desing effectiveness
    c) AS 5 requires testing for design effectiveness and operating effectiveness
  18. Which of the following would probably not be considered an indication of a material weakness?

    a) Evidnce of a material misstatement

    b) Ineffective oversight by the audit committee

    c) An immaterial fraud committed by senior management

    d) Overproduction by the manufacturing plant
    d) This does not directly relate to a material misstatement

    a. incorrect - This indicates a possible material weakness

    b. Incorrect - this indicates a possible material weakness

    c. Incorrect - this indicates a possible material weakness
  19. Which report would not be appropriate for a public accounting firm to provide on financial reporting controls?

    a) Unqualified - No material weakness found

    b) Disclaimer of opinion - unable to perform all necessary procedures

    c) Disclaimer of opinion - significant deficiencies exist

    d) Adverse - material weaknesses exist
    c) a disclaimer is used when the auditor's scope is limited

    a. Incorrect - This is an appropriate report

    b. Incorrect - This is an apporpriate report

    d. Incorrect - Thi is an appropriate report
  20. The purpose of separating the duties of hiring peronnell and distributing payroll checks is to separate the

    a) authorization of transactions from the custody of related assets

    b) Operational responsibility from the recored- keeping responsibility

    c) Human resoures function from the controllership function

    d) Administrative controls from the internal accounting controls
    a) In principle, the payroll function should be divided into authorization, recording, and custody functions. Authorization of hiring, wage rates, and deductions is provided by peronnel. Authorization of hours worked (executued by employees) is provided by production. Based on these authorizations, accounting calculates and records the payroll. Based on the calculated amounts, the treasurer prepares and distributes payroll checks
  21. Which of the following statement is not true with respect to the auditor's report on internal control over financial reporting?

    a) The report will be dated as of the balance sheet date

    b) The report will express an opinion on the effectiveness of internal contol over financial reporting

    c) In one ore more material weaknesses exist, the audito will issue an adverse opinion

    d) The report may be presented with the report on the entity's financial statements as a combined report
    a) The report would be dated as of the date that enough evidence has been gathered to support the auditor's opinion son the effectiveness of the entity's internal control

    b. Incorrect - The report does not express an opinion on management's assessment of internal control over financial reporing as well as the effectiveness of internal control over financial reporting

    c. Incorrect - An adverse opinion is issued if one or more material weakness(es) exists

    d. Incorrect - The report on internal control over financial reporting can be presented along with the report on the company's financial statements or as a combined report
  22. If the auditors encounter a significnat scope limitation in evaluating a public company's internal control over financial reporting, which of the following types of opinions on the effectiveness of the company's internal control over financial reporting would be appropriate?

    a) unqualified opinion or adverse opinion

    b) qualifed opinion or adverse opinion

    c) Unqualified opinion or disclaimer of opinion

    d) Disclaimer of opinion
    d) The reporting option when a scope limitation exists is a disclaimer of opinion

    a. Incorrect - the reporting option when a scope limitation exists is a disclaimer of opinion

    b. Incorrect - a qualified opinion is not a valid reporting option for a scope of limitation and an adverse opinion would only be issued when one ore more material weakness(es) is identified.

    c. Incorrect - While a disclaimer of opinion is one possible reporting option, it is not appropriate to issue an unqualified opinion if a significant scope limitation exists.
  23. Which of the following information would be included in the introductory paragraph of the auditor's report on internal control over financial reporting if the report is presented separately from the auditors' report on the entity's financial statements?

    a) The fact that the auditors conducted an audit of the entity's financial statements

    b) The definition of a material weakness in internal control over financial reporting

    c) Statements identifiying the responsibility of the auditors and management for internal control over financial reporting

    d) A reference to the auditors' report and opinion on the entity's financial statements
    c) Statements identifying the responsibility of the auditor and management for internal control over financial reporting would be included in the introductory paragraph

    a. Incorrect - Reference to the audit of the entity's financial statements would be included in the introductory paragraph of a combined report on teh company's fiancial statements and internal control over financial reporing, but not a separate report on internal control over financial reporting

    b. Incorrect - If a material weakness is identified, the auditor will add a paragraph to the report that defines a material weakness. However, this information would not be included in the introductory paragraph.

    d. Incorrect - References to the auditor's report and opinion on teh company's financial statements would be included in an explanatory paragraph following the opinion paragrpah, not the introductory paragraph.

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