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Understanding Internal Control and Audit Processes

An overview of internal control mechanisms and audit procedures in financial management.

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    Understanding Internal Control and Audit Processes 1 . A set of characteristics that helps to define a seriousness about employees' attitudes about the control activities in a company is referred to as A. Management assertions. B. Control environment. C. Control risk assessment. D. Functional responsibilities. 2. Sound internal control can be described as separating all of the following duties and responsibilities except for A. Transaction authorization. B. Recordkeeping. C. Custody of, or direct access to, assets. D. Hiring of employees.

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    3. The "obtaining an understanding" work phase (phase 1) of internal control evaluation would not give auditors an overall acquaintance with the client's A. Control environment. B. Information and communication system. C. Control activity effectiveness. D. Monitoring activities. 4. The internal control in small business is highly dependent on the A. Separation of functional responsibilities. B. Complexity of the client's internal controls. C. Owner - manager's competence as well as ethics and integrity. D. Bonding of employees. 5 . Which of the following is the least important audit reason for the auditor's obtaining an understanding of a company's internal control? A. To serve as a basis for constructive suggestions. B. To plan subsequent substantive tests. C. To identify types of possible misstatements that may occur. D. To consider factors that may affect the risk of material misstatement.

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    6 . If auditors assess control risk at the maximum level, they will tend to A. Perform a great deal of additional tests of controls. B. Perform a great deal of substantive testing during the audit. C. Perform substantive tests at an interim date. D. Perform more audit procedures using internal evidence. 7 . If a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll IT application? A. Hours worked. B. Total debits and total credits. C. Net pay. D. Department numbers.

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    8 . Generally accepted auditing standards (GAAS) give auditors considerable discretion to decide the amount of work required to satisfy auditing standards guiding internal control evaluation and related audit planning. Which of the following descriptions best expresses the minimum amount of work permitted by GAAS for nonpublic companies? A. Do not obtain an understanding of client environment, accounting, or control activities. Do not document the decision to assess control risk at maximum. Perform 100% substantive audit on all financial statement transactions and balances. B. Obtain an understanding of client environment, accounting, and control activities. Document the decision to assess control risk at maximum. Perform an extensive but not 100% substantive audit on financial statement transactions and balances. C. Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk below the maximum. Perform restricted substantive audit on financial statement transactions and balances, considering the control risk assessment. D. Obtain an understanding of client environment, accounting, and control activities, and perform detail tests of controls. Document the decision to assess control risk at zero. Perform no substantive audit on financial statement transactions and balances because zero control risk means that no errors or fraud can affect the accounts.

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    9 . Which of the following is not an objective of internal controls over financial reporting as defined by the Sarbanes - Oxley Act? A. Policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant. B. Policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant. C. Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations. D. Policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the registrant's assets that could have a material effect on the financial statements. 10 . Assessing control risk at below the maximum level most likely would involve A. Performing more extensive substantive tests with larger sample sizes than originally planned. B. Reducing inherent risk for most of the assertions relevant to significant account balances. C. Changing the timing of substantive tests by omitting interim - date testing and performing the tests at year - end. D. Identifying specific internal control activities that are relevant to specific financial statement assertions.

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    11 . According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to A. Determine whether the company's controls are processing company data effectively. B. Determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as prescribed. C. Determine that the company's employees are processing the controls according to the policy and procedure manuals at the company. D. None of the above. 12 . Tests of controls in a GAAS audit are required for A. Obtaining evidence about the financial statement assertions. B. Accomplishing control over the occurrence of recorded transactions. C. Applying analytical procedures to financial statement balances. D. Obtaining evidence about the operating effectiveness of client control activities.

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    13 . Which of the following does not accurately summarize auditors' requirements regarding internal control? A. Option A B. Option B C. Option C D. Option D 14 . If the auditors encounter a significant 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. Qualified opinion or adverse opinion. C. Unqualified opinion or disclaimer of opinion. D. Disclaimer of opinion.

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    15 . Significant deficiencies are defined as conditions that A. Could adversely affect the organization's ability to initiate, record, process, and report financial data in the financial statements. B. Result in a reasonable possibility that a material misstatement exists in financial statements. C. Exist when the design or operation of a control does not allow the company's management or employees to detect or prevent misstatements in a timely fashion. D. Relate to either a necessary control that is missing or an existing control that is so poorly designed that it fails to satisfy the control's objective. Chapter 06 16 . An audit plan of substantive procedures for cash would not include A. Requesting a cutoff bank statement be mailed to the client. B. Requesting the client to prepare bank reconciliations. C. Preparing a schedule of interbank transfers for a period of 10 business days before and after year - end date. D. Obtaining a written client representation concerning compensating balance agreements.

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