Understanding Internal Control and Audit Processes

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Understanding Internal Control and Audit Processes1.A set of characteristics that helps to define a seriousness about employees' attitudes aboutthe control activities in a company is referred to asA.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 andresponsibilities except forA.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 wouldnotgive auditors an overall acquaintance with the client'sA.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 theA.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 anunderstanding 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 toA.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 wouldbest 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 todecide the amount of work required to satisfy auditing standards guiding internal controlevaluation and related audit planning. Which of the following descriptions best expressesthe 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 not100% substantive audit on financial statement transactions and balances.C.Obtain an understanding of client environment, accounting, and control activities, andperform detail tests of controls. Document the decision to assess control risk below themaximum. Perform restricted substantive audit on financial statement transactions andbalances, considering the control risk assessment.D.Obtain an understanding of client environment, accounting, and control activities, andperform detail tests of controls. Document the decision to assess control risk at zero.Perform no substantive audit on financial statement transactions and balances becausezero control risk means that no errors or fraud can affect the accounts.

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9.Which of the following isnotan objective of internal controls over financial reporting asdefined by the Sarbanes-Oxley Act?A.Policies and procedures that pertain to the maintenance of records that in reasonabledetail accurately and fairly reflect the transactions and dispositions of the assets of theregistrant.B.Policies and procedures that provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles and that receipts and expenditures of the registrant arebeing made only in accordance with authorizations of management and directors of theregistrant.C.Policies and procedures that provide reasonable assurance regarding the compliancewith applicable laws and regulations.D.Policies and procedures that provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the registrant's assets thatcould have a material effect on the financial statements.10.Assessing control risk at below the maximum level most likely would involveA.Performing more extensive substantive tests with larger sample sizes than originallyplanned.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 performingthe tests at year-end.D.Identifying specific internal control activities that are relevant to specific financialstatement assertions.

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11.According to the PCAOB, during the audit of internal controls for an issuer, the ultimateobjective of testing the design effectiveness of internal controls is toA.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 andcan effectively prevent or detect errors or fraud that could result in materialmisstatements, if they operate as prescribed.C.Determine that the company's employees are processing the controls according to thepolicy and procedure manuals at the company.D.None of the above.12.Tests of controls in a GAAS audit are required forA.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 doesnotaccurately summarize auditors' requirements regardinginternal control?A.Option AB.Option BC.Option CD.Option D14.If the auditors encounter a significant scope limitation in evaluating a public company'sinternal control over financial reporting, which of the following types of opinions on theeffectiveness of the company's internal control over financial reporting would beappropriate?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 deficienciesare defined as conditions thatA.Could adversely affect the organization's ability to initiate, record, process, and reportfinancial data in the financial statements.B.Result in a reasonable possibility that a material misstatement exists in financialstatements.C.Exist when the design or operation of a control does not allow the company'smanagement 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 poorlydesigned that it fails to satisfy the control's objective.Chapter 0616.An audit plan of substantive procedures for cash wouldnotincludeA.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 andafter year-end date.D.Obtaining a written client representation concerning compensating balance agreements.

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