AUD-Internal Control

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accounting cpa

Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control?
A. Incompatible duties.
B. Management override.
C. Misstates in judgement
D. Collusion among employees.

Correct: (A)
Incompatible duties may generally be divided among individuals in such a manner as to control the problem.

An entity's ongoing monitoring activities often include:
A. Periodic audits by the audit committee.
B. Reviewing the purchasing function.
C. The audit of the annual financial statements.
D. Control risk assessment in conjunction

Correct: (B)
Monitoring:(1)ongoing: is designed into sales and purchase act.
(2) separate evaluation: recommendation for improving
(3) combination

Which of the following is a provision of the Foreign Corrupt Practices Act?
A. It's a criminal offense for an auditor to fail to detect and report a bribe paid by an American business entity to a foreign official for the purpose of obtaining business.
B. The auditor's detection of illegal acts committees by officials of the auditor's publicly held client in conjunction with foreign officials should be reported to the enforcement Division of the Securities and Exchange Commission.
C. If the auditor of a publicly held company concludes that the effects on the financial statements of a bribe given to a foreign official are not susceptible of reasonable estimation, the auditor's report should be modified.
D. Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurances that internal control objectives are met.

Correct: (D)

An auditor should obtain sufficient knowledge of an entity's information system to understand the
A. Safeguards used to limit access to computer facilities.
B. Process used to prepare significant accounting estimates.
C. Controls used to assure proper authorization of transactions.
D. Controls used to detect concealment of fraud.

Correct: (B)
AU-C 315: states that the auditor should obtain sufficient knowledge of the information system to understand
(1) The major transaction classes
(2) How those transactions are initiated
(3) The available accounting records and support
(4) The manner of processing of transactions
(5) the financial reporting process used to prepare financial statements
(6) the means the entity uses to communicate financial reporting roles and responsibilities.

Decision tables differ from program flowcharts in that decision tables emphasize
A. Ease of manageability for complex programs.
B. Logical relationships among conditions and actions.
C. Cost benefit factors justifying the program.
D. The sequence in which operations are performed.

Correct: (B)
Decision table are graphic methods of describing the logic of decisions.
Program flowcharts simply summarize the steps involved in a program, and emphasize the sequence in which operations are performed.

In obtaining an understanding of an entity;s internal control, an auditor is required to obtain knowledge about the
A. Operating effectiveness of controls
B. Design of controls
C. Both

Correct: (B)
In obtaining an understanding of internal control, the auditor should perform procedures to provide sufficient knowledge of the design of the relevant controls and whether they have been implemented. Information on operating effectiveness need not be obtained unless control risk is to be assessed at a level below the maximum.

Which of the following may not be required on a particular audit of a nonissuer company?
A. Risk assessment procedures.
B. Tests of controls
C. Substantive procedures.
D. Analytical procedures.

Correct: (B)
Test of controls are only required when the auditor relies on the controls or substantive tests alone are not sufficient to audit particular assertions
The rest are required on every audit..

Assessing control risk at a low level involves

(1) identifying specific controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions
(2) performing tests for controls to evaluate the effectiveness of such controls.

An auditor assesses control risk because it
A. is relevant to the auditor's understanding of the control environment.
B. Provide assurance that the auditor's materiality levels are appropriate.
C. Indicates to the auditor where inherent risk may be the greatest
D. Affects the level of detection risk that the auditor may accept.

Correct: (D)The assesses control risk and inherent risk are used to determine the acceptable level of detection risk for financial statement assertions.

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the
A. Extent of tests of controls.
B. Level of detection risk
C. Extent of inherent risk
D. Level of inherent risk

Correct: (C)
Increases in the assessed level of the risk of material misstatement lead to decreases in the acceptable level of detection risk. The auditor will need to increase the extent of substantive tests such as tests of details.
(A) wrong because tests of controls are performed to reduce the assessed level of control risk only when controls are believed to be effective.

An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risk of material misstatement primarily to
A. Determine whether procedures and records
B. Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized.
C. Modify the initial assessments of inherent risk and preliminary judgments about materiality levels.
D. Determine the nature, extent, and timing of substantive tests for financial statements assertions

Correct: (D)

Regardless of the assessed level of control risk, an auditor would perform some
A. Tests of controls to determine the effectiveness of internal control policies.
B. Analytical procedures to verify the design of intenal control.
C. Substantive test to restrict detection risk for significant transaction classes.
D. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

Correct: (C)
Ordinarily the assessed level of control risk cannot be sufficiently low to eliminate the need to perform any substantive tests to restrict detection risk for significant transaction class.
(A) Here control risk is assessed at the maximum level
(D) Dual purpose tests are used if control operating effective;y, less assurance will be required from substantive procedures.

How frequently must an auditor test operating effectiveness of controls that appear to function as they have in past year and on which the auditor wishes to rely in the current year?
A. Monthly
B. Each audit
C. At least every second audit
D. At least every third audit

Correct: (D)

Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is most likely obtained in part by
A. Preparing flowcharts
B. Performing substantive tests.
C. Analyzing tests of trends and ratios
D. Inspection of documents.

Correct: (D)
Inspection of documents in a form of a test of controls, and such tests are used to obtain reasonable assurance that controls are in use and operating effectively.
Test of control include:
Inquiries
Inspection
Observation
Reperformance

Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed?
A. Confirmations of receivables verifying account balance
B. Letters of representations corroborating inventory pricing
C. Attorney;s responses to the auditor's inquires.
D. Client records documenting the use of computer programs.

Correct: (D)
Inspection of client records documenting the use of computer programs will provide evidence to help the auditor evaluate the effectiveness of the design and operation of internal control
(A) Confirmation process is most frequently considered a substantive test(include analytical procedures/calculation/Confirmation)

Which of the following is not a step in an auditor's assessment of control risk?
A. Evaluate the effectiveness of internal control with tests of controls.
B. Obtain an understanding of the entity's information system and control environment.
C. Perform tests of details of transactions to detect material misstatements in the financial statements.
D. Consider whether controls can have a pervasive effect on financial statement assertions.

Correct: (C)
Perform tests of details of transactions to detect MM pertains more directly to detection risk rather than inherent or control risk.
(A) auditor evaluate the effectiveness of internal control with tests of controls.
(B) Obtaining an understanding of the entity's information system and control environment is a preliminary step for considering control risk.

Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain evidence in support of an assessed level of control risk below the maximum.
A. Observing an entity's employee prepare the schedule of past due accounts receivable.
B. Sending confirmation requests to an entity's principal customers to verify the existence of accounts receivable
C. Inspecting an entity's analysis of accounts receivable for unusual balances.
D. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable.

Correct: (A)
Since the auditor uses the result of control to support an assessed level of control risk below the maximum, we are attempting to identify a test of a control
(C) is wrong because the inspection of accounts receivable for unusual balances and comparing uncollectible accounts expense to actual accounts expense is ordinarily an analytical procedures performed as a substantive test.

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