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Auditing and Assurance Chapter 5

The most important fundamental component of an entity's internal control is
People who operate the control system
The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to
Determine the nature, timing, and extent of tests to be performed in the audit
Effectiveness of audit procedures would be reduced by
Performing audit procedures during the interim period as opposed to the fiscal year-end date
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
Determine that the company's controls will satisfy the control objectives and can effectively prevent or detect errors or fraud that could result in material misstatements, if they operate as described.
To test the operating effectiveness of a control, an audit team, might use a combination of each of the tests EXCEPT for:
Confirmation of Balances........This is a substantive test, not a validity test
Which of the following is a preventive control?
Separation of Duties between the payroll and personnel departments
In most audits of large entities, control risk assessment contributes to audit efficiency, which means that:
Auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs.
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?
An Internal Control Questionnaire (ICQ) is a device for collecting evidence in the form of answers to control questions
A bridge workpaper shows the connection between?
Control Evaluation findings and subsequent audit connects control evaluation findings of strengths to the test of control activities for testing the strengths and control evaluation findings of weakness to suggestions for substantive procedures
Tests of Controls in a GAAS Audit are required for:
Obtaining evidence about the operating effectiveness of client control activities
A transaction-level internal control activity is best described as:
An action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company
When planning the audit of internal controls for an issuer, the audit team should:
Identify significant accounts, locations, and assertions in the PLANNING STAGE of an audit of internal controls
A material weakness is a situation which:
It is reasonablypossible that a material misstatement would NOT be detected on a timely basis.
When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on:
1. Whether there is a reasonble possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure
2. The magnitude of the potential misstatement resulting from the deficiency or the deficiencies
Which of the following does NOT accuratelly summarize auditors' requirements regarding internal control?
Testing controls is required only for audits of public companies under AS 5. (PCAOB)
When completing the audit of internal controls for an issuer, the PCAOB requires auditors of public companies to audit internal controls over:
AS 5 applies to financial reporting controls ONLY.
When completing the audit of internal controls for an issuer, AS 5 requires auditors of public companies to report on:
AS 5 requires auditors to issue a report on the audit of internal controls.
When completing the audit of internal controls for an issuer, AS 5 requires auditors to test:
AS 5 requires testing for both design effectiveness and operating effectiveness.
Which of the following would probably NOT be considered an indicationof a material weakness
Overproduction by the manufacturing plant.....This does not directly relate to a material misstatement but it is an operational issue
Which report would NOT be appropriate for a public accounting firm to provide on financial reporting controls?
Disclaimer of Opinion - Significant Deficiencies exist........A disclaimer is used when the auditor's scope is limited but not when significant deficiencies exist, so it is not an appropriate report.
The purpose of separating duties of hiring personnel and distributing payroll checks is to ...
In principle, the payroll function should be divided into its Authorization, Recording, and Custody functions. Authorization of hiring, wage rates, and deductions is provided by personnel. Authorization of hours worked (executed 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.
Which of the following statements is NOT true with respect to the auditors' report on internal control over financial reporting?
The report would be dates as of the day that enough evidence has been gathered to support the auditors' opinion on the effectiveness of the entity's internal control.
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?
Disclaimer of is the reporting option when a scope limitation exists
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?
Statements identifying the responsibility of the auditor and management for internal control over financial reporting would be included in the introductory paragraphs
An entity's internal control consists of the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved. Only some of these objectives, policies, and procedures are relevant to a financial statement audit. Which one of the following would most likely be considered for testing in a financial statement audit?
Maintenance of control over unused checks.
An internal control questionnaire (ICQ) contains the following questions: "Does a single individual receive and list cash receipts and perform posting to sales and general ledgers?" What action should an auditor take if the manager of accounting responds "yes" to the question?
Treat is as pontential control weakness and perform appropriate testing.
The primary responsibility for establishing and maintaining internal controls rests with:
Which internal control documentation method provides the auditor with the best visual understanding of a system and can be used as a means for analyzing complex operations?
A flowcharting approach
What are the factors included in an entity's internal control environment?
1. Audit Committee
2. Internal Audit Function
3. Management Tone at the Top
An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about:
The entity's ability to process and summarize financial data.
In addition to gaining an understanding of the internal controls for a private company, and external auditor, at minimum, would be expected to:
Document their understanding of the internal control system.
An advantage of an internal control questionnaire is:
Its relative ease of completion.
Which of the following is an inherent limitation of any client's internal control?
Procedures whose effectiveness depends on separation of duties can be circumvented by collusion.
Internal controls are designed to provide reasonable assurance that:
Material errors or fraud would be prevented or detected and corrected within a timely period by employees in the course of performing their assigned duties.