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Auditing ch 7
Terms in this set (83)
Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to the audit committee?
Evidence of a lack of objectivity by those responsible for accounting decisions.
In assessing the objectivity of a client's internal auditors, the CPA would be most likely to consider internal auditor's:
Organizational status within the company.
In a financial statement audit performed following AICPA Professional Standards, how frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely upon in the current year?
At least every third audit.
After obtaining an understanding of internal control and arriving at a preliminary assessed level of control risk, an auditor decided to perform tests of controls. The auditor most likely decided that:
It would be efficient to perform tests of controls that would result in a reduction in planned substantive procedures.
Which of the following is least likely to be evidence of operating effectiveness of controls?
Confirmations of accounts receivable.
Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes?
Tests of controls do NOT ordinarily address:
The cost effectiveness of the way a control was applied.
Which is most likely when the assessed level of control risk increases?
Use larger sample sizes for substantive procedures.
Which of the following must the auditor communicate to the audit committee?
Significant deficiencies and material weaknesses.
A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned assessed level of control risk is at what level?
Which of the following would be least likely to be regarded as a test of a control?
Tests of the additions to property by physical inspection.
Which of the following is not considered one of the five major components of internal control?
Which of the following statements is correct concerning the understanding of internal control needed by auditors?
The auditors must have a sufficient understanding to assess the risks of material misstatement.
The effectiveness of controls is not generally tested by:
Performance of analytical procedures.
On financial statement audits, it is required that the auditors obtain an understanding of internal control, including:
Whether it has been implemented (placed in operation).
A significant deficiency:
Is less severe than a material weakness.
This organization developed a set of criteria that provide management with a basis to evaluate controls not only over financial reporting, but also over the effectiveness and efficiency of operations and compliance with laws and regulations:
Committee of Sponsoring Organizations.
Which of the following is most likely to be considered a risk assessment procedure relating to internal control?
Trace a transaction through the information system relevant to financial reporting.
Which statement is correct concerning the definition of internal control developed by the Committee of Sponsoring Organizations (COSO)?
It is a 'process' effected by individuals.
The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of internal and external reporting, the effectiveness and efficiency of operations, and:
Compliance with applicable laws and regulations.
Which statement is correct concerning the relevance of various types of controls to a financial statement audit?
Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant.
Which of the following is not a component of the control environment?
Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies?
Salaried sales personnel.
The Sarbanes-Oxley Act of 2002 requires that the audit committee:
Be directly responsible for the appointment, compensation, and oversight of the work of the CPA firm.
When tests of controls reveal that controls are operating as anticipated, it is most likely that the assessed level of control risk will:
Equal the preliminary assessed level of control risk.
Under which circumstance is it likely that the extent of substantive procedures will be expanded beyond that anticipated in the audit plan?
The operating effectiveness of certain controls was found to be less than expected, although no material misstatements were identified.
The provision of the Foreign Corrupt Practices Act that require implementing an internal control system apply to:
All corporations under the jurisdiction of the SEC.
If the auditors do not perform tests of controls for certain assertions:
They must assess control risk at the maximum level for those assertions.
During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to:
Design further audit procedures.
Which of the following comes closest to outlining the auditors' responsibility for considering internal control in all financial statement audits?
The auditor must obtain an understanding of each of the five internal control components sufficient to assess the risks of material misstatement for the audit.
Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the design of the relevant controls and to determine whether they have been implemented (placed in operation)?
Performance of substantive procedures.
A control deficiency that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting is referred to as a(n):
For effective internal control, which of the following functions should not be assigned to the company's accounting department?
Signing payroll checks.
Which of the following is not a responsibility that should be assigned to a company's internal audit department?
Which of the following is true about the auditors' consideration of internal control in a financial statement audit?
The auditors must obtain an understanding of the steps in processing major types of transactions.
Which of the following is an advantage of describing internal control through the use of a standardized questionnaire?
Questionnaires highlight weaknesses in the system.
Which of the following is least likely to be considered a risk assessment procedure relating to internal control?
Counting marketable securities at year-end.
Which of the following is least likely to be considered a risk assessment procedure?
Observation of the counting of inventory.
Which of the following is not a factor that is considered a part of the client's overall control environment?
The information system.
Which of the following would be least likely to be considered a benefit of effective internal control?
After documenting the client's prescribed internal control, the auditors will often perform a walk-through of each transaction cycle. An objective of a walk-through is to:
Verify that the controls have been implemented (placed in operation).
The major components of internal control include all of the following, except:
Which of the following is correct with respect to control deficiencies discovered during an audit?
All material weaknesses in internal control must be reported to the audit committee in writing.
A service auditor's report on a service center should include a(n)
Detailed description of the service center's internal control.
The report of a service auditor may provide assurance on whether:
Controls are implemented - yes Operating effectiveness of controls - yes
When a client uses a service organization to process certain transactions (e.g., its employee benefit plan), the auditor is least likely to obtain an understanding relating to these transactions by
Sending a confirmation request to the service organization.
After considering the client's internal control, the auditors have concluded that it is well-designed and is functioning as anticipated. Under these circumstances, the auditors would most likely:
Reduce substantive procedures in areas where the internal control was found to be effective.
The use of fidelity bonds protects a company from embezzlement loses and also:
Minimizes the possibility of employing persons with dubious records in positions of trust.
The external auditors might consider the procedures performed by the internal auditors because:
They are employees whose work might affect the external auditors' work.
In the consideration of internal control, the operating effectiveness of controls is tested by:
Tests of controls.
The auditors who become aware of an internal control significant deficiency are required to communicate this to the:
A material weakness involves an amount that could result in a misstatement that is:
At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness?
A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect material misstatements on a timely basis is referred to as a:
To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the:
Well-designed internal control that is functioning effectively is most likely to detect a fraud arising from:
The fraudulent action of an individual employee.
The program flowcharting symbol representing a decision is a:
Controls are not designed to provide assurance that:
Fraud will be eliminated.
The scope of substantive procedures as compared to the scope of tests of controls generally vary:
Which of the following is least likely to be a factor that might indicate to an auditor that an identified risk of misstatement requires special audit consideration?
The rate of technological change is moderate in the industry.
Which of the following audit tests would be regarded as a test of control?
Tests of the signatures on canceled checks to board of director's authorizations.
If the external auditors decide that the work performed by the internal auditors may be used, they should consider the internal auditors':
Competence, objectivity, and approach.
In the consideration of internal control, the auditor is basically concerned that it provides reasonable assurance that:
Misstatements have been prevented or detected.
Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level?
Emphasize the need to remain neutral, rather than to exercise professional skepticism.
In assessing the competence of a client's internal auditor, an external auditor most likely would consider the:
Internal auditor's compliance with professional internal auditing standards.
Which of the following factors would most likely be considered an inherent limitation to an entity's internal control?
Human judgment in the decision making process.
Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both:
Record and conceal fraudulent transactions in the normal course of assigned tasks.
Which of the following is intended to detect deviations from prescribed controls?
Tests of controls designed specifically for the client.
An auditor's purpose for performing tests of controls is to provide reasonable assurance that:
Controls are operating effectively.
Of the following statements about internal control, which one is not valid?
Control activities ensure all fraud will be eliminated.
Tests of controls are most likely to be performed when:
The auditor plans to rely on the controls.
Which of the following would least likely be included in an auditor's tests of controls?
The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States?
An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses financial statements and:
Internal control over financial reporting.
A report on internal control performed in accordance with PCAOB Standard No. 5 includes an opinion on internal control for:
The "as-of date."
When performing an audit of internal control under PCAOB requirements, auditors evaluate control:
Design Effectiveness: yes Operating Effectiveness: yes
When performing an internal control audit under PCAOB requirements, one or more material weaknesses in internal control that exist at year-end will result in what type of report(s)?
Qualified: no Adverse: yes
When performing an internal control audit under PCAOB standards, one or more material weaknesses in internal control that exist at year-end will result in what type of report(s)?
Qualified: no Adverse: no
Applying a data analytical approach to tests of controls is least likely to result in which of the following?
Documenting the engagement through an electronic representation letter obtained monthly.
When obtaining an understanding of internal control relevant to planning of a financial statement audit, the auditor should obtain adequate knowledge about the _____.
Design of controls.
A primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with _____.
Knowledge necessary to assess the risks of material misstatements.
Which of the following statements regarding auditor documentation of the client's internal control is correct?
No one particular form of documentation is necessary, and the extent of documentation may vary.
Which of the following is a likely approach for testing the segregation of duties?
Observing employee performance of processes.
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