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EMGP Chapter 6 http://highered.mheducation.com/sites/0077143019/student_view0/chapter6/multiple_choice_quiz.

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Auditors obtain an understanding of an entitys internal control for the primary purpose of:
A)
Gathering sufficient appropriate evidence to provide a reasonable basis for an opinion on the financial
statements.
B)

Determining the nature, extent and timing of subsequent audit procedures to be performed.

C)

Determining whether interim audit testing is appropriate.

D)

Providing documentary evidence to present to those charged with governance.

An auditors primary consideration regarding an entitys internal controls is whether they


A)

Prevent management override.

B)

Relate to the control environment.

C)

Reflect managements philosophy and operating style.

D)

Affect the financial statement assertions.

Which of the following statements about internal control is correct?


A)
A properly maintained internal control system reasonably ensures that collusion among employees
cannot occur.
B)
The establishment and maintenance of internal control is an important responsibility of the internal
auditor.
C)
An exceptionally strong internal control system is enough for the auditor to eliminate substantive
procedures on a significant account balance.
D)
The cost-benefit relationship is a primary criterion that should be considered in designing an internal
control system.

Internal controls are designed to achieve company objectives in all of the following areas except:
A)

Safeguarding of assets.

B)

Reliability of financial reporting.

C)

Reduction of debt financing costs.

D)

Compliance with laws and regulations.

Internal control is a process designed to provide reasonable assurance regarding the achievement of which
objective?
A)

Effectiveness and efficiency of operations.

B)

Reliability of financial reporting.

C)

Compliance with applicable laws and regulations.

D)

All of the above are correct.

Which of the following is not one of the five major components of internal control?
A)

Risk assessment.

B)

Control activities.

C)

Information and communication.

D)

Human resource background checks.

Monitoring is a major component of the COSO Internal ControlIntegrated Framework. Which of the following is
not correct in how the company can implement the monitoring component?
A)

Monitoring can be an ongoing process.

B)

Monitoring can be conducted as a separate evaluation.

C)

Monitoring and other audit work conducted by internal audit staff can reduce external audit costs.

D)
The independent auditor can serve as part of the entitys control environment and continuous
monitoring.

Which of the following is a proper reason for not conducting tests of controls?
A)

The internal control structure appears very strong.

B)
The procedures require more audit effort than the projected benefits to be obtained from lowering the
control risk.
C)

The company does not have any flowcharts of its system available for review.

D)

The auditor prefers the control risk to be the minimum.

After obtaining an understanding of an entitys internal control system, an auditor may set control risk at high
for some assertions because he or she
A)

Believes the internal controls are unlikely to be effective.

B)

Determines that the pertinent internal control components are not well documented.

C)

Performs tests of controls to restrict detection risk to an acceptable level.

D)

Identifies internal controls that are likely to prevent material misstatements.

Regardless of the assessed level of control risk, an auditor would perform some
A)

Tests of controls to determine the effectiveness of internal controls.

B)

Analytical procedures to verify the design of internal controls.

C)

Substantive procedures to restrict detection risk for material transaction classes.

D)

Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

With preliminary control risk assessments set at high, auditors are likely to:
A)

Use a reliance strategy.

B)

Complete little or no tests of controls.

C)

Complete interim testing of account balances.

D)

Test controls extensively.

Which of the following represents the correct sequence of audit steps that come after first obtaining an
understanding and documenting the entitys internal control?
A)

Test of controls, assess control risk, determine extent of substantive tests, reassess control risk.

B)

Assess control risk, test of controls, determine extent of substantive testing, reassess control risk.

C)

Assess control risk, determine extent of substantive testing, test of controls, reassess control risk.

D)

Assess control risk, test of controls, reassess control risk, determine extent of substantive testing.

A reliance strategy is chosen when the auditor:


A)

Plans on conducting tests of controls.

B)

Has set the control risk at a high level.

C)

Has set the control risk at a lower level.

D)

Both A) and C).

Understanding each of the components of internal control provides knowledge about:


A)

The design of tests of controls.

B)

The assessment of inherent risks.

C)

Factors that affect the risk of material misstatement.

D)

Both A) and C).

The effectiveness of internal control is reduced by:

A)

Computerized accounting records.

B)

Flowcharts.

C)

Human errors or mistakes.

D)

Both A) and C).

Which of the following statements regarding auditor documentation of the entitys internal control is correct?
A)

Documentation must include narrative memorandums.

B)
No documentation is necessary to satisfy auditing standards, however, oral inquiry is required at
minimum.
C)

Internal control questionnaires are specifically tailored to meet the needs of each individual entity.

D)
The auditors assessment of the level of control risk can be documented using a structured working
paper, an internal control questionnaire or a memorandum.

In order to be able to set control risk at a lower level, the auditor must do all of the following except:
A)

Identify all general IT controls.

B)

Identify specific controls that will be relied upon.

C)

Perform tests of controls.

D)

Conclude on the achieved level of control risk.

Assessing control risk below high involves all of the following except
A)

Identifying specific controls to rely on.

B)

Concluding that controls are ineffective.

C)

Performing tests of controls.

D)

Analysing the achieved level of control risk after performing tests of controls.

Which of the following audit techniques would most likely provide an auditor with the most assurance about the
effectiveness of the operation of a control?
A)

Inquiry of entity personnel.

B)

Reperformance of the control by the auditor.

C)

Observation of entity personnel.

D)

Walk-through.

The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is
obtained by
A)
Inspection of documents prepared by a third party but which contain the initials of those applying entity
controls.
B)

Observation by the auditor of the employees performing control activities.

C)

Inspection of a flowchart of duties performed and available personnel.

D)

Inquiries of employees who apply control activities.

An auditor may need to obtain a service auditors report when an entity receives accounting services such as
payroll from a service organization. Which of the following statements is true regarding this service audit report?
A)

It should include an opinion.

B)
It provides the client auditor with a guarantee regarding whether the entitys control procedures have
been placed in operation.
C)

The client auditor need not inquire about the service auditors professional reputation.

D)
The client auditor should perform the procedures at the service organization to verify the information in
the report.

Type 2 reports by the service organizations auditor typically


A)

Provide reasonable assurance that their financial statements are free of material misstatements.

B)
Ensure that the entity will not have any misstatements in areas related to the service organizations
activities.
C)

Ensure that the entity is billed correctly.

D)

Assess whether the service organizations controls are suitably designed and operating effectively.

Significant deficiencies in internal control are matters that come to an auditors attention that should be
communicated to those charged with governance because they represent
A)

Disclosures of information that significantly contradict the auditors going concern assumption.

B)

Material fraud perpetrated by high-level management.

C)

Significant deficiencies in the design or operation of the internal control.

D)
Manipulation or falsification of accounting records or documents from which financial statements are
prepared.
A primary advantage of using generalized audit software packages to audit the financial statements of an entity
that uses an IT system is that the auditor may
A)

Consider increasing the use of substantive tests of transactions in place of analytical procedures.

B)

Substantiate the accuracy of data through self-checking digits and hash totals.

C)

Reduce the level of required tests of controls to a relatively small amount.

D)
Access information stored on computer files while having a limited understanding of the entitys
hardware and software features.

Which of the following is not considered a general control?


A)

Back up and disaster recovery controls.

B)

Password protection on the central server.

C)

Reconciliation of payroll record count with the number of active employees.

D)

Requiring change authorization forms on all program software.

An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on
which of the following controls would the auditor initially focus?
A)

Data capture controls.

B)

Application controls.

C)

Output controls.

D)

General controls.

An auditors flowchart of an entitys accounting system is a diagrammatic representation that depicts the
auditors
A)

Program for tests of controls.

B)

Understanding of the system.

C)

Understanding of the types of fraud that are probable, given the present system.

D)

Documentation of the study and evaluation of the system.

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