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Ch.

6 Audit flashcards | Quizlet 4/28/16, 8:21 PM

Ch. 6 Audit 83 terms by dfishe5

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A primary purpose of internal controls is d


to

A. Form a basis for evaluating employees.


B. Monitor production quality.
C. Avoid clerical errors.
D. Meet objectives of maintaining reliable
documents and records and accurate
financial reporting.

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Internal controls are not designed to b


provide reasonable assurance that

A. Transactions are executed in


accordance with management's
authorization.
B. Embezzlement will be eliminated.
C. Access to assets is permitted only in
accordance with management's
authorization.
D. Amounts recorded for assets are
compared with the actual existing assets
at reasonable intervals.

The basic concept of internal control that a


recognizes the cost of internal control
should not exceed the
benefits expected to be derived is known
as

A. Reasonable assurance.
B. Management responsibility.
C. Limited liability.
D. Management by exception.

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An auditor would most likely be d


concerned with internal control policies
and procedures that provide
reasonable assurance about the

A. Efficiency of management's decision-


making process.
B. Appropriate prices that the entity
should charge for its products.
C. Methods of assigning production tasks
to employees.
D. Entity's ability to accurately process
and summarize financial data.

Management's attitude toward b


aggressive financial reporting and its
emphasis on meeting projected profit
goals most likely would significantly
influence an entity's control environment
when

A. External policies established by parties


outside the entity affect its accounting
practices.
B. Management is dominated by one
individual.
C. Internal audit personnel have direct
access to the board of directors and the
entity's management.
D. The audit committee is active in
overseeing the entity's financial reporting
policies.

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Management philosophy and operating b


style most likely would have a significant
influence on an entity's
control environment when

A. The internal audit function reports


directly to management.
B. Management is dominated by one
individual.
C. Accurate management job
descriptions delineate specific duties.
D. The audit committee actively oversees
the financial reporting process

Proper monitoring within an internal d


control framework may include all of the
following except:

A. An external auditor.
B. An effective audit committee.
C. An internal audit function.
D. The internal revenue service.

An entity's control activities include all of c


the following except:

A. Performance reviews.
B. Information processing.
C. External auditor's tests of controls.
D. Segregation of duties.

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Potential benefits of an entity's controls b


in an IT environment include all of the
following except:

A. Reduction in the risk that controls will


be circumvented.
B. More accurate accounting estimates.
C. Consistent application of predefined
business rules.
D. More timely information.

An entity's IT infrastructure refers to a

A. Hardware components.
B. Programmers.
C. Software.
D. Data provided by the system

Auditors are most likely to gather audit b


evidence solely using substantive
procedures

A. If transactions are recurring.


B. For nonrecurring, unusual
transactions.
C. If control risk is very low.
D. If the entity has a well-designed
automated system

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Proper segregation of functional b


responsibilities in an effective system of
internal control calls for
separation of the functions of

A. Authorization, execution, and


payment.
B. Authorization, recording, and custody.
C. Custody, execution, and reporting.
D. Authorization, payment, and
recording.

Factors that the auditor should consider b


as increasing the effectiveness of the
audit committee include all
of the following except whether:

A. It is independent of management
B.

It is comprised almost exclusively of


members of management, ensuring
detailed knowledge of the
company's operations.
C. It asks management difficult
questions.
D. It interacts regularly with internal audit
personnel

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The documentation of an auditor's d


understanding of internal controls

A. Is optional.
B. Must be exclusively in either narrative,
questionnaires, or flowchart form.
C. Must include flowcharts.
D. Can include any combination of
narratives, questionnaires, or flowcharts.

A well-prepared flowchart should make it c


easier for the auditor to

A. Prepare audit procedure manuals.


B. Prepare detailed job descriptions.
C. Perform walkthroughs.
D. Assess the degree of accuracy of
financial data

A flowchart is most frequently used by an b


auditor in connection with the

A. Preparation of generalized computer


audit programs.
B. Review of the entity's internal controls.
C. Use of statistical sampling in
performing an audit.
D. Performance of analytical procedures
of account balances.

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An advantage of using systems b


flowcharts to document information
about internal control instead of
using internal control questionnaires is
that systems flowcharts

A. Identify whether segregation of duties


prevent collusion.
B. Provide a visual depiction of the
entity's activities.
C. Indicate whether controls are
operating effectively.
D. Reduce the need to observe the
entity's employees performing routine
tasks.

Which of the following audit tests would c


be regarded as a test of controls?

A. Tests of the specific items making up


the balance in a given general ledger
account.
B. Tests comparing inventory pricing to
vendors' invoices.
C. Tests of the signatures on canceled
checks to the board of directors'
authorizations.
D. Tests of the additions to property,
plant, and equipment by physical
inspections.

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The independent auditor selects several b


transactions in each functional area and
traces them through
the entire system, paying special
attention to evidence about whether or
not the control activities are in
operation. This is an example of a(n)

A. Analytical procedure.
B. Test of controls.
C. Substantive procedure.
D. Functional test.

To obtain evidential matter about control a


risk, an auditor selects tests from a
variety of techniques
including

A. Inquiry.
B. Analytical procedures.
C. Calculation.
D. Confirmation.

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Which of the following procedures most d


likely would provide an auditor with
evidence about whether an
entity's internal control is suitably
designed to prevent or detect material
misstatements?

A. Scanning the journals produced by the


internal control system.
B. Performing analytical procedures
using data aggregated at a high level.
C. Vouching a sample of transactions
directly related to the controls.
D. Observing the entity's personnel
applying the controls.

Reports on service organizations typically d

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 organization's
activities.
C. Ensure that the auditee is billed
correctly.
D.

Assess whether the service organization's


controls are suitably designed to achieve
internal control
objectives.

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Where computer processing is used in c


significant accounting applications,
internal control activities may
be defined by classifying control activities
into two types: general and

A. Administrative.
B. Specific.
C. Application.
D. Authorization

Which of the following input controls is a d


numeric value computed to provide
assurance that the original
value has not been altered in
construction or transmission?

A. Hash total.
B. Parity check.
C. Encryption.
D. Check digit.

General controls include all of the b


following except:

A. Organizational controls.
B. Data validation controls.
C. Access security controls.
D. Application system acquisition
controls.

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A limit test is a a

A. Test to ensure that a numerical value


does not exceed some predetermined
value.
B. Check to ensure that the value in a
field falls within an allowable range of
values.
C. Check to ensure that the data in a field
have the proper arithmetic sign.
D. Check on a field to ensure that it
contains either all numeric or alphabetic
characters.

A field test is a d

A. Test to ensure that a numerical value


in a field does not exceed some
predetermined value.
B. Check to ensure that the value in a
field falls within an allowable range of
values.
C. Check to ensure that the data in a field
have the proper arithmetic sign.
D. Check on a field to ensure that it
contains either all numeric or all
alphabetic characters.

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An auditor's primary consideration a


regarding an entity's internal controls is
whether the policies and
procedures

A. Affect the financial statement


assertions.
B. Prevent management override.
C. Relate to the control environment.
D. Reflect management's philosophy and
operating style.

In evaluating internal control, the auditor b


is basically concerned that the system
provides reasonable
assurance that

A. Operational efficiency has been


achieved in accordance with
management plans.
B. Errors and fraud have been prevented,
or detected and corrected.
C. Controls have not been circumvented
by collusion.
D. Management can not override the
system

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Of the following statements about an c


internal control system, which one is
correct?

A.

The maintenance of the system of


internal control is an important
responsibility of the internal audit
function.
B. Administrative controls relate directly
to the safeguarding of assets.
C.

Because of the cost/benefit relationship,


tests of controls may be applied on a test
basis in some
circumstances.
D. Well designed internal control
activities always prevent collusion among
employees.

The concept of reasonable assurance in d


the context of an entity's internal
controls recognizes that

A. Auditors may fail to detect material


misstatements.
B. Proper internal controls guarantee
that material misstatements will not
occur.
C. Proper internal controls preclude
fraud.
D. The costs of some controls may be too
high to implement in relation to potential
benefits

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An effective control environment b

A. Allows management to identify all


relevant risks.
B. Creates a commitment to competence.
C. Guarantees that all controls are
followed as prescribed.
D. Requires an internal audit function.

The control environment component of b


internal control includes all of the
following except:

A. Management's operating style.


B. Access to computer programs.
C. Organizational structure.
D. Human resource policies and practices

Information and communication includes c


all of the following except:

A. Identifying and recording all valid


transactions.
B. Determining the time period in which
transactions occurred.
C. Communicating price changes to
customers.
D. Properly presenting transactions and
related disclosures in the financial
statements.

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An organizational structure is important d


for all of the following reasons except:

A. Ensuring proper accountability.


B. Defining areas of authority.
C. Creating clear lines of reporting.
D. Ensuring a proper commitment to
controls

The risk assessment component of c


internal control refers to

A. The auditor's assessment of control


risk.
B. The auditor's assessment of client risk.
C. The entity's identification and analysis
of risks relevant to achievement of its
objectives.
D. The entity's monitoring of the
potential for material misstatements.

As opposed to a manual control, an b


automated control

A. Can never be circumvented.


B. Should function consistently in the
absence of program changes.
C. Need not be tested by the auditor.
D. Must be tested using the same
techniques as a manual control.

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An IT specialist is least likely to be c


necessary when

A. Data are shared extensively among


systems.
B. The entity participates heavily in
electronic commerce.
C. The system has not changed from the
prior year.
D. Significant audit evidence is in
electronic form.

In planning an audit of a new client, an a


auditor most likely would consider the
methods used to process
accounting information because such
methods

A. Influence the design of internal


controls.
B. Affect the auditor's overall materiality
levels.
C. Assist in evaluating the planned audit
assertions.
D. Determine the auditor's acceptable
level of audit risk

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A substantive strategy differs from a a


reliance strategy in that a substantive
strategy includes

A. Increased implementation of detailed


tests of transactions and balances.
B. Extra tests of controls.
C. Increased emphasis on verbal
representations from management.
D. Setting control risk at a minimum
level.

Which of the following statements a


concerning control risk is correct?

A.

Assessing control risk and obtaining an


understanding of an entity's internal
controls may be
performed concurrently.
B. When control risk is high, an auditor is
required to document the basis for that
assessment.
C.

Control risk may be assessed sufficiently


low to eliminate substantive procedures
for significant
accounts.
D
.
When assessing control risk, an auditor
should not consider evidence obtained in
prior audits about the
operation of control activities.

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Assessing control risk at a lower level b


most likely would involve

A.

Changing the timing of substantive


procedures by omitting interim testing
and performing the tests at
year-end.
B. Identifying specific internal controls
relevant to specific assertions.
C. Performing more extensive
substantive procedures with larger
sample sizes than originally planned.
D. Reducing inherent risk for most of the
assertions relevant to significant account
balances.

. In the audit of financial statements, an b


auditor's primary consideration
regarding an internal control policy
or procedure is whether the policy or
procedure

A. Reflects management's philosophy


and operating style.
B. Affects management's financial
statement assertions.
C. Provides adequate safeguards over
access to assets.
D. Enhances management's decision-
making processes.

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Which of the following most likely would a


not be considered an inherent limitation
of the potential
effectiveness of an entity's internal
controls?

A. Incompatible duties.
B. Management override.
C. Mistakes in judgment.
D. Collusion among employees.

It is important for the CPA to consider b


the competence of the entity's
employees because their
competence bears directly and
importantly upon the

A. Cost/benefit relationship of the system


of internal control.
B. Achievement of the objectives of the
system of internal control.
C. Comparison of recorded accountability
with assets.
D. Timing of the tests to be performed.

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As part of gaining an initial d


understanding of internal control, an
auditor is required to do all of the
following except:

A. Consider factors that affect the risk of


material misstatement.
B. Ascertain whether internal control
policies and procedures have been
placed in operation.
C. Identify the types of potential
misstatements that can occur.
D. Obtain knowledge about the operating
effectiveness of the internal control.

Effective internal control in a small b


company that has an insufficient number
of employees to permit
proper division of responsibilities can
best be enhanced by

A. Employment of temporary personnel


to aid in the separation of duties.
B. Direct participation by the owner of
the business in the recordkeeping
activities of the business.
C. Engaging a CPA to perform monthly
bookkeeping.
D. Delegation of full, clear-cut
responsibility to each employee for the
functions assigned to each.

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The independent auditor should acquire c


an understanding of the internal audit
function as it relates to the
assessment of control risk because

A.

Internal audit programs, audit


documents, and reports can eliminate
the need for the independent
auditor's staff.
B
.
The procedures performed by the
internal audit staff may eliminate the
independent auditor's need for
an extensive study and evaluation of
internal control.
C
.
The work performed by internal audit
personnel may be a factor in determining
the nature, timing, and
extent of the independent auditor's
procedures.
D
.
The understanding of the internal audit
function is an important substantive
procedure to be performed
by the independent auditor.

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In obtaining an understanding of an d
entity's internal control in a financial
statement audit of a nonpublic
company, an auditor is not obligated to

A. Determine whether the control


activities have been placed in operation.
B. Perform procedures to understand the
design of the internal control policies.
C. Document the understanding of the
entity's internal control components.
D. Search for significant deficiencies in
the operation of the internal control.

After completing the preliminary phase a


of the review of internal control, the
auditor decides not to rely on
the system to restrict substantive
procedures. Documentation may be
limited to the auditor's

A. Understanding of the internal control.


B. Reasons for deciding not to extend the
review.
C. Basis for concluding that errors and
fraud will be prevented.
D. Completed internal control
questionnaire.

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In an audit of financial statements of a d


private company in accordance with
generally accepted auditing
standards, an auditor is required to

A. Identify specific internal control


activities relevant to management's
financial statement assertions.
B. Perform tests of controls to evaluate
the effectiveness of the entity's
accounting system.
C. Determine whether procedures are
suitably designed to prevent or detect
material misstatements.
D. Document the auditor's
understanding of the entity's internal
control.

For a complex IT system, auditors are a


least likely to use which of the following
when documenting their
understanding of internal controls?

A. Narratives.
B. Internal control questionnaires.
C. Flowcharts.
D. Organization charts.

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Assessing control risk at a lower level b


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

When an auditor increases the planned a


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 details.


B. Level of inherent risk.
C. Extent of tests of controls.
D. Level of detection risk.

Which of the following procedures most a


likely would be included as part of an
auditor's tests of controls?

A. Inspection.
B. Reconciliation.
C. Confirmation.
D. Analytical procedures

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An auditor is least likely to test the b


internal controls that provide for

A. Approval of the purchase and sale of


marketable securities.
B. Classification of revenue and expense
transactions by product line.
C. Segregation of the functions of
recording disbursements and reconciling
the bank account.
D. Comparison of receiving reports and
vendors' invoices with purchase orders.

For certain controls, such as segregation b


of duties, documentary evidence may not
exist. An auditor
would most likely test the procedures by

A. Reperformance and corroboration.


B. Observation and inquiry.
C. Inspection and vouching.
D. Confirmation and recomputation.

Walkthroughs usually involve all of the a


following audit procedures except:

A. Reperformance.
B. Inquiry.
C. Observation.
D. Inspection.

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Before applying substantive procedures c


to the details of accounts at an interim
date (a date prior to the
balance sheet date), an auditor should

A. Assess control risk at high for the


assertions embodied in the accounts
selected for interim testing.
B.

Determine that the accounts selected for


interim testing are not material to the
financial statements
taken as a whole.
C.

Consider the availability of information at


a later date that will be necessary for the
auditor's
procedures (e.g., electronic data).
D.

Obtain written representations from


management that all financial records
and related data will be
made available.

A high detection risk strategy includes all d


of the following except:

A. Interim testing.
B. Reduced testing of transactions.
C. Heavy reliance on analytical
procedures as substantive procedures.
D. Audit work only completed at year-
end.

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The auditor should consider all of the b


following when deciding whether
substantive procedures will be
performed at an interim date except:

A. The level of control risk.


B. Scheduling conflicts in the audit firm
that make interim testing more
convenient.
C. Whether business conditions will
change after the interim date.
D. The ability to examine the remaining
period.

If auditors conduct substantive d


procedures as of 10/31 for an entity with
a 12/31 year-end

A. Additional tests are seldom conducted


for the remaining period.
B. Additional control tests are required in
the remaining period.
C. The entity's controls likely are
ineffective.
D. Additional tests likely will be
performed in the remaining period.

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Based on a study and evaluation d


completed at an interim date, the auditor
concludes that no significant
internal control weaknesses exist. The
records and procedures would most
likely be tested again at year-end if
A. Compliance tests were not performed
by the internal audit staff during the
remaining period.
B.

The internal control system provides a


basis for reliance in reducing the extent
of substantive
procedures.
C. The auditor used nonstatistical
sampling during interim compliance
testing.
D.

Inquiries and observations lead the


auditor to believe that conditions within
the internal control system
have changed.

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The auditor's communication of material c


weaknesses in internal control for a
nonpublic company is

A
.
Required to enable the auditor to state
that the examination has been made in
accordance with
generally accepted auditing standards.
B. The principle reason for studying and
evaluating the system of internal
controls.
C.

Incidental to the auditor's objective of


forming an opinion as to the fair
presentation of the financial
statements.
D. Required to be included as part of the
audit opinion

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Significant deficiencies are matters that c


come to an auditor's attention that
should be communicated to an
entity's audit committee because they
represent

A. Disclosures of information that


significantly contradict the auditor's
going concern assumption.
B. Material fraud or illegal acts
perpetrated by high-level management.
C. Significant design flaws in internal
controls or poor implementation of
internal controls.
D.

Manipulation or falsification of
accounting records or documents from
which financial statements are
prepared.

All of the following are significant d


deficiencies except:

A. Absence of appropriate reviews of


transactions.
B. Evidence of willful wrongdoing by
lower-level employees.
C. Inadequate provisions for
safeguarding assets.
D. Inventory is highly subject to
obsolescence.

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The normal sequence of documents and a


operations on a well-prepared systems
flowchart is

A. Top to bottom and left to right.


B. Bottom to top and left to right.
C. Top to bottom and right to left.
D. Bottom to top and right to left.

. When documenting an entity's internal d


control, the independent auditor
sometimes uses a systems
flowchart, which can best be described
as a

A. Pictorial presentation of the flow of


instructions in an entity's internal
computer system.
B. Diagram which clearly indicates an
organization's internal reporting
structure.
C.

Graphic illustration of the flow of


operations which is used to replace the
auditor's internal control
questionnaire.
D. Symbolic representation of a system
or series of sequential processes.

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Which of the following is not a d


characteristic of a batch processed
computer system?

A. The collection of like transactions


which are sorted and processed
sequentially against a master file.
B. Keypunching of transactions, followed
by machine processing.
C. The production of numerous
printouts.
D. The posting of a transaction, as it
occurs, to several files, without
intermediate printouts.

Which of the following is a general c


control that would most likely assist an
entity whose systems analyst
left the entity in the middle of a major
project?

A. Grandfather-father-son record
retention.
B. Input and output validation routines.
C. Systems documentation.
D. Check digit verification.

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Ch. 6 Audit flashcards | Quizlet 4/28/16, 8:21 PM

A customer intended to order 100 units a


of product Z96014, but incorrectly
ordered 100 units of a
nonexistent product Z96015. Which of
the following controls most likely would
detect this error?

A. Check digit verification.


B. Record count.
C. Hash total.
D. Redundant data check.

Assume that an auditor estimates that d


10,000 checks were issued during the
accounting period. If an IT
application control which performs a
limit check for each check request is to
be subjected to the auditor's
test data approach, the sample should
include

A. Approximately 1,000 test items.


B. A number of test items determined by
the auditor to be sufficient under the
circumstances.
C. A number of test items determined by
the auditor's reference to the
appropriate sampling tables.
D. One transaction.

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After obtaining an understanding of c


internal controls and assessing control
risk of an entity, an auditor
decided not to perform tests of controls
for purposes of the audit. The auditor
most likely decided that

A.

The available evidential matter obtained


through tests of controls would not
support an increased level
of control risk.
B. A reduction in the assessed level of
control risk is justified for certain
financial statement assertions.
C.

It would be inefficient to perform tests of


controls that would result in a reduction
in planned
substantive procedures.
D. The assessed level of inherent risk
exceeded the assessed level of control
risk.

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Ch. 6 Audit flashcards | Quizlet 4/28/16, 8:21 PM

After the auditor has prepared a c


flowchart of the internal controls
surrounding sales and evaluated the
design of the system, the auditor would
perform tests of controls on all control
activities

A. Documented in the flowchart.


B. Considered to be weaknesses that
might allow errors to enter the
accounting system.
C. That the auditor plans to rely on.
D. That would aid in preventing fraud.

As the acceptable level of detection risk c


increases, an auditor may change the

A. Assessed level of control risk from a


lower level to a higher level.
B. Assurance provided by tests of
controls by using a larger sample size
than planned.
C. Timing of substantive procedures from
year-end to an interim date.
D. Nature of substantive procedures
from less effective to more effective
procedures

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Ch. 6 Audit flashcards | Quizlet 4/28/16, 8:21 PM

In a properly designed internal control d


system, the same employee may be
permitted to

A. Receive and deposit checks and also


approve write-offs of customer accounts.
B. Approve vouchers for payment and
also sign checks.
C. Reconcile the bank statements and
also receive and deposit cash.
D. Sign checks and also cancel
supporting documents.

A procedure that would most likely be b


used by an auditor in performing tests of
control activities that
involve segregation of functions but
which leave no transaction trail is

A. Inspection.
B. Observation.
C. Reperformance.
D. Reconciliation.

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Ch. 6 Audit flashcards | Quizlet 4/28/16, 8:21 PM

During consideration of internal control a


in a financial statement audit of a
nonpublic company, an auditor
is not obligated to

A. Search for significant deficiencies in


the operation of internal control.
B. Understand the internal control
environment and the information
system.
C. Determine whether the controls
relevant to audit planning have been
placed in operation.
D. Perform procedures to understand
the design of internal control.

Audit evidence concerning proper d


segregation of duties ordinarily is best
obtained by

A. Preparation of a flowchart of duties


performed by available personnel.
B. Inquiring whether control activities
operated consistently throughout the
period.
C. Reviewing job descriptions prepared
by the Personnel Department.
D. Direct personal observation of the
employees who apply the control
activities

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Ch. 6 Audit flashcards | Quizlet 4/28/16, 8:21 PM

While substantive procedures may b


support the accuracy of underlying
records, these tests frequently
provide no affirmative evidence of
segregation of duties because

A.

Substantive procedures rarely guarantee


the accuracy of the records if only a
sample of the transactions
has been tested.
B.

The records may be accurate even


though they are maintained by persons
having incompatible
functions.
C
.
Substantive procedures relate to the
entire period under audit, but
compliance tests ordinarily are
confined to the period during which the
auditor is on the entity's premises.
D
.
Many computerized procedures leave no
audit trail of who performed them, so
substantive procedures
may necessarily be limited to inquiries
and observation of office personnel.

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Ch. 6 Audit flashcards | Quizlet 4/28/16, 8:21 PM

Before applying substantive procedures a


to the details of asset and liability
accounts at an interim date, the
auditor should

A. Assess the difficulty in controlling


achieved audit risk for the remainder of
the period.
B.

Investigate significant fluctuations that


have occurred in the asset and liability
accounts since the
previous balance sheet date.
C. Select only those accounts which can
effectively be sampled during year-end
audit work.
D
.
Consider the compliance tests that must
be applied at the balance sheet date to
extend the audit
conclusions reached at the interim date

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Ch. 6 Audit flashcards | Quizlet 4/28/16, 8:21 PM

When communicating internal control- d


related matters noted in an audit of a
nonpublic company, an
auditor's report issued on significant
deficiencies should indicate that

A.

Errors or fraud may occur and not be


detected because there are inherent
limitations in any internal
control system.
B.

The issuance of an unqualified opinion


on the financial statements may depend
on corrective follow-up
action.
C
.
The deficiencies noted were not detected
within a timely period by employees in
the normal course of
performing their assigned functions.
D.

The purpose of the audit was to report


on the financial statements and not to
provide assurance on
internal control.

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Ch. 6 Audit flashcards | Quizlet 4/28/16, 8:21 PM

The program flowcharting symbol d


representing a decision is a

A. Triangle.
B. Circle.
C. Rectangle.
D. Diamond.

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