Question 1

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In an audit of financial statements, an auditor’s primary consideration regarding a control is
whether it

a.
Reflects management’s philosophy and operating style
b.
Provides adequate safeguards over access to assets
c.
Affects management’s financial statement assertions
d.
Enhances management’s decision-making processes
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The correct answer is: Affects management’s financial statement assertions

Question 2
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As part of a periodic planning exercise, AAA Company discovers that a political dispute may
interfere with the company’s supply sources. This is an example of

a.
Risk assessment
b.
Control environment
c.
Control activities
 d.
Monitoring of controls
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The correct answer is: Risk assessment

Question 3
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This is a basic concept of internal control which recognizes that the cost of internal control
should not exceed the benefits expected to be derived from it

a.
Management by exception
b.
Limited liability
c.
Management responsibility
d.
Reasonable assurance
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The correct answer is: Reasonable assurance

Question 4
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An auditor should obtain sufficient knowledge of an entity's information system, including the
related business processes relevant to financial reporting, to understand the

a.
Safeguards used to limit access to computer facilities
 b.
Process used to prepare significant accounting estimates
c.
Policies used to detect the concealment of fraud
d.
Produces used to assure proper authorization of transactions
Feedback
The correct answer is: Process used to prepare significant accounting estimates

Question 5
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Which of the following statements regarding auditor documentation of the client’s internal
control structure is correct?

a.
No documentation is necessary although it is desirable.
b.
No one particular form of documentation is necessary, and the extent of documentation may
vary.
c.
Documentation must include flowcharts
d.
Documentation must include procedural write-ups.
Feedback
The correct answer is: No one particular form of documentation is necessary, and the extent of
documentation may vary.

Question 6
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 Question text
Dutch Company uses its sales invoices for posting perpetual inventory records. Inadequate
internal control over the invoicing allows goods to be shipped but not invoiced.The inadequate
controls could cause what type of misstatement in each of the following accounts? (1) Revenues
(2) Receivables (3) Inventories

a.
Overstatement, overstatement, overstatement
b.
Overstatement, overstatement, understatement
c.
Understatement, understatement, understatement
d.
Understatement, understatement, overstatement
Feedback
The correct answer is: Understatement, understatement, overstatement

Question 7
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It is the process designed and effected by those charged with governance, management, and other
personnel to provide reasonable assurance about the achievement of the entity's objectives

a.
Internal auditing
b.
Internal control
c.
Accounting process
d.
Business strategy
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The correct answer is: Internal control

Question 8
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After obtaining a sufficient understanding of internal control, the auditor

a.
Assesses the need to apply GAAS.
b.
Assesses detection risk to determine the acceptable level of inherent risk.
c.
Determines the preliminary assessment of control risk.
d.
Determines the assessed levels of detection risk and inherent risk.
Feedback
The correct answer is: Determines the preliminary assessment of control risk.

Question 9
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When control risk is assessed at HIGH for all financial statements assertions, an auditor should
document the auditor’s
(1) Understanding of the entity’s internal control structure
(2) Conclusion that control risk is HIGH
(3) Basis for concluding that control risk is HIGH

a.
No, y es, yes
b.
Yes, yes, yes
c.
Yes, yes, no
 d.
Yes, no, no
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The correct answer is: Yes, yes, no

Question 10
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Which of the following statements best describes the phrase, “evaluating the design of a
control”?

a.
Expressing an opinion as to the effectiveness of a control
b.
Observing the application of specific controls
c.
Determining whether the control exists and that the entity is using it
d.
Considering whether the control, individually or in combination with other controls, is capable of
effectively preventing, or detecting and correcting, material misstatements
Feedback
The correct answer is: Considering whether the control, individually or in combination with
other controls, is capable of effectively preventing, or detecting and correcting, material
misstatements

Question 11
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The primary objective of procedures performed to obtain an understanding of internal control is
to provide an auditor with
 a.
Knowledge necessary to plan the audit
b.
Evidence to use in reducing detection risk
c.
Information necessary to prepare flowcharts
d.
A basis for modifying test of controls
Feedback
The correct answer is: Knowledge necessary to plan the audit

Question 12
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Which of the following is an example of an inherent limitation in a client’s internal control
system?

a.
In the performance of most control procedures, there are possibilities of errors arising from
mistakes in judgment
b.
Procedures are designed to assure the execution and recording of transactions in accordance with
management’s authorization
c.
Procedures for handling large numbers of transactions are processed by information technology
(IT) equipment
d.
The effectiveness of procedures depends on the segregation of employee duties
Feedback
The correct answer is: In the performance of most control procedures, there are possibilities of
errors arising from mistakes in judgment

Question 13
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Under PAS 315, monitoring of controls is an internal control component that involves a process
of assessing the quality of internal control performance over time. It involves assessing the
design and operation of controls on a timely basis and taking necessary corrective actions.
Monitoring of controls is accomplished through ongoing monitoring activities, separate
evaluations, or a combination of the two. An entity's ongoing monitoring activities often include

a.
Periodic reporting by the entity's internal auditors about the functioning of internal control
b.
Periodic audits by the audit committee
c.
The audit of the annual financial statements
d.
Reviewing the purchasing account
Feedback
The correct answer is: Reviewing the purchasing account

Question 14
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To obtain an understanding of the relevant policies and procedures of internal control, the auditor
performs all of the following except

a.
Design substantive tests
b.
Make inquiries
c.
Make observations
 d.
Inspect documents and records
Feedback
The correct answer is: Design substantive tests

Question 15
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PSA 315 requires the auditor to obtain an understanding of the client’s internal controls

a.
For every audit
b.
Sufficient to find any frauds which may exist
c.
Whenever it would be appropriate
d.
For first-time audits
Feedback
The correct answer is: For every audit

Question 1
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An auditor may compensate for a weakness in the internal control structure by increasing the

a.
Level of detection risk
b.
Extent of tests of controls
 c.
Extent of test of details
d.
Level of audit risk
Feedback
The correct answer is: Extent of test of details

Question 2
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Control activities are the policies and procedures that help ensure that management directives are
carried out. These include activities relating authorization,performance reviews, information
processing, physical controls and segregation of duties. There is proper segregation of duties
when an individual who

a.
Records a transaction does not have custody of the asset itself
b.
Authorizes a transaction records it
c.
Maintains custody of an asset has access to the accounting records for the asset.
d.
Authorizes a transaction maintains custody of the asset that resulted from the transaction
Feedback
The correct answer is: Records a transaction does not have custody of the asset itself

Question 3
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An auditor’s flowchart of a client’s accounting system is a diagrammatic representation that
depicts the auditor’s

a.
Identification of weaknesses in the system
b.
Assessment of control risk
c.
Assessment of control environment’s effectiveness
d.
Understanding of the system
Feedback
The correct answer is: Understanding of the system

Question 4
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A control that reduces the risk that an existing or potential control weakness will result in a
failure to meet a control objective is referred to as

a.
Offset control
b.
Non-routine control
c.
Conditional control
d.
Compensating control
Feedback
The correct answer is: Compensating control

Question 5
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This internal control component is the foundation for all other components. It set the tone of the
organization, provides discipline and structure, and influences the control consciousness of
employees

a.
Control environment
b.
Entity's risk assessment process
c.
Control activities
d.
Monitoring of control
Feedback
The correct answer is: Control environment

Question 6
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Which of the following statements concerning audit risk and its components is incorrect?

a.
After obtaining an understanding of the accounting and internal control systems, the auditor
should make a preliminary assessment of control risk, at the assertion level, for each material
account balance or class of transactions
b.
Regardless of the assessed levels of inherent and control risks, the auditor should always perform
some substantive procedures for material account balances and classes of transactions
c.
The higher the assessment of inherent and control risks, the more evidence the auditor obtain
from the performance of substantive procedures
d.
The assessed level of inherent risk need not be considered in determining the nature, timing and
extent of substantive procedures required to reduce audit risk to an acceptably low level
Feedback
The correct answer is: The assessed level of inherent risk need not be considered in determining
the nature, timing and extent of substantive procedures required to reduce audit risk to an
acceptably low level

Question 7
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Control activities constitute one of the five components of internal control . Which of the
following is not included in this internal control component?

a.
Performance reviews
b.
An internal audit function
c.
Authorization
d.
Segregation of duties
Feedback
The correct answer is: An internal audit function

Question 8
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When considering an entity's system of internal control, one of the auditor's major concerns is to
ascertain whether internal control is designed to provide reasonable assurance that

a.
The accounting manager reviews all accounting transactions
b.
Corporate morale problems are addressed immediately and effectively
c.
Financial statements are fairly presented
d.
Profit margins are maximized, and operational efficiency is optimized
Feedback
The correct answer is: Financial statements are fairly presented

Question 9
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As a result of obtaining an understanding of an entity's internal control system, the auditor may
become aware of material weaknesses in the design or implementation of internal control.The
auditor is required to communicate this matter to

a.
Board of Accountancy
b.
Chief executive officer
c.
Securities and Exchange Commission
d.
Those charged with governance or management
Feedback
The correct answer is: Those charged with governance or management

Question 10
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In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the
risks of material misstatement at the financial statements level, and at the assertion level for
classes of transactions, account balances, and disclosure. Some of these risks, in the auditor's
judgment, require special audit consideration, such as those that involve fraud or complex
transactions. Such risks are called

a.
Material risks
b.
Audit risks
c.
Business risks
d.
Significant risks
Feedback
The correct answer is: Significant risks

Question 11
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A reason to establish internal control is to

a.
Encourage compliance with organizational objectives
b.
Ensure the accuracy, reliability and timeliness of information
c.
Provide reasonable assurance that the objectives of the organization are achieved
d.
Have a basis for planning the audit
Feedback
The correct answer is: Provide reasonable assurance that the objectives of the organization are
achieved

Question 12
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Obtaining an understanding of internal control involves:
(1) Evaluating the DESIGN of a control
(2) Determining whether the control has been IMPLEMENTED
(3)Testing the EFFECTIVENESS of a control

a.
Yes, yes, yes
b.
No, yes, yes
c.
Yes, no, yes
d.
Yes, yes, no
Feedback
The correct answer is: Yes, yes, no

Question 13
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The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the
risk that

a.
Entity policies may be circumvented by senior management.
b.
Materials misstatements may exist in the financial statements.
c.
Specified controls requiring segregation of duties may be circumvented by collusion.
d.
Tests of controls may fail to identify controls relevant to assertions.
Feedback
The correct answer is: Materials misstatements may exist in the financial statements.

Question 14
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In a financial statement audit, the auditor is required to perform test of controls when
(i) The auditor’s risk assessment includes expectation of the operating effectiveness of controls
(ii) When substantive procedures alone do not provide sufficient appropriate audit evidence at
the assertion level

a.
ii only
b.
i only
c.
Either i or ii
d.
Neither i nor ii
Feedback
The correct answer is: Either i or ii

Question 15
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When obtaining an understanding of the accounting and internal control system the auditor may
trace a few transactions through the accounting system. This technique is

a.
Reperformance
b.
Walk-through
c.
Control test
d.
Validity Test
Feedback
The correct answer is: Walk-through

Question 1
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Evidence of the performance of control risk assessment procedures includes all of the following
except

a.
Flowcharts
b.
Memoranda
c.
Questionnaires
d.
Lead schedule
Feedback
The correct answer is: Lead schedule

Question 2
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Which of the following is the auditor’s purpose of further testing internal control procedures?

a.
Provide a basis for reducing the assessed level of control risk below that which resulted from the
auditor’s initial understanding of internal control.
b.
Provide assurance that transactions are executed in accordance with management’s authorization
and access to assets is limited by a proper segregation of functions
c.
Reduce the risk that errors or fraud which are not prevented or detected by internal control are
not detected by the independent audit
d.
Provide assurance that transactions are recorded as necessary to permit the preparation of the
financial statements in accordance with PFRS
Feedback
The correct answer is: Provide a basis for reducing the assessed level of control risk below that
which resulted from the auditor’s initial understanding of internal control.

Question 3
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After obtaining an understanding of an entity’s internal control, an auditor may assess control
risk at the maximum level for some assertions because the auditor

a.
Identifies internal control policies and procedures that are likely to prevent material
misstatements.
b.
Believes the internal control policies and procedures are unlikely to be effective
c.
Determines that the pertinent internal control components are not well documented.
d.
Performs tests of controls to restrict detection risk to an acceptable level.
Feedback
The correct answer is: Believes the internal control policies and procedures are unlikely to be
effective

Question 4
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Which of the following statements is true?

a.
After performing tests of controls, the auditor will always assess control risk at maximum.
b.
The auditor can simultaneously obtain an understanding of internal control and perform tests of
controls.
c.
Tests of controls are necessary if the auditor plans to use the primarily substantive approach
d.
Tests of controls are necessary if the auditor plans to assess the level of control risk at maximum
Feedback
The correct answer is: The auditor can simultaneously obtain an understanding of internal
control and perform tests of controls.

Question 5
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 Flag question

Question text
After documenting internal control in an audit engagement, the auditor may perform tests on

a.
Those controls in which deficiencies or weaknesses were identified
b.
Those controls that have a material effect on the balances in the financial statements
c.
Those controls that the auditor plans to rely on
d.
Those controls that were reviewed (selected on a random basis)
Feedback
The correct answer is: Those controls that the auditor plans to rely on

Question 6
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Information about segregation of duties ordinarily is best obtained by

a.
Developing audit objectives that reduce control risk.
b.
Observing employees as they apply specific controls
c.
Performing test of transactions that corroborate management's financial statements assertions.
d.
Obtaining a flowchart of activities performed by entity personnel.
Feedback
The correct answer is: Observing employees as they apply specific controls
Question 7
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The primary purpose of the auditor’s consideration of internal control is to provide a basis for

a.
Constructive suggestions to clients concerning deficiencies in internal control
b.
Determining the nature, timing and extent of audit tests to be applied
c.
Determining whether procedures and records that are concerned with the safeguarding of assets
are reliable
d.
The expression of an opinion
Feedback
The correct answer is: Determining the nature, timing and extent of audit tests to be applied

Question 8
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Management’s attitude toward aggressive financial reporting and its emphasis on meeting
projected profit goals most likely would significantly influence an entity’s control environment
when

a.
Management is dominated by one individual who is also a shareholder.
b.
The audit committee is active in overseeing the entity’s financial reporting policies.
c.
External policies established by parties outside the entity affect its accounting practices.
 d.
Internal auditors have direct access to the board of directors and entity management.
Feedback
The correct answer is: Management is dominated by one individual who is also a shareholder.

Question 9
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Tests of controls are used to test whether controls are

a.
Placed in operation or implemented
b.
Operating effectively
c.
Properly incorporated in the financial statements
d.
Properly documented by the client
Feedback
The correct answer is: Operating effectively

Question 10
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An auditor intends to perform test of controls on a client’s control procedures that leaves no audit
trail of documentary evidence. The auditor most likely will test the procedure by

a.
Inquiry and inspection
b.
Analytical procedures and confirmation
c.
Inquiry and observation
d.
Confirmation and reperformance
Feedback
The correct answer is: Inquiry and observation

Question 11
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Risks can arise or change due to circumstances such as the following, except

a.
The accounting and financial reporting framework has remained stable for the past five years,
and no new pronouncements have been made
b.
There is a change in the regulatory or operating environment ( i.e. a new law has been passed
which prohibits the use of a chemical which is a main ingredient of the company’s major
product)
c.
New employees have been hired by the company
d.
The company switched from manual information systems to a computerized system
Feedback
The correct answer is: The accounting and financial reporting framework has remained stable for
the past five years, and no new pronouncements have been made

Question 12
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 Question text
When obtaining an understanding of an entity’s internal control, an auditor should concentrate on
the substance of controls rather than their form because

a.
Management may implement controls with costs in excess of benefits.
b.
Management may establish appropriate controls but not act on them.
c.
The controls may be so inappropriate that no reliance is contemplated by the auditor.
d.
The controls may be operating effectively but may not be documented.
Feedback
The correct answer is: Management may establish appropriate controls but not act on them.

Question 13
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Question text
The following are components of internal control

a.
Legal environment of the firm, management philosophy, and organizational structure
b.
Risk assessment process, backup facilities, responsibility accounting and natural laws
c.
Organizational structure, management philosophy, and planning
d.
Control environment, risk assessment process, control activities, information system and
communication, and monitoring of controls
Feedback
The correct answer is: Control environment, risk assessment process, control activities,
information system and communication, and monitoring of controls

Question 14
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Which of the following parts of the audit is described by this statement? “The auditor examines
and evaluates processes that produce the numbers and disclosures in the financial statements.”

a.
Issuing the audit report
b.
Performing substantive tests
c.
Studying and testing internal control
d.
Planning
Feedback
The correct answer is: Studying and testing internal control

Question 15
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Which of the following statements concerning material weakness and reportable conditions is
correct?

a.
An auditor should report immediately material weaknesses and reportable conditions discovered
during an audit
b.
All reportable conditions are material weaknesses
c.
All material weaknesses are reportable conditions
d.
An auditor should identify and communicate material weaknesses and reportable conditions
 Feedback
The correct answer is: All material weaknesses are reportable conditions
______________________________________________________________

Question 1
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Question text
Obtaining an understanding of internal control involves:
(1) Evaluating the DESIGN of a control
(2) Determining whether the control has been IMPLEMENTED
(3)Testing the EFFECTIVENESS of a control

a.
Yes, yes, yes
b.
Yes, yes, no
c.
No, yes, yes
d.
Yes, no, yes
Feedback
The correct answer is: Yes, yes, no

Question 2
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Question text
The primary purpose of the auditor’s consideration of internal control is to provide a basis for

a.
Determining whether procedures and records that are concerned with the safeguarding of assets
are reliable
b.
Constructive suggestions to clients concerning deficiencies in internal control
c.
Determining the nature, timing and extent of audit tests to be applied
d.
The expression of an opinion
Feedback
The correct answer is: Determining the nature, timing and extent of audit tests to be applied

Question 3
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Question text
When obtaining an understanding of an entity’s internal control, an auditor should concentrate on
the substance of controls rather than their form because

a.
Management may implement controls with costs in excess of benefits.
b.
Management may establish appropriate controls but not act on them.
c.
The controls may be so inappropriate that no reliance is contemplated by the auditor.
d.
The controls may be operating effectively but may not be documented.
Feedback
The correct answer is: Management may establish appropriate controls but not act on them.

Question 4
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 Question text
Risks can arise or change due to circumstances such as the following, except

a.
New employees have been hired by the company
b.
The accounting and financial reporting framework has remained stable for the past five years,
and no new pronouncements have been made
c.
The company switched from manual information systems to a computerized system
d.
There is a change in the regulatory or operating environment ( i.e. a new law has been passed
which prohibits the use of a chemical which is a main ingredient of the company’s major
product)
Feedback
The correct answer is: The accounting and financial reporting framework has remained stable for
the past five years, and no new pronouncements have been made

Question 5
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Question text
Which of the following is the auditor’s purpose of further testing internal control procedures?

a.
Provide assurance that transactions are executed in accordance with management’s authorization
and access to assets is limited by a proper segregation of functions
b.
Reduce the risk that errors or fraud which are not prevented or detected by internal control are
not detected by the independent audit
c.
Provide assurance that transactions are recorded as necessary to permit the preparation of the
financial statements in accordance with PFRS
d.
Provide a basis for reducing the assessed level of control risk below that which resulted from the
auditor’s initial understanding of internal control.
Feedback
The correct answer is: Provide a basis for reducing the assessed level of control risk below that
which resulted from the auditor’s initial understanding of internal control.

Question 6
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Question text
An auditor should obtain sufficient knowledge of an entity's information system, including the
related business processes relevant to financial reporting, to understand the

a.
Produces used to assure proper authorization of transactions
b.
Process used to prepare significant accounting estimates
c.
Policies used to detect the concealment of fraud
d.
Safeguards used to limit access to computer facilities
Feedback
The correct answer is: Process used to prepare significant accounting estimates

Question 7
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This is a basic concept of internal control which recognizes that the cost of internal control
should not exceed the benefits expected to be derived from it

a.
Management responsibility
b.
Reasonable assurance
 c.
Limited liability
d.
Management by exception
Feedback
The correct answer is: Reasonable assurance

Question 8
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The primary objective of procedures performed to obtain an understanding of internal control is
to provide an auditor with

a.
Knowledge necessary to plan the audit
b.
Information necessary to prepare flowcharts
c.
A basis for modifying test of controls
d.
Evidence to use in reducing detection risk
Feedback
The correct answer is: Knowledge necessary to plan the audit

Question 9
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An auditor may compensate for a weakness in the internal control structure by increasing the

a.
Level of detection risk
b.
Level of audit risk
c.
Extent of test of details
d.
Extent of tests of controls
Feedback
The correct answer is: Extent of test of details

Question 10
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After documenting internal control in an audit engagement, the auditor may perform tests on

a.
Those controls that the auditor plans to rely on
b.
Those controls that were reviewed (selected on a random basis)
c.
Those controls in which deficiencies or weaknesses were identified
d.
Those controls that have a material effect on the balances in the financial statements
Feedback
The correct answer is: Those controls that the auditor plans to rely on

Question 11
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In an audit of financial statements, an auditor’s primary consideration regarding a control is
whether it

a.
Affects management’s financial statement assertions
b.
Enhances management’s decision-making processes
c.
Reflects management’s philosophy and operating style
d.
Provides adequate safeguards over access to assets
Feedback
The correct answer is: Affects management’s financial statement assertions

Question 12
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Question text
Control activities constitute one of the five components of internal control . Which of the
following is not included in this internal control component?

a.
Segregation of duties
b.
Authorization
c.
An internal audit function
d.
Performance reviews
Feedback
The correct answer is: An internal audit function

Question 13
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 Flag question

Question text
After obtaining an understanding of an entity’s internal control, an auditor may assess control
risk at the maximum level for some assertions because the auditor

a.
Performs tests of controls to restrict detection risk to an acceptable level.
b.
Identifies internal control policies and procedures that are likely to prevent material
misstatements.
c.
Determines that the pertinent internal control components are not well documented.
d.
Believes the internal control policies and procedures are unlikely to be effective
Feedback
The correct answer is: Believes the internal control policies and procedures are unlikely to be
effective

Question 14
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Question text
Control activities are the policies and procedures that help ensure that management directives are
carried out. These include activities relating authorization,performance reviews, information
processing, physical controls and segregation of duties. There is proper segregation of duties
when an individual who

a.
Authorizes a transaction records it
b.
Records a transaction does not have custody of the asset itself
c.
Authorizes a transaction maintains custody of the asset that resulted from the transaction
d.
Maintains custody of an asset has access to the accounting records for the asset.
Feedback
The correct answer is: Records a transaction does not have custody of the asset itself

Question 15
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Which of the following statements is true?

a.
Tests of controls are necessary if the auditor plans to use the primarily substantive approach
b.
Tests of controls are necessary if the auditor plans to assess the level of control risk at maximum
c.
After performing tests of controls, the auditor will always assess control risk at maximum.
d.
The auditor can simultaneously obtain an understanding of internal control and perform tests of
controls.
Feedback
The correct answer is: The auditor can simultaneously obtain an understanding of internal
control and perform tests of controls.

er i or ii
Feedback
The correct answer is: Either i or ii

Question 5
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 Question text
Evidence of the performance of control risk assessment procedures includes all of the following
except

a.
Memoranda
b.
Flowcharts
c.
Questionnaires
d.
Lead schedule
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The correct answer is: Lead schedule

Question 6
Incorrect
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Information about segregation of duties ordinarily is best obtained by

a.
Developing audit objectives that reduce control risk.
b.
Performing test of transactions that corroborate management's financial statements assertions.
c.
Obtaining a flowchart of activities performed by entity personnel.
d.
Observing employees as they apply specific controls
Feedback
The correct answer is: Observing employees as they apply specific controls

Question 7
Incorrect
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 Flag question

Question text
Management’s attitude toward aggressive financial reporting and its emphasis on meeting
projected profit goals most likely would significantly influence an entity’s control environment
when

a.
Management is dominated by one individual who is also a shareholder.
b.
External policies established by parties outside the entity affect its accounting practices.
c.
Internal auditors have direct access to the board of directors and entity management.
d.
The audit committee is active in overseeing the entity’s financial reporting policies.
Feedback
The correct answer is: Management is dominated by one individual who is also a shareholder.

Question 8
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When obtaining an understanding of the accounting and internal control system the auditor may
trace a few transactions through the accounting system. This technique is

a.
Control test
b.
Walk-through
c.
Reperformance
d.
Validity Test
 Feedback
The correct answer is: Walk-through

Question 9
Correct
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Which of the following statements best describes the phrase, “evaluating the design of a
control”?

a.
Expressing an opinion as to the effectiveness of a control
b.
Considering whether the control, individually or in combination with other controls, is capable of
effectively preventing, or detecting and correcting, material misstatements
c.
Determining whether the control exists and that the entity is using it
d.
Observing the application of specific controls
Feedback
The correct answer is: Considering whether the control, individually or in combination with
other controls, is capable of effectively preventing, or detecting and correcting, material
misstatements

Question 10
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Question text
Which of the following parts of the audit is described by this statement? “The auditor examines
and evaluates processes that produce the numbers and disclosures in the financial statements.”

a.
Performing substantive tests
 b.
Issuing the audit report
c.
Studying and testing internal control
d.
Planning
Feedback
The correct answer is: Studying and testing internal control

Question 11
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After obtaining a sufficient understanding of internal control, the auditor

a.
Determines the preliminary assessment of control risk.
b.
Assesses detection risk to determine the acceptable level of inherent risk.
c.
Determines the assessed levels of detection risk and inherent risk.
d.
Assesses the need to apply GAAS.
Feedback
The correct answer is: Determines the preliminary assessment of control risk.

Question 12
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Question text
An auditor’s flowchart of a client’s accounting system is a diagrammatic representation that
depicts the auditor’s

a.
Assessment of control risk
b.
Identification of weaknesses in the system
c.
Understanding of the system
d.
Assessment of control environment’s effectiveness
Feedback
The correct answer is: Understanding of the system

Question 13
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Under PAS 315, monitoring of controls is an internal control component that involves a process
of assessing the quality of internal control performance over time. It involves assessing the
design and operation of controls on a timely basis and taking necessary corrective actions.
Monitoring of controls is accomplished through ongoing monitoring activities, separate
evaluations, or a combination of the two. An entity's ongoing monitoring activities often include

a.
The audit of the annual financial statements
b.
Reviewing the purchasing account
c.
Periodic reporting by the entity's internal auditors about the functioning of internal control
d.
Periodic audits by the audit committee
Feedback
The correct answer is: Reviewing the purchasing account

Question 14
Correct
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Tests of controls are used to test whether controls are

a.
Properly documented by the client
b.
Properly incorporated in the financial statements
c.
Operating effectively
d.
Placed in operation or implemented
Feedback
The correct answer is: Operating effectively

Question 15
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Question text
PSA 315 requires the auditor to obtain an understanding of the client’s internal controls

a.
Sufficient to find any frauds which may exist
b.
Whenever it would be appropriate
c.
For every audit
d.
For first-time audits
Feedback
The correct answer is: For every audit
Question 1
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Dutch Company uses its sales invoices for posting perpetual inventory records. Inadequate
internal control over the invoicing allows goods to be shipped but not invoiced.The inadequate
controls could cause what type of misstatement in each of the following accounts? (1) Revenues
(2) Receivables (3) Inventories

a.
Understatement, understatement, understatement
b.
Overstatement, overstatement, overstatement
c.
Overstatement, overstatement, understatement
d.
Understatement, understatement, overstatement
Feedback
The correct answer is: Understatement, understatement, overstatement

Question 2
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Which of the following is an example of an inherent limitation in a client’s internal control
system?

a.
In the performance of most control procedures, there are possibilities of errors arising from
mistakes in judgment
b.
The effectiveness of procedures depends on the segregation of employee duties
 c.
Procedures for handling large numbers of transactions are processed by information technology
(IT) equipment
d.
Procedures are designed to assure the execution and recording of transactions in accordance with
management’s authorization
Feedback
The correct answer is: In the performance of most control procedures, there are possibilities of
errors arising from mistakes in judgment

Question 3
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As part of a periodic planning exercise, AAA Company discovers that a political dispute may
interfere with the company’s supply sources. This is an example of

a.
Risk assessment
b.
Control environment
c.
Control activities
d.
Monitoring of controls
Feedback
The correct answer is: Risk assessment

Question 4
Incorrect
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In a financial statement audit, the auditor is required to perform test of controls when
(i) The auditor’s risk assessment includes expectation of the operating effectiveness of controls
(ii) When substantive procedures alone do not provide sufficient appropriate audit evidence at
the assertion level

a.
i only
b.
Neither i nor ii
c.
ii only
d.
Either i or ii
Feedback
The correct answer is: Either i or ii

Question 5
Correct
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Question text
Evidence of the performance of control risk assessment procedures includes all of the following
except

a.
Memoranda
b.
Flowcharts
c.
Questionnaires
d.
Lead schedule
Feedback
The correct answer is: Lead schedule

Question 6
Incorrect
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 Flag question

Question text
Information about segregation of duties ordinarily is best obtained by

a.
Developing audit objectives that reduce control risk.
b.
Performing test of transactions that corroborate management's financial statements assertions.
c.
Obtaining a flowchart of activities performed by entity personnel.
d.
Observing employees as they apply specific controls
Feedback
The correct answer is: Observing employees as they apply specific controls

Question 7
Incorrect
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Question text
Management’s attitude toward aggressive financial reporting and its emphasis on meeting
projected profit goals most likely would significantly influence an entity’s control environment
when

a.
Management is dominated by one individual who is also a shareholder.
b.
External policies established by parties outside the entity affect its accounting practices.
c.
Internal auditors have direct access to the board of directors and entity management.
d.
The audit committee is active in overseeing the entity’s financial reporting policies.
Feedback
The correct answer is: Management is dominated by one individual who is also a shareholder.

Question 8
Correct
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Question text
When obtaining an understanding of the accounting and internal control system the auditor may
trace a few transactions through the accounting system. This technique is

a.
Control test
b.
Walk-through
c.
Reperformance
d.
Validity Test
Feedback
The correct answer is: Walk-through

Question 9
Correct
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Question text
Which of the following statements best describes the phrase, “evaluating the design of a
control”?

a.
Expressing an opinion as to the effectiveness of a control
b.
Considering whether the control, individually or in combination with other controls, is capable of
effectively preventing, or detecting and correcting, material misstatements
 c.
Determining whether the control exists and that the entity is using it
d.
Observing the application of specific controls
Feedback
The correct answer is: Considering whether the control, individually or in combination with
other controls, is capable of effectively preventing, or detecting and correcting, material
misstatements

Question 10
Incorrect
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Question text
Which of the following parts of the audit is described by this statement? “The auditor examines
and evaluates processes that produce the numbers and disclosures in the financial statements.”

a.
Performing substantive tests
b.
Issuing the audit report
c.
Studying and testing internal control
d.
Planning
Feedback
The correct answer is: Studying and testing internal control

Question 11
Incorrect
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Question text
After obtaining a sufficient understanding of internal control, the auditor
 a.
Determines the preliminary assessment of control risk.
b.
Assesses detection risk to determine the acceptable level of inherent risk.
c.
Determines the assessed levels of detection risk and inherent risk.
d.
Assesses the need to apply GAAS.
Feedback
The correct answer is: Determines the preliminary assessment of control risk.

Question 12
Incorrect
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Question text
An auditor’s flowchart of a client’s accounting system is a diagrammatic representation that
depicts the auditor’s

a.
Assessment of control risk
b.
Identification of weaknesses in the system
c.
Understanding of the system
d.
Assessment of control environment’s effectiveness
Feedback
The correct answer is: Understanding of the system

Question 13
Incorrect
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 Question text
Under PAS 315, monitoring of controls is an internal control component that involves a process
of assessing the quality of internal control performance over time. It involves assessing the
design and operation of controls on a timely basis and taking necessary corrective actions.
Monitoring of controls is accomplished through ongoing monitoring activities, separate
evaluations, or a combination of the two. An entity's ongoing monitoring activities often include

a.
The audit of the annual financial statements
b.
Reviewing the purchasing account
c.
Periodic reporting by the entity's internal auditors about the functioning of internal control
d.
Periodic audits by the audit committee
Feedback
The correct answer is: Reviewing the purchasing account

Question 14
Correct
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Question text
Tests of controls are used to test whether controls are

a.
Properly documented by the client
b.
Properly incorporated in the financial statements
c.
Operating effectively
d.
Placed in operation or implemented
Feedback
The correct answer is: Operating effectively

Question 15
Correct
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Question text
PSA 315 requires the auditor to obtain an understanding of the client’s internal controls

a.
Sufficient to find any frauds which may exist
b.
Whenever it would be appropriate
c.
For every audit
d.
For first-time audits
Feedback
The correct answer is: For every audit

Question 1
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Question text
The following are components of internal control

a.
Organizational structure, management philosophy, and planning
b.
Risk assessment process, backup facilities, responsibility accounting and natural laws
c.
Legal environment of the firm, management philosophy, and organizational structure
d.
Control environment, risk assessment process, control activities, information system and
communication, and monitoring of controls
Feedback
The correct answer is: Control environment, risk assessment process, control activities,
information system and communication, and monitoring of controls

Question 2
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Which of the following statements concerning material weakness and reportable conditions is
correct?

a.
An auditor should report immediately material weaknesses and reportable conditions discovered
during an audit
b.
All material weaknesses are reportable conditions
c.
An auditor should identify and communicate material weaknesses and reportable conditions
d.
All reportable conditions are material weaknesses
Feedback
The correct answer is: All material weaknesses are reportable conditions

Question 3
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When considering an entity's system of internal control, one of the auditor's major concerns is to
ascertain whether internal control is designed to provide reasonable assurance that

a.
The accounting manager reviews all accounting transactions
b.
Profit margins are maximized, and operational efficiency is optimized
c.
Financial statements are fairly presented
d.
Corporate morale problems are addressed immediately and effectively
Feedback
The correct answer is: Financial statements are fairly presented

Question 4
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To obtain an understanding of the relevant policies and procedures of internal control, the auditor
performs all of the following except

a.
Make observations
b.
Design substantive tests
c.
Make inquiries
d.
Inspect documents and records
Feedback
The correct answer is: Design substantive tests

Question 5
Correct
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Which of the following statements regarding auditor documentation of the client’s internal
control structure is correct?
 a.
Documentation must include procedural write-ups.
b.
No documentation is necessary although it is desirable.
c.
Documentation must include flowcharts
d.
No one particular form of documentation is necessary, and the extent of documentation may
vary.
Feedback
The correct answer is: No one particular form of documentation is necessary, and the extent of
documentation may vary.

Question 6
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A reason to establish internal control is to

a.
Encourage compliance with organizational objectives
b.
Ensure the accuracy, reliability and timeliness of information
c.
Have a basis for planning the audit
d.
Provide reasonable assurance that the objectives of the organization are achieved
Feedback
The correct answer is: Provide reasonable assurance that the objectives of the organization are
achieved

Question 7
Correct
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 Flag question

Question text
In conducting an audit in accordance with PSAs, the auditor is required to identify and assess the
risks of material misstatement at the financial statements level, and at the assertion level for
classes of transactions, account balances, and disclosure. Some of these risks, in the auditor's
judgment, require special audit consideration, such as those that involve fraud or complex
transactions. Such risks are called

a.
Significant risks
b.
Business risks
c.
Material risks
d.
Audit risks
Feedback
The correct answer is: Significant risks

Question 8
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As a result of obtaining an understanding of an entity's internal control system, the auditor may
become aware of material weaknesses in the design or implementation of internal control.The
auditor is required to communicate this matter to

a.
Board of Accountancy
b.
Chief executive officer
c.
Securities and Exchange Commission
d.
Those charged with governance or management
Feedback
The correct answer is: Those charged with governance or management

Question 9
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When control risk is assessed at HIGH for all financial statements assertions, an auditor should
document the auditor’s
(1) Understanding of the entity’s internal control structure
(2) Conclusion that control risk is HIGH
(3) Basis for concluding that control risk is HIGH

a.
No, y es, yes
b.
Yes, yes, yes
c.
Yes, no, no
d.
Yes, yes, no
Feedback
The correct answer is: Yes, yes, no

Question 10
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An auditor intends to perform test of controls on a client’s control procedures that leaves no audit
trail of documentary evidence. The auditor most likely will test the procedure by

a.
Confirmation and reperformance
b.
Inquiry and inspection
c.
Inquiry and observation
d.
Analytical procedures and confirmation
Feedback
The correct answer is: Inquiry and observation

Question 11
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It is the process designed and effected by those charged with governance, management, and other
personnel to provide reasonable assurance about the achievement of the entity's objectives

a.
Accounting process
b.
Business strategy
c.
Internal control
d.
Internal auditing
Feedback
The correct answer is: Internal control

Question 12
Incorrect
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Question text
Which of the following statements concerning audit risk and its components is incorrect?

a.
The higher the assessment of inherent and control risks, the more evidence the auditor obtain
from the performance of substantive procedures
b.
Regardless of the assessed levels of inherent and control risks, the auditor should always perform
some substantive procedures for material account balances and classes of transactions
c.
After obtaining an understanding of the accounting and internal control systems, the auditor
should make a preliminary assessment of control risk, at the assertion level, for each material
account balance or class of transactions
d.
The assessed level of inherent risk need not be considered in determining the nature, timing and
extent of substantive procedures required to reduce audit risk to an acceptably low level
Feedback
The correct answer is: The assessed level of inherent risk need not be considered in determining
the nature, timing and extent of substantive procedures required to reduce audit risk to an
acceptably low level

Question 13
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A control that reduces the risk that an existing or potential control weakness will result in a
failure to meet a control objective is referred to as

a.
Offset control
b.
Compensating control
 c.
Non-routine control
d.
Conditional control
Feedback
The correct answer is: Compensating control

Question 14
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The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the
risk that

a.
Specified controls requiring segregation of duties may be circumvented by collusion.
b.
Entity policies may be circumvented by senior management.
c.
Tests of controls may fail to identify controls relevant to assertions.
d.
Materials misstatements may exist in the financial statements.
Feedback
The correct answer is: Materials misstatements may exist in the financial statements.

Question 15
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This internal control component is the foundation for all other components. It set the tone of the
organization, provides discipline and structure, and influences the control consciousness of
employees
 a.
Entity's risk assessment process
b.
Monitoring of control
c.
Control environment
d.
Control activities
Feedback
The correct answer is: Control environment