Question 1

Organizational charts are useful to an independent external auditor because the

y
Response: Provide a starting point for assessing control risk
Correct answer: Provide a starting point for assessing control risk

Question 2
In an audit of financial statements, an auditor’s primary consideration regarding
a control is whether it
Response: Affects management’s financial statement assertions
Correct answer: Affects management’s financial statement assertions

Question 3
Management‘s aggressive attitude toward financial reporting and its emphasis o
n meeting projected profit goals most likely would significantly influence an entity‘
s control environment when
Response: [none]
Correct answer: External policies established by parties outside the entity affect i
ts accounting practices

Question 4
Audit evidence concerning segregation of duties ordinarily is best obtained by
Response: Observing the employees as they apply specific controls.
Correct answer: Observing the employees as they apply specific controls.

Question 5
Which of the following statements about internal control is true?
Response: The cost-benefit relationship is a primary criterion that should be con
sidered in designing internal control
Correct answer: The cost-benefit relationship is a primary criterion that should be
considered in designing internal control

Question 6
As part of understanding internal control in planning an audit for a private comp
any, an auditor is not required to
Response: Obtain knowledge about the operating effectiveness of internal control
.
Correct answer: Obtain knowledge about the operating effectiveness of internal c
ontrol.

Question 7
Directors, management, external auditors and internal auditors all play important
roles in creating proper control processes. Senior management is primarily resp
onsible for
Response: Establishing and maintaining an organizational culture
Correct answer: Establishing and maintaining an organizational culture

Question 8
Which of the following most likely would not be considered an inherent limitatio
n of the potential effectiveness of an entity’s internal control?
Response: Incompatible duties
Correct answer: Incompatible duties

Question 9
Transaction authorization within an organization may be either specific or gener
al. An example of specific transaction authorization is the
Response: Approval of a detailed construction budget for a warehouse
Correct answer: Approval of a detailed construction budget for a warehouse

Question 10
The primary objective of procedures performed to obtain an understanding of int
ernal control in a financial statement audit is to provide an auditor with
Response: Knowledge necessary to plan the audit
Correct answer: Knowledge necessary to plan the audit

Question 11
Which of the following are considered control environment factors?
Response: Personnel Policies and Practices only
Correct answer: Personnel Policies and Practices only

Question 12
An auditor should obtain sufficient knowledge of an entity’s information system r
elevant to financial reporting to understand the
Response: Process used to prepare significant accounting estimates.
Correct answer: Process used to prepare significant accounting estimates.
Question 13
After obtaining a sufficient understanding of internal control in an audit of the fi
nancial statements the, auditor assesses
Response: [none]
Correct answer: Control risk to determine the acceptable level of detection risk.

Question 14
An auditor is particularly interested whether internal control is _______ over fina
ncial reporting
Response: [none]
Correct answer: Properly designed and operated effectively

Question 15
Which of the following best describe the interrelated components of internal con
trol?
Response: Control environment, risk assessment, control activities, information a
nd communication systems, and monitoring.
Correct answer: Control environment, risk assessment, control activities, informati
on and communication systems, and monitoring.

Question 16
If internal control is properly designed, the same employee may be permitted to
Response: Sign checks and also cancel supporting documents
Correct answer: Sign checks and also cancel supporting documents

Question 17
A company operates its own truck fleet. Rising operating costs have caused the
company to reassess its internal control. Which one of the following controls m
ay help to lower operating costs?
Response: Parts and hand tools must be requisitioned from the parts department
Correct answer: Each driver has a control card for fuel use at the self-service di
esel fuel dock

Question 18
Which of the following is a step in an auditor’s decision to assess control risk b
elow the maximum?
Response: Identify specific controls that are likely to detect or prevent material
misstatements
Correct answer: Identify specific controls that are likely to detect or prevent mate
rial misstatements

Question 19
Regardless of the assessed level of control risk, an auditor would perform som
e
Response: Substantive tests to restrict detection risk for significant transaction cl
asses
Correct answer: Substantive tests to restrict detection risk for significant transacti
on classes

Question 20
In gaining an understanding of internal control, the auditor may trace several tra
nsactions through the control process, including how the transactions interface wi
th any service organizations whose services are part of the information system.
The primary purpose of this task is to
Response: Determine whether the controls have been placed in operation.
Correct answer: Determine whether the controls have been placed in operation.

Question 21
An entity should consider the cost of a control in relationship to the risk. Which
of the following controls best reflects this philosophy for a large dollar investment
in heavy machine tools?
Response: Imprinting a controlled identification number on each tool.
Correct answer: Imprinting a controlled identification number on each tool.

Question 22
Control activities constitute one of the five components of internal control. Contr
ol activities do not encompass
Response: An internal auditing function.
Correct answer: An internal auditing function.

Question 23
The information and communication component of internal control includes the
methods and records established to initiate, record, process, and report transacti
ons and to maintain accountability. For which of the following transactions would
the auditor ordinarily have the greatest difficulty in obtaining assurance that inter
nal control objectives are met?
Response: [none]
Correct answer: Collection of contributions from the public by a nonprofit organiz
ation

Question 24
The frequency of the comparison of recorded accountability with assets (for the
purpose of safeguarding assets) should be determined by
Response: The nature and amount of the asset and the cost of making the com
parison
Correct answer: The nature and amount of the asset and the cost of making the
comparison

Question 25
A CPA’s consideration of internal control in a financial statement audit of a non
public company
Response: is usually more limited than that made in connection with an engage
ment to report on management’s written assertion as to the effectiveness of inter
nal control
Correct answer: is usually more limited than that made in connection with an en
gagement to report on management’s written assertion as to the effectiveness of
internal control

Question 26
A small private entity may use less formal means to ensure that internal control
objectives are achieved. For example, extensive accounting procedures, sophisti
cated accounting records, or formal controls are least likely to be needed if
Response: Management is closely involved in operations
Correct answer: Management is closely involved in operations

Question 27
Internal controls are designed to provide reasonable assurance that
Response: Material errors or fraud will be prevented or detected and corrected
within a timely period by employees in the course of performing their assigned d
uties
Correct answer: Material errors or fraud will be prevented or detected and correc
ted within a timely period by employees in the course of performing their assign
ed duties

Question 28
Monitoring is an important component of internal control. Which of the following
items would not be an example of monitoring?
Response: Data processing management regularly reconciles batch control totals
for items processed with batch controls for items submitted
Correct answer: Data processing management regularly reconciles batch control t
otals for items processed with batch controls for items submitted

Question 29
A secondary result of the auditor’s consideration of internal control in an audit o
f a private company’s financial statements is that the consideration may
Response: Bring to the auditor's attention possible reportable conditions
Correct answer: Bring to the auditor's attention possible reportable conditions

Question 30
A financial statement auditor is considering internal control for a client with an i
nformation system that makes extensive use of information technology. Which of
the following statements related to the assessment of control risk and the deter
mination of detection risk for this client is false?
Response: The auditor must possess all the information technology skills necess
ary to complete the engagement
Correct answer: The auditor must possess all the information technology skills n
ecessary to complete the engagement

Question 31
A proper segregation of duties requires
Response: That an individual recording a transaction not compare the accounting
record of the asset with the asset itself
Correct answer: That an individual recording a transaction not compare the acco
unting record of the asset with the asset itself

Question 32
The Framework on IC indicates that internal controls may be preventive or dete
ctive. Which of the following controls is preventive?
Response: Requiring two persons to open mail.
Correct answer: Requiring two persons to open mail.

Question 33
Internal control is a function of management, and effective control is based upo
n the concept of charge and discharge of responsibility and duty. Which of the f
ollowing is one of the overriding principles of internal control?
Response: Responsibility for the performance of each duty must be fixed.
Correct answer: Responsibility for the performance of each duty must be fixed.
Question 34
Proper segregation of duties reduces the opportunities for persons to be in posi
tions to both
Response: Perpetrate and conceal errors or fraud
Correct answer: Perpetrate and conceal errors or fraud

Question 35
It is important for the auditor to consider the competence of the audit client’s e
mployees because their competence bears directly and importantly upon the
Response: Achievement of the objectives of internal control
Correct answer: Achievement of the objectives of internal control

Question 36
The ultimate purpose of assessing control risk is to contribute to the auditor’s e
valuation of the risk that
Response: Material misstatements may exist in the financial statements
Correct answer: Material misstatements may exist in the financial statements

Question 37
Control activities include procedures that pertain to physical controls over acces
s to and use of assets and records. A departure from the purpose of such proc
edures is that
Response: Only storeroom personnel and line supervisors have access to the ra
w materials Storeroom
Correct answer: Only storeroom personnel and line supervisors have access to t
he raw materials Storeroom

Question 38
A reason to establish internal control is to
Response: Provide reasonable assurance that the objectives of the organization
are achieved
Correct answer: Provide reasonable assurance that the objectives of the organiz
ation are achieved

Question 39
Basic to a proper control environment are the quality and integrity of personnel
who must perform the prescribed procedures. Which is not a factor in providing f
or competent personnel?
Response: Segregation of duties
Correct answer: Segregation of duties

Question 40
In obtaining an understanding of an entity's internal control in a financial statem
ent audit, an auditor is not obligated to
Response: Search for significant deficiencies in the operation of internal control
Correct answer: Search for significant deficiencies in the operation of internal co
ntrol

Question 41
Which of the following statements concerning control risk in a financial stateme
nt audit is true?
Response: Assessing control risk and obtaining an understanding of an entity’s i
nternal control may be performed concurrently.
Correct answer: Assessing control risk and obtaining an understanding of an enti
ty’s internal control may be performed concurrently.

Question 42
Internal control can provide only reasonable assurance of achieving entity contr
ol objectives. One factor limiting the likelihood of achieving those objectives is th
at
Response: The cost of internal control should not exceed its benefits
Correct answer: The cost of internal control should not exceed its benefits

Question 43
When considering an entity’s internal control, an auditor should concentrate on t
he substance of controls rather than their form because
Response: Management may establish appropriate controls but not act on them
Correct answer: Management may establish appropriate controls but not act on t
hem

Question 44
Effective internal control
Response: Reduces the need for management to review exception reports on a
day-to-day basis.
Correct answer: Reduces the need for management to review exception reports
on a day-to-day basis.

Question 45
 Internal control cannot be designed to provide reasonable assurance regarding t
he achievement of objectives concerning
Response: Availability of reliable data for decision-making purposes and protectio
n of important documents and records.
Correct answer: Elimination of all fraud.