Which of management’s assertions with respect to implementing internal controls is the auditor primarily concerned?
A. Reliability of financial reporting
B. Effectiveness of operations
C. Efficiency of operations
D. Compliance with applicable laws and regulations
A. Reliability of financial reporting
Internal controls:
A. Guarantee that the company complies with all laws and regulations
B. Only apply to SEC companies
C. Consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals.
D. Are implemented by and are the responsibility of the auditors.
C. Consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals.
An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as:
A. A material weakness
B. Collusion
C. A significant deficiency
D. A control deficiency
B. Collusion
The auditors primary purpose in auditing the client’s system of internal control over financial reporting is:
A. To prevent fraudulent financial statements from being issued to the public.
B. To efficiently conduct the Audit of Financial Statements.
C. To evaluate the effectiveness of the company’s internal controls over all relevant assertions in the financial statements.
D. To report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements.
C. To evaluate the effectiveness of the company’s internal controls over all relevant assertions in the financial statements.
Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the:
A. Ability of the internal audit staff to maintain it
B. Proper implementation by management
C. Competency and dependability of the people using it
D. Adequacy of the computer system
C. Competency and dependability of the people using it
When considering internal controls, an important point to consider is that:
A. Companies must use the COSO framework to establish internal controls.
B. Auditors are concerned with the client’s internal controls over the safeguarding of assets if they affect the financial statements.
C. Management is responsible for understanding and testing internal control over financial reporting.
D. Auditors can ignore controls affecting internal management information.
B. Auditors are concerned with the client’s internal controls over the safeguarding of assets if they affect the financial statements.
The financial statements may not correctly reflect accounting frameworks such as GAAP or IFRS if the :
A. Company’s controls do not promote compliance with applicable rules and regulations.
B. Company’s controls do not promote effectiveness.
C. Controls affecting the reliability of financial reporting are inadequate.
D. Company’s controls do not promote efficiency.
C. Controls affecting the reliability of financial reporting are inadequate.
The primary emphasis by auditors is on controls over:
A. Classes of transactions
B. Both A and B, because they are equally important.
C. Account balances
D. Both A and B, because they vary from client to client
A. Classes of transactions
Which of the following activities would be least likely to strengthen a company’s internal control?
A. Carefully selecting and training employees.
B. Fixing responsibility for the performance of employee duties.
C. Maintaining insurance for fire and theft.
D. Separating accounting from other financial operations.
C. Maintaining insurance for fire and theft.
Which of the following best describes the purpose of control activities?
A. The actions, policies, and procedures that reflect the overall attitudes of management.
B. Activities that deal with the ongoing assessment of the quality of internal control by management
C. The identification and analysis of risks relevant to the preparation of financial statements.
D. The policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity’s objectives.
D. The policies and procedures that help ensure that necessary actions are taken to address risks to the achievement of the entity’s objectives.
An audit procedure that would most likely be used by an auditor in performing tests of control procedures in which the segregation of functions and that leaves no “audit” trail is:
A. inspection
B. reconciliation
C. reperformance
D. observation
D. observation
Internal controls normally include procedures designed to provide reasonable assurance that:
A. Collusive activities would be detected by segregation of employee duties.
B. Employees act with integrity when performing their assigned tasks.
C. Decision processes leading to management’s authorization of transactions are sound.
D. Transactions are executed in accordance with management’s authorization
D. Transactions are executed in accordance with management’s authorization
Proper segregation of functional responsibilities calls for separation of:
A. Authorization, execution, and payment.
B. Authorization, recording, and custody.
C. Custody, execution, and reporting.
D. Authorization, payment, and recording.
B. Authorization, recording, and custody.
If a company has an effective internal audit department:
A. Their work cannot be used by the external auditors per PCAOB Standard 5.
B. It can reduce external audit costs by providing direct assistance to the external auditors.
C. The internal auditors can express an opinion on the fairness of the financial statements.
D. The internal auditors must be CPAs in order for the external auditors to rely on their work.
B. It can reduce external audit costs by providing direct assistance to the external auditors.
Narratives, flowcharts, and internal control questionnaires are three common methods of:
A. testing the internal controls.
B. documenting the auditor’s understanding of internal controls.
C. documenting the auditor’s understanding of a client’s organizational structure.
D. designing the audit manual and procedures.
B. documenting the auditor’s understanding of internal controls.
Which of the following best defines fraud in a financial statement auditing context?
A. Fraud is either an intentional or unintentional misstatement of the financial statements, depending on materiality.
B. Fraud is an unintentional misstatement of the financial statements.
C. Fraud is an intentional misstatement of the financial statements.
D. Fraud is either an intentional or unintentional misstatement of the financial statements, depending on consistency.
C. Fraud is an intentional misstatement of the financial statements.
Most cases of fraudulent reporting involve:
A. An overstatement of liabilities
B. Inadequate disclosures
C. An overstatement of income
D. An overstatement of expenses
C. An overstatement of income
Misappropriation of assets is normally perpetrated by:
A. The internal auditors.
B. Management of the company.
C. Members of the board of directors.
D. Employees at lower levels of the organization.
D. Employees at lower levels of the organization.
The two main categories of fraud are fraudulent financial reporting and misappropriation of assets. True or False?
True
Which of the following is not a factor that relates to opportunities to commit fraudulent financial reporting?
A. High turnover of accounting, internal audit, and information technology staff.
B. Management’s practice of making overly aggressive forecasts.
C. Lack of controls related to the calculation and approval of accounting estimates.
D. Ineffective oversight of financial reporting by the board of directors.
B. Management’s practice of making overly aggressive forecasts.
Fraud is more prevalent in smaller businesses and not-for-profit organizations because it is more difficult for them to maintain:
A. Adequate supervisory boards.
B. Adequate compensation.
C. Adequate financial reporting standards.
D. Adequate separation of duties.
D. Adequate separation of duties.
Which of the following is a factor that relates to incentives to misappropriate assets?
A. Significant accounting estimates involving subjective judgments.
B. High turnover of accounting, internal audit and information technology staff.
C. Significant personal financial obligations.
D. Management’s practice of making overly aggressive forecasts.
C. Significant personal financial obligations.
Who is most likely to perpetrate fraudulent financial reporting?
A. The internal auditors.
B. Members of the board of directors
C. Management of the company
D. Production employees
C. Management of the company
“An attitude, character, or set of ethical values exist that allow management or employees to commit a dishonest act….” describes the opportunities condition included in the fraud triangle. True or False?
False, it is an attitude/rationalization
An ineffective board of director oversight over financial reporting is an example of an incentives/pressures risk factor. True or False?
False, it is an opportunity
When assessing the risk for fraud, the auditor must be cognizant of the fact that:
A. Analytical procedures must be performed on revenue accounts.
B. Horizontal analysis is not useful in helping to determine unusual financial statement relationships.
C. The existence of fraud risk factors means fraud exists.
D. The auditor cannot make inquiries about fraud to company personnel who have no financial statement responsibilities.
A. Analytical procedures must be performed on revenue accounts.
This is to identify any unusual or unexpected relationships involving revenue accounts
When the auditor receives inconsistent responses from management and others within the organization, the auditor should obtain additional audit evidence to resolve the inconsistency. True or False?
True
Which party has the primary responsibility to oversee an organization’s financial reporting and internal control process?
A. Management of the company
B. The board of directors
C. The financial statement auditors
D. The audit committee
D. The audit committee
Audit committee oversight also serves as a deterrent to fraud by senior management. True or False?
True
The auditors should pay careful attention to accounting principles that involve subjective measurements or complex transactions. True or False?
True
Which of the following is not one of the three primary objectives of effective internal control?A. Reliability of financial reporting
B. Efficiency and effectiveness of operations
C. Compliance with laws and regulations
D. Assurance of elimination of business risk
D. Assurance of elimination of business risk
Internal controls are not designed to provide reasonable assurance that:
A. transactions are executed in accordance with management’s authorization.
B. all frauds will be detected.
C. company personnel comply with applicable rules and regulations.
D. the company’s resources are used efficiently and effectively.
B. all frauds will be detected.
Which of the following is responsible for establishing a private company’s internal control?
A. Internal Auditors
B. Audit committee
C. FASB
D. Senior Management
D. Senior Management
Two key concepts that underlie management’s design and implementation of internal control are:
A. costs and materiality.
B. absolute assurance and costs.
C. inherent limitations and reasonable assurance.
D. collusion and materiality.
C. inherent limitations and reasonable assurance.
The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on:
A. the audit committee of the board of directors.
B. the CFO and the independent auditors.
C. the company’s board of directors.
D. management.
D. management.
Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies?
A. Management, Financial statement auditors (Yes, Yes)
B. Management, Financial statement auditors (No, Yes)
C. Management, Financial statement auditors (No, No)
D. Management, Financial statement auditors (Yes, No)
A. Management, Financial statement auditors (Yes, Yes)
Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements?
A. A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
B. A statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
C. A statement that management, the board of directors, and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
D. A statement that the external auditors are solely responsible
A. A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
When management is evaluating the design of internal control, management evaluates whether the control can do which of the following?
A. Detect material misstatements, Correct material misstatements (No, Yes)
B. Detect material misstatements, Correct material misstatements (Yes, No)
C. Detect material misstatements, Correct material misstatements (Yes, Yes)
D. Detect material misstatements, Correct material misstatements (No, No)
B. Detect material misstatements, Correct material misstatements (Yes, No)
When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is:
A. insufficient.
B. ineffective.
C. inadequate.
D. inefficient.
B. ineffective.
Management must disclose material weaknesses in internal control in its audit report:
A. only if the auditor identifies the weakness as significant.
B. whenever the weakness is deemed significant to a single class of transactions.
C. if the weakness exists at the end of the year.
D. whenever the weakness is significant to overall financial reporting objectives.
C. if the weakness exists at the end of the year.
