Auditing And Assurance Services, 14e (Arens)
diting and Assurance Services, 14e (Arens)Chapter 10 Section 404 Audits of Internal Control and Control RiskLearning Objective 10-11) Which of the following is not one of the three primary objectives of effective internal control?A) reliability of financial reportingB) efficiency and effectiveness of operationsC) compliance with laws and regulationsD) assurance of elimination of business riskAnswer: DTerms: Internal control objectivesDiff: EasyObjective: LO 10-1AACSB: Analytic skills2) The Public Company Accounting Oversight Board states that reasonable assurance allows a:A) small likelihood of ineffective internal controls.B) remote likelihood that material misstatements will not be prevented or detected by internal control.C) likelihood that material misstatements will not be prevented or detected by internal control.D) high likelihood that material misstatements will not be prevented or detected by internal control.Answer: BTerms: Reasonable assuranceDiff: EasyObjective: LO 10-1AACSB: Reflective thinking skillsTopic: Public3) Which of the following is most correct regarding the requirements under Section 404 of the SarbanesOxley Act?A) The audits of internal control and the financial statements provide reasonable assurance as tomisstatements.B) The audit of internal control provides absolute assurance of misstatement.C) The audit of financial statements provides absolute assurance of misstatement.D) The audits of internal control and the financial statements provide absolute assurance as tomisstatements.Answer: ATerms: Sarbanes Oxley Act Section 404Diff: EasyObjective: LO 10-1AACSB: Reflective thinking skills1Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
de.blogspot.comhttp://downloadslide.blogspot.com4) Which of management's assertions with respect to implementing internal controls is the auditorprimarily concerned?A) efficiency of operationsB) reliability of financial reportingC) effectiveness of operationsD) compliance with applicable laws and regulationsAnswer: BTerms: Management's assertionsDiff: EasyObjective: LO 10-1AACSB: Reflective thinking skills5) To issue a report on internal control over financial reporting for a public company, an auditor must:A) evaluate management's assessment process.B) independently assess the design and operating effectiveness of internal control.C) evaluate management's assessment process and independently assess the design and operatingeffectiveness of internal control.D) test controls over significant account balances.Answer: CTerms: Internal control over financial reporting for public companyDiff: ModerateObjective: LO 10-1AACSB: Reflective thinking skillsTopic: Public6) A company frequently sells products at a price below inventory cost. Essential controls in the riskassessment process would include:A) adequate controls that address the risk of overstating inventory.B) adequate controls that address the risk of not including a purchased item in inventory.C) adequate controls that address the risk of understatement of inventory.D) adequate controls that address the risk of overstatement of cost of goods sold.Answer: ATerms: Controls in risk assessment processDiff: ModerateObjective: LO 10-1AACSB: Analytic skills7) Internal controls are not designed to provide reasonable assurance that:A) all frauds will be detected.B) transactions are executed in accordance with management's authorization.C) access to assets is permitted only in accordance with management's authorization.D) company personnel comply with applicable rules and regulations.Answer: ATerms: Internal controls; reasonable assuranceDiff: ModerateObjective: LO 10-1AACSB: Analytic skills2Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
de.blogspot.comhttp://downloadslide.blogspot.com8) Describe each of the three broad objectives management typically has for internal control. With whichof these objectives is the auditor primarily concerned?Answer: The three objectives are: Reliability of financial reporting. Management has both a legal and professional responsibility to besure that the information is fairly presented in according with reporting requirements such as GAAP. Efficiency and effectiveness of operations. Controls within an organization are meant to encourageefficient and effective use of its resources to optimize the company's goals. Compliance with laws and regulations. Public, non-public, and not-for-profit organizations arerequired to follow many laws and regulations. Some relate to accounting only indirectly, such asenvironmental protection and civil rights laws. Others are closely related to accounting, such as incometax regulations and anti-fraud legal provisions.The auditor's focus in both the audit of financial statements and the audit of internal controls is on thecontrols over the reliability of financial reporting plus those controls over operations and compliancewith laws and regulations that could materially affect financial reporting.Terms: Three broad objectives management has for internal controlDiff: EasyObjective: LO 10-1AACSB: Reflective thinking skills9) The Sarbanes-Oxley Act of 2002 requires that public companies issue an internal control report.A) TrueB) FalseAnswer: ATerms: Sarbanes-Oxley ActDiff: EasyObjective: LO 10-1AACSB: Reflective thinking skillsTopic: SOX10) The primary emphasis by auditors when evaluating and testing internal control is on controls overclasses of transactions rather than controls over account balances.A) TrueB) FalseAnswer: ATerms: Evaluating and testing internal controlsDiff: ModerateObjective: LO 10-1AACSB: Reflective thinking skills3Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
arning Objective 10-21) Which of the following is responsible for establishing a private company's internal control?A) Senior ManagementB) Internal AuditorsC) Senior Management and auditorsD) Audit committeeAnswer: ATerms: Internal controlDiff: EasyObjective: LO 10-2AACSB: Reflective thinking skills2) 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.Answer: CTerms: Internal control design and implementationDiff: EasyObjective: LO 10-2AACSB: Analytic skills3) The PCAOB places responsibility for the reliability of internal controls over the financial reportingprocess to:A) the company's board of directors.B) the audit committee of the board of directors.C) the CEO and the CFO.D) the CFO and the Independent Auditors.Answer: CTerms: PCAOB; internal control responsibilityDiff: EasyObjective: LO 10-2AACSB: Reflective thinking skillsTopic: Public4Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
de.blogspot.comhttp://downloadslide.blogspot.com4) Which of the following parties provides an assessment of the effectiveness of internal control overfinancial reporting for public companies?A)ManagementFinancial statement auditorsYesYesB)ManagementNoFinancial statement auditorsNoManagementYesFinancial statement auditorsNoManagementNoFinancial statement auditorsYesC)D)Answer: ATerms: Internal control effectivenessDiff: EasyObjective: LO 10-2AACSB: Reflective thinking skills5) An act of two or more employees to steal assets and cover their theft by misstating the accountingrecords would be referred to as:A) collusion.B) a material weakness.C) a control deficiency.D) a significant deficiency.Answer: ATerms: Employees steal assetsDiff: EasyObjective: LO 10-2AACSB: Ethical understanding and reasoning abilities5Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
de.blogspot.comhttp://downloadslide.blogspot.com6) Sarbanes-Oxley requires management to issue an internal control report that includes two specificitems. Which of the following is one of these two requirements?A) A statement that management is responsible for establishing and maintaining an adequate internalcontrol structure and procedures for financial reporting.B) A statement that management and the board of directors are jointly responsible for establishing andmaintaining 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 responsiblefor establishing and maintaining an adequate internal control structure and procedures for financialreporting.D) A statement that the external auditors are solely responsible.Answer: ATerms: Sarbanes-Oxley; Internal control reportDiff: EasyObjective: LO 10-2AACSB: Reflective thinking skillsTopic: SOX7) When management is evaluating the design of internal control, management evaluates whether thecontrol can do which of the following?A)Detect material misstatements Correct material misstatementsYesYesB)Detect material misstatements Correct material misstatementsNoNoC)Detect material misstatements Correct material misstatementsYesNoD)Detect material misstatements Correct material misstatementsNoYesAnswer: CTerms: Internal control designDiff: EasyObjective: LO 10-2AACSB: Analytic skillsTopic: SOX6Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
de.blogspot.comhttp://downloadslide.blogspot.com8) When one material weakness is present at the end of the year, management of a public company mustconclude that internal control over financial reporting is:A) insufficient.B) inadequate.C) ineffective.D) inefficient.Answer: CTerms: Internal control weakness; Public companyDiff: EasyObjective: LO 10-2AACSB: Analytic skillsTopic: Public9) The auditors primary purpose in auditing the client's system of internal control over financialreporting is:A) to prevent fraudulent financial statements from being issued to the public.B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in thefinancial statements.C) to report to management that the internal controls are effective in preventing misstatements fromappearing on the financial statements.D) to efficiently conduct the Audit of Financial Statements.Answer: BTerms: Primary purpose to audit system of internal controlDiff: ModerateObjective: LO 10-2AACSB: Analytic skillsTopic: Public10) Management must disclose material weaknesses in internal control in its audit report:A) whenever the weakness is deemed significant to a single class of transactions.B) whenever the weakness is significant to overall financial reporting objectives.C) if the weakness exists at the end of the year.D) only if the auditor identifies the weakness as significant.Answer: CTerms: Material weaknesses in internal controlDiff: ModerateObjective: LO 10-2AACSB: Reflective thinking skillsTopic: Public7Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
) In performing the audit of internal control over financial reporting the auditor emphasizes internalcontrol over class of transactions because:A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.B) the class of transaction is where most fraud schemes occur.C) account balances are less important to the auditor then the changes in the account balances.D) classes of transactions tests are the most efficient manner to compensate for inherent risk.Answer: ATerms: Internal control over class of transactionsDiff: ModerateObjective: LO 10-2AACSB: Reflective thinking skillsTopic: Public12) Internal controls can never be regarded as completely effective. Even if company personnel coulddesign an ideal system, its effectiveness depends on the:A) adequacy of the computer system.B) proper implementation by management.C) ability of the internal audit staff to maintain it.D) competency and dependability of the people using it.Answer: DTerms: Internal control effectivenessDiff: ModerateObjective: LO 10-2AACSB: Ethical understanding and reasoning abilities13) Even with the most effectively designed internal control, the auditor must obtain audit evidence,beyond testing the controls, for every:A) transaction.B) financial statement account.C) material financial statement account.D) financial statement account that will be relied upon by third parties.Answer: CTerms: Effectively designed internal controls; testing of controlsDiff: ModerateObjective: LO 10-2AACSB: Analytic skills14) Of the following statements about internal controls, which one is least likely to be correct?A) No one person should be responsible for the custodial responsibility and the recording responsibilityfor an asset.B) Transactions must be properly authorized before such transactions are processed.C) Because of the cost-benefit relationship, a client may apply controls on a test basis.D) Control procedures reasonably ensure that collusion among employees cannot occur.Answer: DTerms: Internal controlsDiff: ModerateObjective: LO 10-2AACSB: Reflective thinking skills8Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
) The Sarbanes-Oxley Act requires:A) all public companies to issue reports on internal controls.B) all public companies to define adequate internal controls.C) the auditor of public companies to design effective ICFR.D) the auditor of public companies to provide recommendations to correct material weaknesses.Answer: ATerms: Sarbanes-Oxley ActDiff: ChallengingObjective: LO 10-2AACSB: Reflective thinking skillsTopic: SOX16) The financial statements may not correctly reflect accounting frameworks such as AAP or IFRS if the:A) controls affecting the reliability of financial reporting are inadequate.B) company's controls do not promote efficiency.C) company's controls do not promote effectiveness.D) company's controls do not promote compliance with applicable rules and regulations.Answer: ATerms: Financial statements reflect accounting frameworksDiff: ChallengingObjective: LO 10-2AACSB: Reflective thinking skills17) The primary emphasis by auditors is on controls over:A) classes of transactions.B) account balances.C) both A and B, because they are equally important.D) both A and B, because they vary from client to client.Answer: ATerms: Primary emphasis by auditors on controlsDiff: ChallengingObjective: LO 10-2AACSB: Reflective thinking skills18) An auditor should consider two key issues when obtaining an understanding of a client's internalcontrols. These issues are:A) the effectiveness and efficiency of the controls.B) the frequency and effectiveness of the controls.C) the design and implementation of the controls.D) the implementation and efficiency of the controls.Answer: CTerms: Key issues understanding client's internal controlsDiff: ChallengingObjective: LO 10-2AACSB: Reflective thinking skills9Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
) When a company designs and implements internal controls, cost of the controls is not a validconsideration.A) TrueB) FalseAnswer: BTerms: Design and implement internal control; costDiff: EasyObjective: LO 10-2AACSB: Reflective thinking skillsLearning Objective 10-31) Which of the following activities would be least likely to strengthen a company's internal control?A) separating accounting from other financial operationsB) maintaining insurance for fire and theftC) fixing responsibility for the performance of employee dutiesD) carefully selecting and training employeesAnswer: BTerms: Not strengthen internal controlDiff: EasyObjective: LO 10-3AACSB: Analytic skills2) Which of the following components of the control environment define the existing lines ofresponsibility and authority?A) Organizational StructureB) Management philosophy and operating styleC) Human resource policies and practicesD) Management integrity and ethical valuesAnswer: ATerms: Control environment components; Responsibility and authorityDiff: ModerateObjective: LO 10-3AACSB: Reflective thinking skills10Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
de.blogspot.comhttp://downloadslide.blogspot.com3) Which of the following factors may increase risks to an organization?A)Geographic dispersion ofPresence of new informationcompany operationstechnologiesYesYesB)Geographic dispersion ofcompany operationsNoPresence of new informationtechnologiesNoGeographic dispersion ofcompany operationsYesPresence of new informationtechnologiesNoGeographic dispersion ofcompany operationsNoPresence of new informationtechnologiesYesC)D)Answer: ATerms: Increase risks to an organizationDiff: ModerateObjective: LO 10-3AACSB: Analytic skills4) Which of the following statements is most correct with respect to separation of duties?A) Employees should not have temporary and permanent custody of assets.B) Employees who authorize transactions should not have custody of related assets.C) It is permissible to allow an employee to open cash receipts and record those receipts.D) Employees who authorize transactions should have recording responsibility for these transactions.Answer: BTerms: Separation of dutiesDiff: ModerateObjective: LO 10-3AACSB: Reflective thinking skills5) Authorizations can be either general or specific. Which of the following is not an example of a generalauthorization?A) Automatic reorder points for raw materials inventory.B) A sales manager's authorization for a sales return.C) Credit limits for various classes of customers.D) A sales price list for merchandise.Answer: BTerms: General or specific authorizationsDiff: ModerateObjective: LO 10-3AACSB: Reflective thinking skills11Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall
de.blogspot.comhttp://downloadslide.blogspot.com6) Which of the following is correct with respect to the design and use of business documents?A) Not all documents used for internal purposes need to be prenumbered.B) Documents should be designed for single purposes only to avoid confusion in their use.C) Documents should be designed to be understandable only by those who use them.D) Documents designed for external use must be prenumbered.Answer: DTerms: Design and use of business documentsDiff: ModerateObjective: LO 10-3AACSB: Reflective thinking skills7) Which of the following best describes the purpose of control activities?A) the actions, policies and procedures that reflect the overall attitudes of managementB) the identification and analysis of risks relevant to the preparation of financial statementsC) the policies and procedures that help ensure that necessary actions are taken to address risks to theach
Auditing and Assurance Services, 14e (Arens) Chapter 10 Section 404 Audits of Internal Control and Control Risk Learning Objective 10-1 1) 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 .
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