MIDTERM ACTIVITY 2

1. A reason to establish internal control is to

a. Have a basis for planning the audit
b. Encourage compliance with organizational objectives
c. Ensure the accuracy, reliability and timeliness of information
d. Provide reasonable assurance that the objectives of the organization are
achieved
2. These are policies and procedures designed to eliminate or to reduce threats to
fundamental principles to an acceptable level
a. Safeguards
b. Control activities
c. Internal controls
d. Segregation of duties
3. The following is a component of internal control
a. Legal environment of the firm
b. Organizational structure
c. Control environment
d. Risk assessment process
4. An auditor would most likely be concerned with internal control policies and
procedures that provide reasonable assurance about
a. methods of assigning production tasks to employees.
b. the efficiency of management's decision-making process.
c. appropriate prices the entity should charge for its products.
d. the entity's ability to process and summarize financial data.
5. Which statement is correct concerning the definition of internal control developed
by the Committee of Sponsoring Organizations (COSO)?
a. Its applicability is largely limited to internal auditing applications.
b. It is recognized in the Statement on Auditing Standards.
c. It emphasizes the effectiveness and efficiency of operations rather than the
reliability of financial reporting.
d. It suggests that it is important to view internal control as an end product as
contrasted to a process or means to obtain an end.
6. Monitoring is considered
a. A component of internal control.
b. An element of the control environment.
c. The primary asset safeguarding technique.
d. A portion of information and communication.
7. The definition of internal control developed by the Committee of Sponsoring
Organizations (COSO) and included in the professional standards includes the
reliability of financial reporting, the effectiveness and efficiency of operations and
a. Compliance with applicable laws and regulations.
b. Effectiveness of prevention of fraudulent occurrences.
c. Safeguarding of entity assets.
d. Incorporation of ethical business practice standards.
8. Which statement is correct concerning the relevance of various types of controls
to a financial audit?
a. An auditor may ordinarily ignore a consideration of controls when a
substantive audit approach is taken.
b. Controls over the reliability of financial reporting are ordinarily most
directly relevant to an audit but other controls may also be relevant.
c. Controls over safeguarding of assets and liabilities are of primary
importance, while controls over the reliability of financial reporting may
also be relevant.
d. All controls are ordinarily relevant to an audit.
9. When an auditor considers a client's internal control, which of the following is
ordinarily a type of control activity that is considered?
a. Risk assessment over cash disbursements.
b. Segregation of duties over payroll.
c. Inclusion of the president as a member of the audit committee.
d. Management's monitoring policies over cash receipts.
10. Which of the following is not ordinarily considered a factor indicative of
increased financial reporting risk when an auditor is considering a client's risk
assessment policies?
a. Commissioned sales personnel.
b. Implementation of a new information system.
c. Rapid growth organization.
d. Corporate restructuring.
11. Effective I/C in a small company that has insufficient employees to permit proper
division of responsibilities can be best enhanced by
a. Employment of temporary personnel to aid in the separation of duties.
b. Direct participation by the owner of the business in the recordkeeping
activities of the business.
c. Engaging a CPA to perform monthly "write-up" work.
d. Delegation of full, clear-cut responsibility to each employee for the
functions assigned to each.
12. During the audit, the independent auditor identified the existence of a reportable
condition in the client's system of internal controls and orally communicated this
finding to the client's senior management and audit committee. The auditor should
a. Consider the reportable condition a scope limitation and therefore disclaim
an opinion.
b. Document the matter in the working papers and consider the effects of the
condition on the audit.
c. Suspend all audit activities pending directions from the client's audit
committee.
d. Withdraw from the engagement.
13. After the auditor has prepared a flowchart of the I/C surrounding sales and
evaluated the design of the ICS, the auditor would perform tests of controls on all
internal control procedures
a. Documented in the flowchart.
 b. Considered to be weaknesses that might allow errors to enter the
accounting system.
c. Considered to be strengths that the auditor plans to rely on.
d. That would aid in preventing irregularities.
14. This organization developed a set of criteria that provide management with a basis
to evaluate controls not only over financial reporting, but also over the
effectiveness and efficiency of operations and compliance with laws and
regulations: 
a. Foreign Corrupt Practices Corporation.
b. Committee of Sponsoring Organizations.
c. Cohen Commission.
d. Financial Accounting Standards Board.
15. Which of the following would be least likely to be considered a benefit of
effective internal control? 
a. Eliminating all employee fraud.
b. Restricting access to assets.
c. Detecting ineffectiveness.
d. Ensuring authorization of transactions.
16. The major components of internal control include all of the following, except: 
a. Risk assessment.
b. The control environment.
c. Internal auditing.
d. Control activities.
17. Which of the following statements is correct concerning the understanding of
internal control needed by auditors? 
a. The auditors must understand the information system, not the accounting
system.
b. The auditors must understand monitoring and all preliminary accounting
controls.
c. The auditors must have a sufficient understanding to assess the risks of
material misstatement.
d. The auditors must understand the control environment, risk assessment,
and all control activities.
18. Well-designed internal control that is functioning effectively is most likely to
detect an fraud arising from: 
a. The fraudulent action of several employees.
b. The fraudulent action of an individual employee.
c. Informal deviations from the official organization chart.
d. Management fraud.
19. Of the following statements about internal control, which one is not valid?
a. No one person should be responsible for the custodial responsibility and
the recording responsibility for an asset.
b. Transactions must be properly authorized before such transactions are
processed.
c. Because of the cost/benefit relationship, a client may apply control
procedures on a test basis.
 d. Control activities reasonably insure that collusion among employees can
not occur.
20. Which of the following comes closest to outlining the auditors' responsibility for
considering internal control in all financial statement audits? 
a. An understanding of the control environment, information and
communication, risk assessment and monitoring is necessary; an
understanding of control activities is only necessary for areas in which the
auditor is performing tests of controls.
b. The auditor must obtain an understanding of each of the five internal
control components sufficient to assess the risks of material misstatement
for the audit.
c. When tests of controls have been performed, control risk must be assessed
at a level less than the maximum.
d. An understanding of the control environment is necessary, but no
understanding of the other components is necessary unless control risk is
to be assessed at a level less than the maximum.