ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 8

AUDITING (Auditing Theory) J. Ireneo  M. Ngina  F. Tugas  F. Yabut

AT-09: UNDERSTANDING THE ENTITY’S INTERNAL CONTROL

1. Which of the following is a correct statement in relation to internal controls?
I. Internal controls are process designed, implemented and maintained by those charged with
governance, management, and other personnel
II. Internal controls provide absolute assurance about the achievement of the entity’s objectives
on financial reporting, operations, and compliance.
III. Internal controls can be implemented using information technology.

A. I and III only B. II only C. II and III only D. I, II and III

2. Which of the following statements is/are correct?

I. The auditor can eliminate substantive tests on significant account balances and classes of
transactions for an entity that has exceptionally strong internal control
II. There is a direct relationship between an entity’s objectives and the controls it implements to
provide reasonable assurance about their achievement.
III. Effective controls can reduce the cost of external audit.

A. I and III only B. II only C. II and III only D. I, II and III

3. Internal controls may be classified as?

I. Manual, automated or IT-dependent controls
II. Preventive, detective or corrective controls.

a. I only b. II only c. Both I and II d. Neither I nor II

4. Internal control can only provide reasonable, not absolute, assurance of achieving entity control
objectives. Which of the following is a limiting factor of achieving those objectives?
I. In the performance of most control procedures, there are possibilities of errors arising from
mistakes in judgment.
II. The board of directors is active and independent.
III. The cost of internal control should not exceed its benefits.
IV. Collusion may occur even if incompatible functions or duties have been segregated.

A. I and III only B. I, II and III only C. I, III and IV only D. I, II, III and IV

5. Which of the following conditions supports strong internal control?

A. Strict monitoring by the Bureau of Internal Revenue.
B. The existence of related parties and related party transactions.
C. Pressure by the financial community to improve earnings performance.
D. An economic downturn.

6. Which of the following statements best describes “control activities”?

A. The entity’s process for identifying business risks relevant to financial reporting objectives
and deciding about actions to address those risks, and the results thereof.
B. The system for transferring information from transaction processing systems to the general
ledger or the financial reporting system.
C. Policies and procedures that help ensure that management directives are carried out.
D. This includes the governance and management functions and the attitudes, awareness,
and actions of those charged with governance and management concerning the entity’s
internal control and its importance to the entity.

7. Which of the following is not an element of “control environment”?

A. Commitment to competence
B. Communication and enforcement of integrity and ethical values
C. Assignment of authority and responsibility
D. Leadership responsibilities for quality within the firm

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AT-09
Week 8: UNDERSTANDING THE ENTITY’S INTERNAL CONTROL

8. Management’s attitude towards 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. The audit committee is active in overseeing the entity’s financial reporting policies.
D. Internal auditors have direct access to the board of directors and entity management.

9. An entity’s risk assessment process includes how management:

I. Identifies business risks relevant to financial reporting objectives
II. Estimates the significance of the risks
III. Assesses the likelihood of the occurrence of risks
IV. Decides on actions to address the risks.

A. I and III only B. I, II and III only C. I, III and IV only D. I, II, III and IV

10. Risks can arise or change due to circumstances such as the following, except:
A. There is a change in the regulatory or operating environment.
B. No new employees have been hired by the company.
C. The company switched from manual information systems to a computerized system.
D. The accounting and financial reporting framework has experienced significant revisions.

11. Which of the following pertains to risk assessment?

I. An audit client’s process for identifying business risks relevant to the financial reporting
objective
II. Business procedures, within both IT and manual systems, by which those transactions are
initiated, recorded, processed, corrected, transferred to the general ledger and reported in the
financial statements
III. Client policies on limiting physical access to assets and records
A. I and III only B. I only C. II and III only D. I, II and III

12. The information system consists of the following:

A. Infrastructure (physical and hardware components) and software
B. People
C. Procedures and data
D. All of these.

13. Control activities are the policies and procedures that help ensure that management directives are
carried out. These include activities relating to 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. Authorizes a transaction maintains custody of the asset that resulted from the transaction.
C. Records a transaction do not compare the accounting record of the asset with the asset itself.
D. Maintains custody of an asset has access to the accounting records for the asset.

14. The objective of the recording function of transactions (in the context of internal accounting
control) is to
A. Limit access to assets and to permit preparation of financial statements in accordance with
GAAP.
B. Assure compliance with the rules of all regulatory bodies having jurisdiction over the
reporting entity.
C. Permit preparation of financial statements in accordance with GAAP and to maintain
accountability of assets.
D. Encourage operational efficiency and adherence to prescribed managerial policies.

15. Which of the following descriptions pertain to performance reviews?

A. Control activities that include reviews and analyses of actual performance versus budgets,
forecasts, and prior period performance.
B. Controls performed to check accuracy, completeness, and authorization of transactions.
C. Physical security of assets, including adequate safeguards such as secured facilities over
access to assets and records.
D. The assignment of incompatible functions to different people.
E. Control activities involving the specific or general authorization of a transaction.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AT-09
Week 8: UNDERSTANDING THE ENTITY’S INTERNAL CONTROL

16. An entity’s ongoing monitoring activities often include:

A. Periodic audits by the audit committee.
B. Reviewing the purchasing function.
C. The audit of the annual financial statements.
D. Control risk assessment in conjunction with quarterly reviews.

17. Which of the following is not a detective control?

A. The use of batch totals.
B. Reconciling the accounts receivable subsidiary file with the control account.
C. Requirement that two persons open mail.
D. Preparation of bank reconciliation.

18. Not an example of general transaction authorization is the:

A. Setting of automatic reorder points.
B. Establishment of sales prices.
C. Establishment of a customer’s credit limits.
D. Approval of a construction budget for a new warehouse.

19. 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. Compensating control
B. Non-routine control
C. Conditional control
D. Offset control

20. Which of the following is (are) a correct statement(s) for internal control systems of small
companies?
I. Elements of internal control for small entities may not be available in documentary form
II. Segregation of incompatible duties are often inadequate due to staff limitations
III. The involvement of the owner-manager may be a compensatory control for the inadequate
segregation of incompatible duties

A. I and III only B. II only C. II and III only D. I, II and III

21. According to PSA 315, the auditor uses the understanding of internal control to:
I. Identify types of potential misstatements
II. Consider factors that affect the risk of material misstatements
III. Design the nature, timing and extent of further audit procedures (i.e., tests of controls and
substantive tests)

A. I and III only B. II only C. II and III only D. I, II and III

- END -

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