INTERNAL CONTROL – TEST BANK 8.

If the auditors' assessment of the design

of internal control reveals that it cannot be
relied upon, the auditors are not required to
True or False prepare any documentation of internal
control for their working papers.
1. Internal control is concerned with the
reliability of financial information. True False

True False
9. The relatively low number of types of
transactions incurred by small firms makes
2. The Foreign Corrupt Practices Act the segregation of duties impossible.
prohibits bribes to foreign corporate officials
to obtain business. True False

True False
10. In a financial statement audit, CPAs are
required to assess the operating
3. Incompatible duties exist when an effectiveness of most significant accounting
employee is in a position to perpetrate and oriented controls.
conceal errors or fraud.
True False
True False

Multiple Choice Questions

4. Internal auditors should preferably report
to the chief accounting officer of the 11. Which of the following matters would an
company. auditor most likely consider to be a
significant deficiency to be communicated to
True False the audit committee?
A. Management's failure to renegotiate
5. Well-designed internal control will prevent unfavorable long-term purchase
all fraud by top management. commitments.

True False B. Recurring operating losses that may

indicate going concern problems.
C. Evidence of a lack of objectivity by those
6. CPA firms may use written narratives to responsible for accounting decisions.
describe internal control in their audit
working papers. D. Management's current plans to reduce its
ownership equity in the entity.
True False

12. In assessing the objectivity of a client's

7. The auditors' communication of internal internal auditors, the CPA would be most
control significant deficiencies should be likely to consider internal auditor's:
addressed only to senior management of
the company. A. Education levels.
True False B. Experience.
C. Organizational status within the
company.
D. Training and supervisory skills.
13. In a financial statement audit performed 16. Which of the following is not ordinarily a
following AICPA Professional Standards, procedure for documenting an auditor's
how frequently must an auditor test understanding of internal control for
operating effectiveness of controls that planning purposes?
appear to function as they have in past
A. Checklist.
years and on which the auditor wishes to
rely upon in the current year? B. Flowchart.
A. Monthly. C. Questionnaire.
B. Each audit. D. Confirmation
C. At least every second audit.
D. At least every third audit. 17. Tests of controls do not ordinarily
address:
A. By whom a control was applied.
14. After obtaining an understanding of
internal control and arriving at a preliminary B. How a control was applied.
assessed level of control risk, an auditor
decided to perform tests of controls. The C. The consistency with which a control was
auditor most likely decided that: applied.

A. Additional evidence to support a D. The cost effectiveness of the way a

reduction in the assessed level of control control was applied.
risk is not available.
B. An increase in the assessed level of 18. Which is most likely when the assessed
control risk is justified for certain financial level of control risk increases?
statement assertions.
A. Change from performing substantive
C. It would be efficient to perform tests of procedures at year-end to an interim date.
controls that would result in a reduction in
planned substantive procedures. B. Perform substantive procedures directed
inside the entity rather than tests directed
D. There were many internal control toward parties outside the entity.
deficiencies that would allow misstatements
to enter the accounting system. C. Use the maximum number of dual
purpose tests.
D. Use larger sample sizes for substantive
15. Which of the following is least likely to procedures.
be evidence of operating effectiveness of
controls?
A. Cancelled supporting documents. 19. Which of the following must the auditor
communicate to the audit committee?
B. Confirmations of accounts receivable.
A. Significant deficiencies and material
C. Records documenting usage of computer weaknesses.
programs.
B. Only significant deficiencies.
D. Signatures on authorization forms.
C. Only material weaknesses.
D. Neither significant deficiencies nor C. The auditors must have a sufficient
material weaknesses. understanding to assess the risks of
material misstatement.
20. A client's internal control appears strong,
but the CPA has elected not to perform any D. The auditors must understand the control
tests of controls. The planned assessed environment, risk assessment, and all
level of control risk is at what level? control activities.
A. Zero.
B. Low. 24. The effectiveness of controls is not
generally tested by:
C. Moderate.
A. Inspection of documents and reports.
D. Maximum.
B. Performance of analytical procedures.
C. Observation of the application of
21. Which of the following would be least
accounting policies and procedures.
likely to be regarded as a test of a control?
D. Inquiries of appropriate client personnel.
A. Tests of the additions to property by
physical inspection.
B. Comparisons of the signatures on 25. On financial statement audits, it is
cancelled checks to the authorized check required that the auditors obtain an
signer list. understanding of internal control, including:
C. Tests of signatures on purchase orders. A. Its operating effectiveness.
D. Recalculation of payroll deduction B. Whether it has been implemented (placed
in operation).
C. Performing tests of controls for all
22. Which of the following is not considered
material controls.
one of the five major components of internal
control? D. Its ability to provide reasonable
assurance
A. Risk assessment.
B. Segregation of duties.
26. A significant deficiency:
C. Control activities.
A. Differs from a material weakness in that it
D. Monitoring.
involves internal control over operations
rather than internal control over financial
reporting.
23. Which of the following statements is
correct concerning the understanding of B. Involves an amount of discovered
internal control needed by auditors? misstatements greater than the amount
used as the planning measure of materiality.
A. The auditors must understand the
information system, not the accounting C. Is identical to a material weakness except
system. that it need not be communicated to those
responsible for oversight of the company's
B. The auditors must understand monitoring financial reporting.
and all preliminary accounting controls.
D. Is less severe than a material weakness.
27. This organization developed a set of Organizations (COSO) includes controls
criteria that provide management with a related to the reliability of financial reporting,
basis to evaluate controls not only over the effectiveness and efficiency of
financial reporting, but also over the operations, and:
effectiveness and efficiency of operations
A. Compliance with applicable laws and
and compliance with laws and regulations:
regulations.
A. Foreign Corrupt Practices Corporation.
B. Effectiveness of prevention of fraudulent
B. Committee of Sponsoring Organizations. occurrences.
C. Cohen Commission. C. Safeguarding of entity equity.
D. Financial Accounting Standards Board. D. Incorporation of ethical business practice
standards.

28. Which of the following is most likely to

be considered a risk assessment procedure 31. Which statement is correct concerning
relating to internal control? the relevance of various types of controls to
a financial statement audit?
A. Confirm accounts receivable.
A. An auditor may ordinarily ignore the
B. Perform a test of a control relating to
consideration of controls when a substantive
payroll.
audit approach is used.
C. Take test counts of the year-end
B. Controls over the reliability of financial
inventory.
reporting are ordinarily most directly relevant
D. Trace a transaction through the to an audit, but other controls may also be
information system relevant to financial relevant.
reporting.
C. Controls over safeguarding assets and
liabilities are of primary importance, while
controls over the reliability of financial
29. Which statement is correct concerning
reporting may also be relevant.
the definition of internal control developed
by the Committee of Sponsoring D. All controls are ordinarily relevant to an
Organizations (COSO)? audit.
A. Its applicability is largely limited to
internal auditing applications.
32. Which of the following is not a
B. It is recognized in the Statements on component of the control environment?
Auditing Standards.
A. Integrity and ethical values.
C. It emphasizes the effectiveness and
B. Risk assessment.
efficiency of operations over the reliability of
financial reporting. C. Commitment to competence.
D. It suggests that it is important to view D. Organizational structure.
internal control as an end product as
contrasted to a process or means to obtain
an end 33. Which of the following is not ordinarily
considered a factor indicative of increased
financial reporting risk when an auditor is
30. The definition of internal control considering a client's risk assessment
developed by the Committee of Sponsoring policies?
A. Salaried sales personnel. C. Deviation rates were greater than zero
and approached anticipated levels.
B. Implementation of a new information
system. D. The operating effectiveness of certain
controls was found to be less than expected,
C. Rapid growth of the organization.
although no material misstatements were
D. Corporate restructuring. identified.

34. The Sarbanes-Oxley Act of 2002 37. The provisions of the Foreign Corrupt
requires that the audit committee: Practices Act apply to:

A. Annually reassess control risk using A. All U.S. corporations.

information from the CPA firm.
B. All U.S. corporations that engage in
B. Be directly responsible for the foreign operations.
appointment, compensation and oversight of
C. All corporations that must file under the
the work of the
Securities Exchange Act of 1934.
CPA firm.
D. All U.S. partnerships and corporations.
C. Require that the company's CPA firm
rotate the partner in charge of the audit.
D. Review the level of management
compensation.

35. When tests of controls reveal that

controls are operating as anticipated, it is
most likely that the assessed level of control
risk will:
A. Be less than the preliminary assessed
level of control risk.
B. Equal the preliminary assessed level of
control risk.
C. Equal the actual control risk.
D. Be less than the actual control risk.

36. Under which circumstance is it likely that

the extent of substantive procedures will be
expanded beyond that anticipated in the
audit plan?
A. The auditors have determined that
controls have been implemented (placed in
operation) but, in accordance with the audit
plan, have performed no tests of controls.
B. Certain controls do not leave a trail of
documentary evidence.