No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

AT.08.05 – Study and Evaluation of Internal Control

1. A process effected by an entity’s board, management, and other personnel, designed to provide
reasonable assurance regarding the achievement of objectives relating to operations, financial
reporting, and compliance.
a. Quality control
b. Quality management
c. Internal controls
d. Accounting information systems

2. Which of the following is responsible for establishing a private company’s internal controls?
a. Management
b. Auditors
c. Management and Auditors
d. Committee on Sponsoring Organizations

3. A major control available in a small company, which might not be feasible in a big company, is:
a. A voucher system
b. Better segregation of duties
c. Monthly bank reconciliations
d. Owner-manager’s personal interest and close relationship with personnel.

4. When the auditor attempts to understand the operation of an accounting system by tracing a few
transactions through the accounting system, from a transaction’s inception, the auditor is said to be
performing:
a. Tracing
b. Vouching
c. Walkthrough
d. Test of controls

5. When performing a financial statements audit, the auditor should always obtain an understanding of an
audit client’s internal controls sufficient to:
a. Assess control risk.
b. Provide reasonable protection against client fraud and defalcations by client employees.
c. Provide a basis for suggestions to the client for improving the accounting system.
d. Provide a method for safeguarding assets, checking the accuracy and reliability of
accounting data, promoting operational efficiency, and encouraging adherence to
prescribed managerial policies.

6. In relation to understanding an audit client’s internal controls (risk assessment procedure) and
performing test of controls (further audit procedure), ___________ is/are always performed by the
auditor.
a. Understanding an audit client’s internal controls
b. Performing test of controls
c. Both A and B.
d. Neither A nor B.

7. This is considered as the most important internal control component as it is the foundation on which an
effective system of internal control is built and operated in an organization.
a. Control environment
b. Control activities
c. Risk assessment process
d. Information and communication systems

8. I. An auditor will not perform test of controls when control risk is initially assessed at high level
II. Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial
statement audit, but other controls may also be relevant.
III. It is required to perform understanding and evaluation of controls for all financial statement area and
line items.

I. II. III.
A True False True
B True True False
C False True True
D True False False

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JABELLAR/AJABINAL
JMAGLINAO/RBERCASIO/ASARMIENTO/JGERONIMO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

9. To issue a report on internal controls over financial reporting (ICFR) in an integrated audit, an auditor
must:
a. Evaluate management’s assessment process.
b. Evaluate management’s assessment process and independently assess the design and
operating effectiveness of internal control.
c. Independently assess the design and operating effectiveness of internal control.
d. Test controls over significant account balances.

10. Which of the following statements is correct with respect to separation of duties?
a. Employees who authorize transactions should not have custody of related assets.
b. Employees should not have temporary and permanent custody of 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.

11. When a compensating control exists, the absence of a key control:

a. is no longer a concern because there is no longer a significant deficiency or material
weakness.
b. is still a major concern to the auditor.
c. could cause a material loss, so it must be tested using substantive procedures.
d. is magnified and must be removed from the sampling process and examined in its entirety.

12. The auditor is required to perform test of controls if:

a. The auditor intends to rely on the audit client’s internal controls to reduce the extent of
substantive procedures.
b. Substantive procedures alone will not provide the auditor with sufficient and appropriate audit
evidence.
c. Both A and B.
d. Neither A nor B.

13. An auditor typically follows a _____ approach in obtaining an understanding of internal control.
a. Top-down.
b. Bottom-up.
c. Parallel.
d. All of the above.

14. Narratives, flowcharts, and internal control questionnaires are three common methods of:
a. Documenting the auditor’s understanding of internal controls.
b. Testing the internal controls.
c. Designing the audit manual and procedures.
d. Documenting the auditor’s understanding of a client’s organizational structure.

15. When considering internal control, an auditor must be aware of the concept of reasonable assurance,
which recognizes that
a. Employment of competent personnel provides assurance that the objectives of internal control
will be achieved.
b. Establishment and maintenance of internal control is an important responsibility of the
management and not of the auditor.
c. Segregation of incompatible functions is necessary to ascertain that the control procedures are
effective.
d. Cost of internal control procedures should not exceed the benefits expected to be derived from
the control.

16. An audit client’s information system consists of:

a. People
b. Infrastructure
c. Software
d. All of the above.

17. When management compares actual results versus budget, forecasts, or prior period results for the
purpose of identifying variances and necessary corrective actions, which of the following control
activities is being implemented?
a. Authorization
b. Physical controls
c. Performance reviews
d. Segregation of duties

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JABELLAR/AJABINAL
JMAGLINAO/RBERCASIO/ASARMIENTO/JGERONIMO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

18. Monitoring activities performed by internal auditors, audit committee, and/or external auditors are most
likely classified as:
a. Ongoing monitoring activities
b. Separate evaluations
c. Either A or B
d. Neither A nor B

19. An entity's ongoing monitoring activities often include

a. Reviewing the purchasing function.
b. Periodic audits by the audit committee.
c. The audit of the annual financial statements.
d. Control risk assessment in conjunction with quarterly reviews.

20. It is an identified and assessed risk of material misstatement that, in the auditor’s judgment, requires
special audit consideration. Controls over such areas should be tested in the current period even if
there were no significant changes that have occurred from those controls.
a. Special risk
b. Fraud risk
c. Significant risk
d. Systematic risk

21. A(n) _______ deficiency exists if a necessary control is missing or not properly formulated.
a. Control
b. Significant
c. Design
d. Operating

22. A procedure that would most likely be used by an auditor in performing tests of control procedures that
involve segregation of functions and that leave no transaction trail is:
a. Observation.
b. Inspection.
c. Reperformance.
d. Reconciliation.

23. Statement 1: Significant deficiencies in internal controls must be communicated in writing, via a
management letter or other means of communication.
Statement 2: The basis for a control risk assessment which is set at maximum is no longer needed to
be documented in the auditor’s working papers.
a. True, True
b. True, False
c. False, True
d. False, False

24. In assessing control risk, an auditor ordinarily selects from a variety of techniques, including
a. Reperformance and observation
b. Inquiry and analytical procedures
c. Reperformance and confirmation
d. Comparison and confirmation

25. What is the objective of testing the operating effectiveness of controls?

a. Provide a basis for reducing the assessed level of control risk below that which resulted from
the auditor’s initial understanding of internal controls.
b. Provide a basis for increasing the assessed level of control risk above that which resulted from
the auditor’s initial understanding of internal controls.
c. To provide a basis for the auditor’s reliance on controls over transactions that are low in volume,
but material in individual amounts.
d. Provide assurance that transactions are executed in accordance with management’s
authorization and access to assets is limited by segregation of duties.

26. In general, material fraud perpetrated by which of the following are most difficult to detect?
a. Cashier
b. Keypunch operator
c. Internal auditor
d. Controller

3|Page
JABELLAR/AJABINAL
JMAGLINAO/RBERCASIO/ASARMIENTO/JGERONIMO
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

27. Which of the following statements about the reliance approach is correct?
a. The auditor is required to perform more effective substantive procedures.
b. The auditor’s procedures are moved closer to or at year-end.
c. The auditor sets a larger sample size.
d. The auditor documents the basis for the control risk assessment.

28. International standards on auditing require that for controls that do not relate to significant risks, or
those that there were no significant changes as to manner of operation and relevance to the current
period audit, such controls be tested at least once in every _________ audit.
a. Yearly
b. Second
c. Third
d. Fifth

29. An auditor’s letter issued on significant deficiencies relating to an entity’s internal control observed
during a financial statement audit should
a. Include a brief description of the tests of controls performed in searching for significant
deficiencies and material weaknesses.
b. Indicate that the significant deficiencies should be disclosed in the annual report to the entity’s
shareholders.
c. Indicate that the audit’s purpose was to report on the financial statements and not to express
an opinion on the internal controls.
d. Include a paragraph describing management’s assertion concerning the effectiveness of
internal control.

30. A material weakness is a significant deficiency (or combination of significant deficiencies) that results
in a reasonable possibility that a misstatement of at least what amount will not be prevented or
detected?
a. An amount greater than zero.
b. An amount greater than zero, but at least inconsequential.
c. An amount greater than inconsequential.
d. A material amount.
*End of Handout*

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JMAGLINAO/RBERCASIO/ASARMIENTO/JGERONIMO