Fundamental of Auditing - Exercise Topic 2-3 – Ethics & Internal Controls

MULTIPLE CHOICE QUESTIONS

1) An audit of financial statements is conducted to determine whether the:
-> ope A) organisation is operating efficiently and effectively.
-> compli B) auditee is following specific procedures or rules set down by a peer group authority.
-> FS C) overall financial statements are stated in accordance with specified criteria.
D) none of the above

2) Using the same auditor team on an assurance engagement over a long period of time most likely creates which of the following
threats to auditor independence?
A) self-interest.
B) self-review.
C) intimidation.
D) familiarity.

3) Which one of the following is NOT one of the five fundamental principles of professional conduct set out in the Code of Ethics
for Professional Accountants?
A) continuing education
B) confidentiality
C) integrity
D) objectivity

4) When considering the arrangement of staff to an engagement, an audit partner must always:
A) ensure confidentiality is not compromised.
B) ensure the audit staff are satisfied.
C) be satisfied that the staff has the appropriate expertise and independence.
D) ensure the client is satisfied.

5) Proper segregation of functional responsibilities calls for separation of the functions of:
A) authorisation, payment, and recording. recording
B) custody, execution, and reporting.
C) authorisation, recording, and custody. reconcile
auth_ custody
D) authorisation, execution, and payment.

6) When controls leave no documentary evidence or trail:

A) the only way available as verification of their effectiveness is inquiry of management.
B) it is impossible to verify them so the auditor will have to rely on substantive tests.
C) the auditor generally observes them being applied.
D) it is impossible to audit that area of client's system.

7) Which of the following would not be considered an inherent limitation of the potential effectiveness of an entity's internal control
structure?
A) Incompatible duties
B) Management override
C) Mistakes in judgment
D) Collusion among employees

8) Actions, policies, and procedures that reflect the overall attitude of management, directors, and owners of the entity about internal
control relate to which of the following internal control components?
A) Control environment
B) Information and communication
C) Risk assessment
D) Monitoring

9) What requirements are usually necessary to become licensed as a certified public accountant?
A. Successful completion of the Uniform CPA Examination.
B. Experience in the accounting field.
C. Education.
D. All of the above.

10) Compliance auditing often extends beyond audits leading to the expression of opinions on the fairness of financial presentation
and includes audits of efficiency, economy, effectiveness, as well as
A) accuracy.
B) adherence to specific rules or procedures.
C) evaluation.
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 D) internal control.

11) Which of the following correctly describes an internal control component?

A) Control activities set the tone of the organization.
B) Information and communication systems have to do with management's analysis of risk.
C) Risk assessment relates to assessing the quality of the internal control structure over time.
D) Monitoring relates to ongoing assessment by management to determine whether controls are operating as intended.

12) Which of the following best describes the operational audit?

A) It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the
company.
B) It concentrates on implementing financial and accounting control in a newly organized company.
C) It focuses on verifying the fair presentation of a company’s results of operations.
D) It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls.
DISCUSSION PROBLEMS

Required: Indicate which of the five COSO internal control components is best represented by each internal control. (Control
environment, Risk assessment, Control activities, Information and communication, and Monitoring)

1. The company’s computer systems track individual transactions and automatically accumulate transactions to create a trial
balance.
information & communication (use relevant, quality information)
Answer:............................................................................................................................................

2. On a monthly basis, department heads compare a budget to actual performance report and investigate unusual differences.
control activities
Answer:............................................................................................................................................

3. The company must receive university transcripts documenting all college degrees earned before an individual can begin his or
her first day of employment with the company.
control environment
Answer:.............................................................................................................................................

4. Senior management obtains data about external events that might affect the entity and evaluates the impact of that information
on its existing accounting processes.

risk assessment (identify and assess events that impact the system of IC)
Answer:.............................................................................................................................................

5. Each quarter, department managers are required to perform a self-assessment of the department’s compliance with company
policies. Reports summarizing the results are to be submitted to the senior executive overseeing that department.
monitoring
Answer:.............................................................................................................................................

6. Before a cash disbursement can be processed, all payee information must be verified by matching the payee to the company’s
approved vendor listing.
control activities
Answer:.............................................................................................................................................

7. The system automatically reconciles the detailed accounts receivable subsidiary ledger to the accounts receivable general ledger
account on a daily basis.

Answer:.............................................................................................................................................
information and communication

8. The company has developed a detailed series of accounting policy and procedures manuals to help provide detailed instructions
to employees about how controls are to be performed.
control activities
Answer:.............................................................................................................................................

9. The company has an organizational chart that establishes the formal lines of reporting and authorization protocols.
control envorironment
Answer:.............................................................................................................................................

10. The compensation committee reviews compensation plans for senior executives to determine if those plans create unintended
pressures that might lead to distorted financial statements.

risk assessment
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Answer:.............................................................................................................................................