Question

1. Consider the following statements:

       I. Per COSO, Control Activities are the policies and procedures that help insure that management’s

         directives are carried out.
      II. A Reliance Strategy is used when control risk is considered High.

      a. I is true; II is true

      b. I is true;   II is false

      c. I is false; II is true

      d. I is false; II is false

2. Management's attitude toward 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.
b. External policies established by parties outside the entity affect its accounting practices.
c. Internal audit personnel have direct access to the board of directors and the entity's management.
d. The audit committee is active in overseeing the entity's financial reporting policies.

3. The documentation of an auditor's understanding of internal controls
     a. Is optional.
     b. Must be exclusively in either narrative, questionnaires, or flowchart form.
     c. Must include flowcharts.
     d. Can include any combination of narratives, questionnaires, or flowchart.

4. To obtain evidential matter about the operating effectiveness of controls, an auditor uses a variety

      of techniques including:

      a. Analytical procedures

      b. Confirmation

      c. Recalculation

      d. Reperformance

5. Which of the following statements is correct regarding internal control?

      a. A well-designed internal control environment ensures the achievement of an entity’s control

          objectives.

      b. An inherent limitation to internal control is the fact that controls can be circumvented by

           management override.

      c. A well-designed and well-operated internal control environment should detect collusion

           perpetuated by two people.

      d. Internal control is a necessary business function and should be designed and operated to detect

           all errors and fraud.

                    See CPA Exam materials.   [try Mod 2 #23]

6. Consider the following statements:

        I. A Control Deficiency exists when the design or operation of a control does not allow management

            or employees, in the normal course of performing their assigned functions, to prevent or detect

            and correct, misstatements on a timely basis.

       II. A transaction (audit) trail includes the documents and records that allow an auditor to trace a

            transaction from its origination through to its final disposition, or vice versa. [Statement is TRUE}

      a. I is true;   II is true

      b. I is true;   II is false

      c. I is false; II is true

      d. I is false; II is false

7. Which controls “… apply to the processing of individual applications, such as sales or payroll, and

       help ensure the completeness and accuracy of transaction processing, authorization, and validity.”

      [see page 204]?

      a. Application controls.

      b. Data Capture controls.

      c. General controls.

      d. Output controls

8. After obtaining an understanding of internal controls and assessing control risk of an entity, an

      auditor decided not to perform tests of controls for purposes of the audit. The auditor most likely

      decided that

      a. the available evidential matter obtained through tests of controls would not support an increased

          level of control risk.

      b. A reduction in the assessed level of control risk is justified for certain financial statement

           assertions.

      c. It would be inefficient to perform tests of controls that would result in a reduction in planned

           substantive procedures.

      d. The assessed level of Audit Risk is deemed too low.

9. All of the following are control deficiencies except:
     a. Absence of appropriate reviews of transactions.

     b. fixed assets are financed with long-term debt.

     c. Inadequate documentation of the components of internal control.

     d. The absence of an internal process to report deficiencies in internal control to management on a

          timely basis.
     e. All of the above represent control deficiencies.

10. Which of the following best represents a walkthrough?

      a. The controller reviews the bank reconciliation, and the resulting journal entries, prepared by the

           accountant.

      b. The auditor walks the production line to find inefficiencies in the inventory process and reports

            them to management

      c. The controller takes a sample of write-offs to ensure they have been adequately documented and

            recorded.

      d. The auditor traces three purchasing transactions from the purchase order to the financial

            statement for observation and understanding.

Answer 1

Dear Student,

As per the HOMEWORKLIB POLICY, only the first fours questions should ansered. Kindly take note of it.

Part 1

Answer is option A

a. I is true;   II is true

Reliance strategy is used in case when the control risk is assumed to be high, while test of controls is performed in case when the control risk is assumed to be low.

Part 2

Answer is option A

a. Management is dominated by one individual.

If management is dominated by single shareholder then it is possible that he may follow overly aggressive accounting principles.

Part 3

Answer is option D

d. Can include any combination of narratives, questionnaires, or flowchart.

It can be any form that makes understanding easy and complete.

Part 4

Answer is option D

d. Reperformance

Control risk is evaluated through inquiries of personnel, observing activities and operations, documents and records inspection and control procedure’s reperformance.