Chapter 08 - TEST BANK PDF

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Chapter 08Student: ___________________________________________________________________________ Assessing control risk at less than high involves all of the following except: A. identifying specific controls to rely on. B. concluding that controls are ineffective. C. performing tests of controls. D. ...

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Chapter 08 Student: ___________________________________________________________________________ 1. Assessing control risk at less than high involves all of the following except: A. identifying specific controls to rely on. B. concluding that controls are ineffective. C. performing tests of controls. D. analysing the achieved level of control risk after performing tests of controls.

2. Obtaining an understanding of the internal control and assessing control risk: A. may be performed concurrently in an audit. B. needs to be documented only if the assessed level is less than high. C. is possible but not necessary in performing an audit. D. is necessarily sequential audit steps.

3. Tests of controls are performed to determine whether or not: A. control policies and procedures are functioning as designed. B. necessary controls are absent. C. incompatible functions exist. D. material dollar misstatements exist.

4. The conclusion reached as a result of assessing control risk is referred to as the: A. assurance provided by internal control. B. determined level of acceptable detection risk. C. product of the understanding of internal control. D. assessed level of control risk.

5. An auditor assesses the level of control risk to: A. determine the extent of tests of controls to be performed. B. determine the extent of substantive tests to be performed. C. ascertain whether irregularities are probable. D. ascertain whether any employees have incompatible duties.

6. How does the extent of substantive tests required to constitute sufficient appropriate audit evidence vary with the auditor's assessment of control risk? A. Randomly. B. Disproportionately. C. Directly. D. Inversely.

7. After obtaining an understanding of internal control in an audit engagement, the auditor should perform tests of controls on: A. those control activities for which reportable conditions were identified. B. a random sample of the control activities that were identified. C. those control activities that have a material effect upon the financial report balances. D. those control activities that the auditor identified to reduce the assessed level of control risk.

8. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the: A. factors that raise doubts about the auditability of the financial report. B. operating effectiveness of internal control policies and procedures. C. risk that material misstatements exist in the financial report. D. possibility that the nature and extent of substantive tests may be reduced.

9. Assessing control risk as less than high would most likely involve: A. changing the timing of substantive tests by omitting interim testing and performing the tests at year-end. B. identifying specific internal controls relevant to specific assertions. C. performing more extensive substantive tests with larger sample sizes than originally planned. D. reducing inherent risk for most of the assertions relevant to significant account balances.

10. A primary purpose of internal controls is to: A. form a basis for evaluating employees. B. monitor production quality. C. avoid clerical errors. D. meet objectives of maintaining sound documents and records and accurate financial reporting.

11. The basic concept of internal control which recognises that the cost of internal control should not exceed the benefits expected to be derived is known as: A. reasonable assurance. B. management responsibility. C. limited liability. D. management by exception.

12. When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to: A. assess the risk of material misstatement and plan the audit. B. provide suggestions for improvement to the client. C. serve as a basis for setting audit risk and materiality. D. comply with the Corporations Act 2001.

13. Which of the following would be least likely to suggest to an auditor that the client's management may have overridden the internal control? A. Differences are always disclosed on a computer exception report. B. Management does not correct internal control deficiencies that it knows about. C. There have been two new controllers this year. D. There are numerous delays in preparing timely internal financial reports.

14. In assessing control risk, the auditor is basically concerned that the system provides reasonable assurance that: A. controls have not been circumvented by collusion. B. misstatements have been prevented or detected. C. operational efficiency has been achieved in accordance with management plans. D. management cannot override the system.

15. Of the following statements about an internal control, which one is not valid? A. No one person should be responsible for the custodial responsibility and the recording responsibility for an asset. B. Transactions must be properly authorised before such transactions are processed. C. Because of the cost–benefit relationship, a client may apply control procedures on a test basis. D. Control procedures reasonably ensure that collusion among employees cannot occur.

16. Which of the following statements about internal control is correct? A. The establishment and maintenance of internal control is an important responsibility of the internal auditor. B. Properly maintained internal control reasonably ensures that collusion among employees cannot occur. C. The cost-benefit relationship is a primary criterion that should be considered in designing internal control. D. Exceptionally strong internal control is enough for the auditor to eliminate substantive tests on a significant account balance.

17. For internal control purposes, which of the following individuals should preferably be responsible for the distribution of payroll cheques? A. Bookkeeper. B. Payroll clerk. C. Cashier. D. Receptionist.

18. Which of the following is one of the overriding principles of internal control? A. Responsibility for accounting and financial duties should be assigned to one responsible officer. B. Responsibility for the performance of each duty must be fixed. C. Responsibility for the accounting duties must be borne by the audit committee of the company. D. All of the options listed here are correct

19. For effective internal control purposes, which of the following individuals should be responsible for mailing signed cheques? A. Computer operator. B. Financial controller. C. Accounts payable clerk. D. Payroll clerk.

20. Peter Budd, the purchasing officer of Lake Hardware Wholesalers Pty Ltd (Lake), has a relative who owns a retail hardware store. Peter Budd tive to buy at Lake's wholesale arranged for hardware to be delivered by manufacturers to the retail store on a COD basis, thereby enabling his rela prices. Budd was probably able to accomplish this because of Lake's poor internal control for:

A. B. C. D.

purchase requisitions. cash receipts. perpetual inventory records. purchase orders.

21. A company policy should clearly indicate that defective merchandise returned by customers is to be delivered to the: A. sales clerk. B. receiving clerk. C. inventory control clerk. D. accounts receivable clerk.

22. An effective internal control for the payroll function would generally include which of the following? A. Total time recorded on time-clock cards should be reconciled to job reports by employees responsible for those specific jobs. B. Payroll department employees should be supervised by the management of the personnel department. C. Payroll department employees should be responsible for maintaining employee personnel records. D. Total time spent on jobs should be compared with total time indicated on time-clock cards.

23. An auditor reviews a client's payroll procedures. The auditor would consider the internal control to be less than effective if a payroll department supervisor was assigned the responsibility for: A. reviewing and approving time reports for subordinate employees. B. distributing payroll cheques to employees. C. hiring subordinate employees. D. initiating requests for salary adjustments for subordinate employees.

24. 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. external policies established by parties outside the entity affect its accounting practices. B. management is dominated by one individual. C. internal auditors 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.

25. The control environment component of internal controls includes all of the following except: A. management's operating style. B. access to computer programs. C. organisational structure. D. human resource policies and practices.

26. The risk assessment component of internal controls refers to: A. the auditor's assessment of control risk. B. the auditor's assessment of engagement risk. C. the entity's identification and analysis of risks relevant to achievement of its objectives. D. the entity's monitoring of the potential for material misstatements.

27. Which of the following is not one of the five elements of internal control? A. Corporate governance. B. Control procedures. C. Control environment. D. Information system.

28. The internal control environment includes all of the following except: A. organisational structure. B. management philosophy and operating style. C. human resource policies and procedures. D. tests of control.

29. Transaction authorisation within an organisation may be either specific or general. An example of specific transaction authorisation is the: A. setting of automatic reorder points for material or merchandise. B. approval of a detailed construction budget for a warehouse. C. establishment of requirements to be met in determining a customer's credit limits. D. establishment of sales prices for products to be sold to any customer.

30. An effective internal control requires organisational independence of departments. Organisational independence would be impaired in which of the following situations? A. The internal auditors report to the audit committee of the board of directors. B. The financial controller reports to the marketing director. C. The payroll accounting department reports to the chief accountant. D. The cashier reports to the treasurer.

31. A well-prepared flowchart should make it easier for the auditor to: A. prepare audit procedure manuals. B. prepare detailed job descriptions. C. perform walkthroughs. D. assess the degree of accuracy of financial data.

32. A flowchart is most frequently used by an auditor in connection with the: A. preparation of generalised computer audit programs. B. review of the client's internal accounting controls. C. use of statistical sampling in performing an audit. D. performance of analytical procedures on account balances.

33. An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts: A. identify internal control weaknesses more prominently. B. provide a visual depiction of clients' activities. C. indicate whether controls are operating effectively. D. reduce the need to observe clients' employees performing routine tasks.

34. For a complex system, auditors are least likely to use which of the following when documenting their understanding of internal controls? A. Narratives. B. Internal control questionnaires. C. Flowcharts. D. Organisation charts.

35. Walk-throughs usually involve all of the following audit procedures except: A. re-performance. B. inquiry. C. observation. D. inspection.

36. Which of the following is not a reason to assess control risk as high? A. Internal control policies or procedures are unlikely to be effective. B. Evaluating the effectiveness of the internal control policies or procedures would be more time consuming than another audit approach. C. The auditor has assessed detection risk as high. D. Internal control policies or procedures are unlikely to pertain to an assertion.

37. In obtaining an understanding of the internal control policies and procedures that are relevant to audit planning, the auditor should perform procedures to provide sufficient knowledge of: A. design of the relevant policies, procedures and records and their operating effectiveness. B. design of the relevant policies, procedures and records and their relationships to assertions. C. the complexity of the entity and the sophistication of its systems and operations. D. design of the relevant policies, procedures and records and whether they have been placed in operation.

38. Which of the following is not a medium that can normally be used by an auditor to record information concerning a client's internal control? A. Narrative memorandum. B. Procedures manual. C. Flowchart. D. Decision table.

39. When the auditor has assessed the level of control risk at less than high, the auditor should document: A. the understanding of the entity's internal control elements obtained to plan the audit. B. the conclusion and the basis for that conclusion. C. the implications for the overall audit strategy. D. All of the given answers are correct.

40. Procedures directed towards obtaining evidence concerning the effectiveness of the design or operation of an internal control policy or procedure are referred to as: A. analytical procedures. B. substantive tests. C. tests of controls. D. confirmations.

41. The auditor observes client employees in obtaining an understanding of the internal control in order to: A. prepare a flowchart. B. update information contained in the organisation and procedure manuals. C. corroborate the information obtained during the initial phases of obtaining an understanding of the internal control. D. determine the extent of compliance with quality control standards.

42. The following are steps in the audit process:

I. prepare flowchart. II. gather exhibits of all documents. III. interview personnel. The most logical sequence of steps is:

A. B. C. D.

I, II, III. I, III, II. III, II, I. II, I, III.

43. The auditor's understanding of the client's internal control is documented to substantiate: A. conformity of the accounting records with the accounting standards. B. representation as to adherence to requirements of management. C. compliance with the auditing standards. D. the fairness of the financial report presentation.

44. After the auditor has prepared a flowchart of the accounting system and control procedures surrounding sales, and assessed the design of the system, the auditor would perform tests of controls for all control procedures: A. documented in the flowchart. B. considered to be deficiencies that might allow errors to enter the accounting system. C. considered to be strengths that the auditor plans to use as a basis for an assessed level of control risk less than high. D. that would aid in preventing irregularities.

45. Which of the following internal control features would an auditor be least likely to review? A. Segregation of the asset-handling and record-keeping functions. B. Company policy regarding credit and collection efforts. C. Classification of sales and cost records by products. D. Authorisation of additions to plant and equipment.

46. When considering the internal control for inventory with respect to segregation of duties, an auditor would be least likely to: A. inspect documents. B. make inquiries. C. observe procedures. D. consider policy and procedure manuals.

47. In the weekly computer run to prepare payroll cheques, a cheque was printed for an employee whose employment was terminated the previous week. Which of the following controls, if properly used, would have been most effective in preventing this error or ensuring its prompt detection?

A. A control total for hours worked, prepared from time cards collected by the timekeeping department and compared to the payroll sheets. B. Requiring the accounting department to account for all pre-numbered cheques issued to the IT department for the processing of the payroll. C. The use of check digits on employee numbers. D. The use of a header label on the payroll input sheet. 48. The auditor obtains evidence supporting the notion that proper segregation of duties exists by: A. personally observing the employees who apply the control procedures. B. reviewing job descriptions in the personnel department. C. preparing a flowchart of duties performed by personnel. D. performing tests to determine whether control procedures operated consistently throughout the period.

49. Which of the following is essential to determine whether effective internal control policies and procedures have been prescribed and are being followed? A. Developing questionnaires and checklists. B. Understanding control policies directed towards operating efficiency. C. Understanding the internal control and performing tests of controls. D. Observing employee functions and making inquiries.

50. Which of the following input controls is a numeric value computed to provide assurance that the original value has not been altered in construction or transmission? A. Hash total. B. Parity check. C. Encryption. D. Check digit.

51. A limit test is a: A. test to ensure that a numerical value does not exceed some predetermined value. B. check to ensure that the value in a field falls within an allowable range of values. C. check to ensure that the data in a field have the proper arithmetic sign. D. check on a field to ensure that it contains either all numeric or alphabetic characters.

52. An IT input control is designed to ensure that: A. machine processing is accurate. B. only authorised personnel have access to the computer area. C. data received for processing are properly authorised and converted to machine readable form. D. electronic data processing has been performed as intended for the particular application.

53. For good internal control, which of the following functions should not be the responsibility of the treasurer's department? A. Data processing. B. Handling of cash. C. Custody of securities. D. Establishing credit policies.

54. In updating a computerised accounts receivable file, which one of the following would be used as a batch control to verify the accuracy of the postings of cash receipts remittances? A. The sum of the cash deposits, plus the discounts, less the sales returns. B. The sum of the cash deposits. C. The sum of the cash deposits, less the discounts taken by customers. D. The sum of the cash deposits, plus the discounts taken by customers.

55. After obtaining an initial understanding of a client's IT controls, an auditor may decide not to perform tests of controls related to the control procedures within the IT portion of the client's internal control. Which of the following would not be a valid reason for choosing to omit tests of controls?

A. The controls appear adequate. B. The controls duplicate operative controls existing elsewhere in the system. C. There appear to be major deficiencies that would preclude using the stated procedure as a basis to reduce the assessed level. D. The time and dollar costs of testing exceed the time and dollar savings in substantive testing if the tests of controls show the controls to be operative. 56. Which of the following computer documentation would an auditor most likely utilise in obtaining an understanding of internal control? A. Systems flowcharts. B. Record layouts. C. Program listings. D. Record counts.

57. Which of the followi...