Multiple Choice Questions
1. The auditor wants to develop an efficient approach to perform an integrated audit of internal controls and financial statements for a public company. Which of the following statements is correct regarding the integrated audit?
a. The auditor should concentrate on transaction processing systems because they contain the "key" controls that should be evaluated.
b. The auditor should address materiality by first looking at significant processes affecting account balances, not just the balances.
c. Because accounting estimates are subjective, the auditor should perform direct tests only of accounts established by accounting estimates.
d. Accounting disclosures are separate and need not be included in the auditor's assessment of internal controls over financial reporting.
2. Which of the following statements is true regarding the conduct of an integrated audit?
a. The auditor must perform a financial statement audit for the same period of time covered by the internal control audit.
b. The auditor is not required to test important transaction controls if the auditor decides to perform direct tests of the account balances.
c. If the auditor does not find any material misstatements in the company's financial statements, the auditor can assert that internal control over financial reporting is effective.
d. All of the above.
3. Which of the following statements is not correct regarding the auditor's report on internal control over financial reporting?
a. The report must cover the same period of time for which the financial statements are prepared.
b. The auditor must explicitly reference the criteria for evaluating internal control, e.g., the COSO framework.
c. The audit is performed in conjunction with the auditing standards promulgated by the International Auditing Standards Board.
d. The audit must report on whether management used the appropriate tools in its assessment of internal control over financial reporting.
4. Regarding an auditor's adverse opinion on a company's internal controls, the following statement(s) is(are) true:
a. The auditor must state whether the company has developed an effective process to fix the control deficiency.
b. The auditor must explicitly state whether the deficiencies led to a material misstatement in the financial statements.
c. The auditor must explicitly state whether there were deficiencies in the control environment.
d. None of the above.
5. If management finds a material weakness in internal controls but remediates the control before year end and determines that no material misstatements have occurred because of the deficiency, the auditor should:
a. Test the remediated control to determine that it is working effectively
b. Issue an adverse opinion because the control was not working effectively throughout the year
c. Expand tests of the affected account balances to develop an independent assessment as to whether there are material misstatements
d. All of the above
e. (a) and (c) above
6. The auditor's tests of internal control over financial reporting include all of the following except controls over:
a. Disclosures
b. Processes leading to accounting estimates
c. Adjusting journal entries
d. Determining the income tax liability
e. All of the above are included
7. Which of the following would not be a primary consideration of the auditor in determining whether a deficiency was a significant deficiency or a material weakness?
a. The rate of failure of the control
b. The volume and dollar amount of transactions affected by the control
c. Whether the control is computerized or manual
d. Whether the control deficiency is mitigated by other control elements, e.g., the control environment
8. Residual risk is:
a. Best determined by management as the amount that is acceptable to them
b. Constrained by the PCAOB's definition of material weakness
c. Not explicitly addressed by the auditor, but is addressed by management
d. (a) and (c) only
e. All of the above
9. Which of the following are correct related to the auditor's tests of the client's processes of monitoring controls?
I. The auditor should test monitoring only if the management's evaluation of internal control indicates that management is relying on monitoring controls.
II. Monitoring is a process to determine that other controls are working properly.
III. Monitoring can substitute for a deficiency of other controls.
a. I only
b. I and II only
c. I, II, and III
d. II and III
10. All of the following would be included in the auditor's tests of controls over accounting estimates except:
a. Confirmation of the estimate with outside third parties
b. Review of documentation to determine that the estimate is properly reviewed and authorized
c. Review of processes used to determine if there are changes to the parameters used in the estimates, including management monitoring of the economic environment
d. Review of processes to approve changes to the estimation process