2. A sequence test is performed on the payroll information to ensure all employee numbers have been accounted for. What type of control is this? A. processing control B. output control C. input control D. logical access control 3. The auditor performs a test that includes examining the signatures on cash payments. The signature evidences proper approval of the amount and existence of the payment. Of the ten payments tested, three signatures are missing. In this scenario, how are the exceptions defined? A. three signatures missing B. ten payments selected C. remaining payments not selected D. seven signatures that exist 4. Which of the following statements accurately describe the system of internal control? (Several choices may be correct.) C. Strategic and operating objectives are more likely to be met if internal controls are designed and maintained by entry-level employees only. E. An internal control framework provides a structure to allow the auditor to assess the system of internal controls as compared to a theoretical model. B. The objective of internal control is to ensure the auditors can issue a clean audit opinion. A. The internal control system is designed by those charged with governance and the management of an organization. F. If a system of internal controls put in place by management aligns closely with a framework of internal control, the controls can be described as strong. D. The auditor is always required to obtain an understanding of the internal control system. 5. While entering in a purchase invoice, the computer system checks the cost of the inventory entered to the cost already in the system. This control is part of the control objective that ensures transactions are A. timely. B. real. C. valued. D. classified. 6. Which of the following are true with respect to internal controls? (Several choices may be correct.) A. Internal controls relate to only the reliability of financial reporting. G. For a small entity, the owner-manager is often heavily involved in the day-to-day running of the business, and this can be seen as both a control strength and a weakness. F. Entity-level controls are always tested by the auditor. D. Internal controls are designed and implemented to ensure that transactions are real, recorded, correctly valued, classified, summarized, and posted on a timely basis. C. The objectives of internal controls are the same as the assertions for financial statements. E. There are limitations of internal control, such as ineffective understanding of the purpose of a control. B. There is one framework for internal controls. 7. Which of the following statements accurately describe the selection and design of internal controls? (Several choices may be correct.) B. Testing of controls are usually documented and carried out during the year-end audit. A. If a control is performed more frequently, the more testing will need to be required in order for the auditor to be satisfied that the control is operating effectively. C. Only significant control exceptions are investigated by the auditors. F. Changes in an accounting system will decrease the extent of control testing required. D. A control exception is an observed condition that provides evidence that the control being tested did not operate as intended. E. The auditor's prior-period experiences with the engagement and the past results of control testing do not impact the extent of control testing. 8. Within an entity, proper approval is required prior to any major expenditure. This procedure is part of the entity's A. risk assessment process. B. information systems. C. control environment. D. control activities. 9. Which of the following would be considered an adverse change in the overall control environment of an entity? A. addition of a new product line B. purchase of significant assets C. loss of the CFO D. loss of entry-level employee 10. Evidence Inc. is a payroll processing firm. Claire and Chuck Stone own the majority of the shares in the Stone Group, which controls Evidence. Chuck is the chair of the board of directors of both Evidence and the Stone Group, and Claire is a director of both companies as well as the CFO of Evidence. Claire and Chuck have a fairly laid-back management style. They trust their workers to work hard for the company, and they reward them well. The accounting staff, in particular, are very loyal to the company. Chuck tells you that some accounting staff enjoy their jobs so much they have never taken holidays, and they rarely take sick leave. Claire and Chuck have not bothered much in the past with formal procedures and policies, but they have requested that the accounting staff start documenting the more common procedures. Claire and Chuck do not conduct formal performance reviews; they rely on their staff to tell them when there is a problem. The accounting department is overseen by Roger Maddow, a designated accountant. He was hired by Claire and Chuck due to his strong credentials and his past experience working with external auditors. The audit of Evidence is now coming to an end. Which of the following are true with respect to Evidence? (Several choices may be correct.) E. Roger was hired due to his knowledge, demonstrating a commitment to competent management. G. The management letter will identify all internal control weaknesses identified. D. Although some documentation is now being done, it is being done at a low level rather than being designed by senior management. There is a risk that the documentation will be incomplete, without the necessary review procedures. F. The auditor will provide a management letter to Roger. B. Because this is a small entity, there should be no concern about the control environment. A. The control environment would be stronger if the CFO and the director positions were split. C. Management philosophy and operating style are laid back, suggesting that formal control structures are not in place. 11. Which of the following statements accurately describe documenting and testing internal controls? (Several choices may be correct.) A. It is more common to use a narrative form of documenting internal controls in a larger and more complex environment. D. The limitation with the audit technique of observing an internal control is that the evidence gathered applies only to a certain point of time. C. Analytical procedures are frequently used to test controls. B. A flowchart typically takes longer to prepare as it provides a visual representation of the flow of transactions. F. When an auditor is not personally familiar with auditing a certain industry, an internal control checklist can be helpful. E. An auditor is always required to document their understanding of internal controls and the extent of documentation increases with the complexity of the client and its systems. 12. An auditor performs a control test that includes examining the approval signature on the monthly bank reconciliation for proof of management review. How many bank reconciliations should be examined in order for the auditor to gain reasonable assurance that the control of management review of the bank reconciliations is effective? 2 7 1 3