Auditing

Chapter 6 quiz

1.An auditor's primary consideration regarding an entity's internal controls is whether they

a. Prevent management override.

b. Relate to the control environment.

c. Reflect management's philosophy and operating style.

d. Facilitate reliable financial reporting in conformance (in the US) with GAAP

2.Which of the following statements is true?

a. A properly maintained internal control system reasonably assures that collusion among employees cannot occur.

b. The establishment and maintenance of internal control is an important responsibility of the internal auditor.

c. An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance.

d. Management has primary responsibility to maintain adequate internal control over the entity's assets and records.

3. In which of the following situations is the auditor most likely to use a reliance strategy?

A. If transactions are recurring.

B. For nonrecurring, unusual transactions.

C. If control risk is very high.

D. If the entity has a poorly-designed automated system.

4.Which of the following is not one of the 5 COSO components of a company's internal control system?

a. Control risk.

b. The company's risk assessment process.

c. Control activities.

d. Control environment.

5.In which of the following situations would an auditor most likely use a reliance strategy?

a. The company has been slow to update its IT system to reflect changes in billing practices.

b. The auditor hired an IT specialist whose report to the auditor reveals that the specialist did not perform sufficient procedures to allow the auditor to properly assess the effect of the IT system on control risk.

c. A company receives sales orders, bills customers, and receives payment based on information generated from its IT system, and no paper trail is generated.

d. The auditor has been unable to ascertain whether all changes to a company's IT system were properly authorized.

6.After obtaining an understanding of the company's internal control system, an auditor may decide to set control risk at the maximum level (i.e. take a substantive approach) for some assertions because he

a. Believes the internal controls are unlikely to be effective.

b. Determines that the pertinent internal control components are not well documented.

c. Performs tests of controls to restrict detection risk to an acceptable level.

d. Identifies internal controls that are likely to prevent material misstatements.

7.An auditor, with regard to a significant account or class of transactions, even if he assesses control risk to be extremely low, must perform some

a. Tests of the internal controls.

b. Analytical procedures.

c. Substantive audit procedures.

d. Dual purpose tests.

8.Audit evidence concerning proper segregation of duties ordinarily is best obtained by

A. Preparation of a flowchart of duties performed by available personnel.

B. Inquiring whether control activities operated consistently throughout the period.

C. Reviewing job descriptions prepared by the Personnel Department.

D. Direct personal observation of the employees who apply the control activities.

9.Significant deficiencies (in internal control)

A.Are more of a threat than material weaknesses to a company generating materially correct financial reporting.

B.Are less of a threat than material weaknesses to a company generating materially correct financial reporting.

C. Are just as much a threat as material weaknesses to a company generating materially correct financial reporting.

10. If a company has low Detection Risk in its overall financial reporting or in a particular account

A. Often it will have high Inherent Risk and high Control Risk.

B. Often the most important of the substantive audit procedures will be performed near the fiscal year end.

C. Often the most important of the internal control testing will be performed near the fiscal year end.

D. All the above are true.

E. None of the above are true.