Line Item: Basic Concepts of internal Control

CPAR
1. According to PSA 400, which of the following is correct regarding internal control
system?

a. Internal control system refers to all the policies and procedures adopted by the
auditor to assist in achieving management’s objective.
b. A strong environment, by itself, ensure the effectiveness of the internal control
system.
c. In the audit of financial statements, the auditor is only concerned with those policies
and procedures within the accounting and internal control systems that are relevant to
the financial statements
d. The internal control system is confined to those matters which relate directly to the
functions of the accounting system.

2. Which of the following is correct about internal control?

a. Accounting and internal control systems provide management with conclusive

evidence that objectives are reached.
b. One of the inherent limitations of accounting and internal control systems is the
possibility that the procedures may become inadequate due to changes in conditions,
and compliance with procedures may deteriorate.
c. Most internal controls tend to be directed at non-routine transactions.
d. Management does not consider costs of the accounting and internal control systems.

3. Corporate directors, management, external auditors, and internal auditors all play
important roles in creating a proper control environment. Top management is primarily
responsible for

a. Establishing a proper environment and specifying overall internal control.

b. Reviewing the reliability and integrity of financial information and the means used to
collect and report such information.
c. Ensuring that external and internal auditors adequately monitor the control
environment.
d. Implementing and monitoring controls designed by the board of directors.

4. Which of the following best describe the interrelated components of internal control?

a. Organizational structure, management philosophy, and planning.

b. Control environment, risk assessment, control activities, information and
communication systems, and monitoring.
c. Risk assessment, backup facilities, responsibility accounting and natural laws.
d. Legal environment of the firm, management philosophy, and organizational structure.
5. In an audit of financial statements, an auditor’s primary consideration regarding a
control is whether it

a. Reflects management’s philosophy and operating style.

b. Affects management’s financial statement assertions.
c. Provides adequate safeguards over access to assets.
d. Enhances management’s decision-making processes.

6. Effective internal control

a. Eliminates risk and potential loss to the organization.

b. Cannot be circumvented by management.
c. Is unaffected by changing circumstances and conditions encountered by the
organization.
d. Reduces the need for management to review exception reports on a day-to-day
basis.

7. Which of the following statements about internal control is correct?

a. Properly maintained internal controls reasonably assure that collusion among

employees cannot occur.
b. Establishing and maintaining internal control is the internal auditor’s responsibility.
c. Exceptionally strong control allows the auditor to eliminate substantive tests.
d. The cost-benefit relationship should be considered in designing internal control.

8. The ultimate purpose of assessing control risk is to contribute to the auditor’s

evaluation of the risk that :

a. Tests of controls may fail to identify controls relevant to assertions.

b. Material misstatements may exist in the financial statements.
c. Specified controls requiring segregation of duties may be circumvented by collusion.
d. Entity policies may be overridden by senior management.

9. A proper understanding of the client’s internal control is an integral part of the audit
planning process. The results of the understanding

a. Must be reported to the shareholders and the SEC.

b. Bear no relationship to the extent of substantive testing to be performed.
c. Are not reported to client management.
d. May be used as the basis for withdrawing from an audit engagement.

10. An entity should consider the cost of a control in relationship to the risk. Which of
the following controls best reflects this philosophy for a large peso investment in heavy
machine tools?
a. Conducting a weekly physical inventory.
b. Placing security guards at every entrance 24 hours a day.
c. Imprinting a controlled identification number on each tool.
d. Having all dispositions approved by the vice president of sales.

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

a. Performing tests of transactions that corroborate management’s financial statement

assertions
b. Observing the employees as they apply specific controls.
c. Obtaining a flowchart of activities performed by available personnel.
d. Developing audit objectives that reduce control risk.

12.Which of the following statements about preliminary assessment of control risks is

correct?

a. After obtaining an understanding of the accounting and internal control systems, the
auditor should make a preliminary assessment of control risks, at the assertion level, for
all accounts. Or transaction classes.
b. The preliminary assessment of control risk can be done only after completing tests of
controls.
c. The preliminary assessment of control risk for a financial assertion is normally low,
unless the auditor is able to identify weaknesses that may indicate ineffectiveness of
accounting and internal control system.
d. The auditor ordinarily assesses control risk at high level for some or all assertions
when it is not cost efficient to do tests of controls.

13. Which of the following statements concerning control risk is correct?

a. When control risk is at the maximum level, an auditor is required to document the
basis for that assessment.
b. Control risk may be assessed sufficiently low to eliminate substantive testing for
significant transaction classes.
c. When assessing control risk, an auditor should not consider evidence obtained in
prior audits about the operation of controls.
d. Assessing control risk and obtaining an understanding of an entity’s internal control
may be performed concurrently.

14. Based on a consideration of internal control completed at an interim date, the

auditor assessed control risk at a low level and performed interim substantive tests. The
records and procedures would most likely be tested again at year-end if

a. Tests of controls were not performed by the internal auditor during the remaining
period.
b. Internal control provides a basis for limiting the extent of substantive testing.
c. The auditor used nonstatistical sampling during the interim period testing of controls.
d. Inquiries and observations lead the auditor to believe that conditions have changed.

15. Although substantive tests may support the accuracy of underlying records, these
tests frequently provide no affirmative evidence of segregation of duties because

a. Substantive tests rarely guarantee the accuracy of the records if only a person who
performs incompatible functions.
b. The records may be accurate even though they are maintained by a person who
performs incompatible functions.
c. Substantive tests relate to the entire period under audit, but tests of controls ordinarily
are confined to the period during which the auditor is on the client’s premises.
d. Many computerized procedures leave no audit trail of who performed them, so
substantive tests may necessarily be limited to inquiries and observation of office
personnel.

16. After obtaining an understanding of internal control and assessing control risk, an
auditor decided not to perform additional tests of controls. The auditor most likely
concluded that the

a. Additional evidence to support a further reduction in control risk was not cost-
beneficial toobtain.
b. Assessed level of inherent risk exceeded the assessed level of control risk.
c. Internal control was properly designed and justifiably may be relied on.
d. Evidence obtainable through tests of controls would not support an increased
assessment of control risk.

17. The objective of tests of details of transactions performed as tests of controls is to

a. Monitor the design and use of entity documents such as prenumbered shipping form
b. Determine whether controls have been placed in operation
c. Detect material misstatements in the account balances of the financial statements.
d. Evaluate whether controls operated effectively.

18. An auditor wishes to perform tests of controls on a client’s cash disbursements

procedures. If the controls leave no audit trail of documentary evidence, the auditor
most likely will test the procedures by

a. Confirmation and observation. c. Analytical procedures and confirmation.

b. Observation and inquiry. d. Inquiry and analytical procedures

19. Which of the following would not be a method used to conduct tests of controls?

a. Inquiry b. Walkthrough c. Confirmation d. Observation

20. The auditor is examining copies of sales invoices only for the initials of the person
responsible for checking the extensions. This is an example of a
a. Test of controls b. Dual purpose test c. Substantive test d. Test of balances

21. Which of the following types of evidence would an auditor most likely examine to
determine whether controls are operating as designed?

a. Confirmations of receivables verifying account balances.

b. Letters of representations corroborating inventory pricing.
c. Attorneys’ responses to the auditor’s inquiries.
d. Client records documenting the use of computer programs.

22. Which of the following procedures concerning accounts receivable is an auditor

most likely to perform to obtain evidential matter in support of an assessed level of
control risk below the maximum level?

a. Sending confirmation requests to an entity’s principal customers to verify the

existence of accounts receivable.
b. Inspecting an entity’s analysis of accounts receivable for unusual balances
c. Comparing an entity’s uncollectible accounts expense to actual uncollectible
accountsreceivable.
d. Observing an entity’s employee prepare the schedule of past due accounts
receivable.

23. An auditor is least likely to test controls that provide for

a. Classification of revenue and expense transactions by product line

b. Approval of the purchase and sale of trading securities
c. Segregation of the functions of recording disbursements and reconciling the bank
account
d. Comparison of receiving reports and vendors’ invoices with purchase orders

24. In a small company that doesn't employ an adequate number of employees to

permit proper division of responsibilities, effective internal control can be
strengthened by

a. Direct participation by the owner of the business in the record keeping activities of the
business.
b. Employment of temporary personnel to aid in the separation of duties.
c. Delegation of full, clear-cut responsibility to each employee for the functions assigned
to each.
d Engaging a CPA to perform monthly "write up" work.

25. Which of the following is true of the communication to management of material

weaknesses inaccounting and internal control?

a. Communication must be in writing.

b. Oral communication of material weaknesses, when appropriate, would be
documented in the audit working papers.
c. The communication should indicate that the auditor had extensively examined the
accounting and internal control system of the client.
d. The auditors should indicate in the communication that the examination is primarily
designed to determine whether the accounting and internal control is adequate.

26. Transaction authorization within an organization may be either specific or general.

An example of specific transaction authorization is the

a. Approval of a construction budget for a new warehouse

b. Setting of automatic reorder points
c. Establishment of a customer’s credit limits
d. Establishment of sales prices

27. Internal control should provide reasonable (but not necessarily absolute) assurance
which means that:

a. The cost of control activities should not exceed the benefits.

b. Internal control is management’s, not auditor’s, responsibility.
c. An attestation engagement about management’s internal control assertions may not
necessarily detect all reportable conditions.
d. There is always a risk that reportable conditions may result in material
misstatements.

28. Which of the following statements is an example of an inherent limitation of internal

control.

a. Errors may arise from mistakes in judgments.

b. The effectiveness of control procedures depends on segregation of duties.
c. Procedures are designed to assure that transactions are executed as management
authorities.
d. Computers process large numbers of transactions.

29.Proper segregation of functional responsibilities calls for separation of the functions

of
a. Authorization, execution, and recording. c. Custody, execution, and
reporting.
b. Authorization, execution, and payment. d. Authorization, payment, and
recording.

30. Which of the following is a responsibility that should not be assigned to only one
employee?

a. Access to securities in the company’s safe deposit box.

b. Custodianship of the cash working fund.
c. Reconciliation of bank statement.
d. Custodianship of tools and small equipment.

31. Which of the following activities would be least likely to strengthen a company’s
internal control?

a. Maintaining insurance for fire and theft.

b. Separating accounting from other financial operations.
c. Fixing responsibility for the performance of employee duties.
d. Carefully selecting and training employees.

32. As generally conceived, the “audit committee” of a publicly held company should be
made up of

a. Members of the board of directors who are not officers or employees.

b. Representatives of the major equity interests (bonds, preferred stock, common
stock).
c. The audit partner, the chief financial officer, the legal counsel, and at least one
outsider.
d. Representatives from the client’s management, investors, suppliers, and customers.

33. When considering internal control, the auditor’s primary concern is to determine

a. The reliability of the accounting information system.

b. The possibility of fraud occurring.
c. Compliance with policies, plans, and procedures.
d. The type of an opinion he will issue.

34. Of the following, the best statement of the CPA’s primary objective in considering
internal control
is that the review is intended to provide

a. A basis for reliance on the system and determining the scope of other auditing
procedures.
b. Reasonable protection against client fraud and defalcations by client employees.
c. A basis for constructive suggestions to the client for improving his internal control
system.
d. A method for ensuring that there is reasonable assurance that the financial
statements are reliable.

35. When an auditor assesses control risk below the maximum level, the auditor is
required to document the auditor’s
1. Basis for concluding that control Understanding of the entity’s internal
2. Risk is below the maximum level control structure elements

a. Yes Yes b. No No c. Yes No d. No Yes

36. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is

a. Substantive tests, documentation of control structure, and tests of controls

b. Documentation of control structure, tests of controls, and substantive tests
c. Documentation of control structure, substantive tests, and tests of controls
d. Tests of controls, documentation of control structure, and substantive tests

37. In obtaining an understanding of an entity’s internal control structure, an auditor is

required to obtain knowledge about the
1.Operating effectiveness of Design of policies
2.Policies and procedures and procedures

a. Yes Yes b. No Yes c. Yes No d. No No

38 Which of the following audit techniques most likely would provide an auditor with the
most
assurance about the effectiveness of the operation on an internal control procedure?

a. Confirmation with outside parties c. Recomputation of account balance

b. Observation of client personnel d. Inquiry of client personnel

39. Which of the following is the correct order for performing the auditing procedures A
through C below
A = Tests of Controls
B = Preparation of a flowchart depicting the client’s internal control structure
C = Substantive tests

a. ABC b. BAC c. ACB d. BCA

40. After considering a client’s internal control, an auditor has concluded that the system
is well designed and is functioning as anticipated. Under these circumstances, the auditor
would most likely

a. Cease to perform further substantive tests

b. Not increase the extent of planned substantive tests
c. Increase the extent of anticipated analytical procedures
d. Perform all tests of controls to the extent outlined in the preplanned audit program
Line Item: Internal Control Consideration
CPAR

1. It is a process, effected by those charged with governance, management, and other

personnel, designed to provide reasonable assurance regarding the achievement of
objectives in the following categories:
Effectiveness and efficiency of operations
Reliability of financial reporting
Compliance with applicable laws and regulations

a. Internal auditing b. Internal control c. Business strategy d. Accounting

process

-Answer B
2. Which of the following best describes an internal control system?

a. All the policies and procedures adopted by the management of an entity to assist
in achieving management's objective of ensuring, as far as practicable, orderly
and efficient conduct of its business, including adherence to management
policies; safeguarding of assets; prevention and detection of fraud and error;
accuracy and completeness of the accounting records; and timely preparation of
reliable financial information.
b. The series of tasks and records of an entity by which transactions are
processed as a means of maintaining financial records. Such systems identify,
assemble, analyze, calculate, classify, record, summarize and report transactions
and other events.
c. This includes, but is not limited to, plan of organization and the procedures and
records that are concerned with the decision processes leading to management’s
authorization of transactions. It promotes operational efficiency and adherence to
managerial policies.
d. This comprises the plan of organization and the procedures and records that
are concerned with the safeguarding of assets and the reliability of financial
records. It involves systems of authorization and approval controls over assets,
internal audit and all other financial matters.

-Answer A
3. Which of the following is not one of the essential concepts of internal controls?

a. It is a process
b. It is effected by those charged with governance, management, and other personnel in
an entity
c. It is a means or tool used by management to achieve the entity’s objectives
d. It can be expected to absolute assurance regarding that the achievement of the
entity’s objectives
- Answer D
4. A reason to establish internal control is to:

a. Have a basis for planning the audit

b. Provide reasonable assurance that the objectives of the organization are achieved
c. Encourage compliance with organizational objectives
d. Ensure the accuracy, reliability and timeliness of information

-Answer B

5. Internal controls are not designed to provide reasonable assurance that

a. Transactions are executed in accordance with management’s authorization

b. Irregularities will be eliminated
c. Access to assets is permitted only in accordance with management’s authorization
d. The recorded accountability for assets is compared with the existing assets at
reasonable intervals

6. Internal control can only provide reasonable, not absolute, assurance of achieving
entity control objectives. One of the factors limiting the likelihood of achieving those
objectives is that:

a. The auditor’s primary responsibility is the detection of fraud.

b. The board of directors is active and independent.
c. The cost of internal control should not exceed its benefits.
d. Management monitors internal control.

-Answer B

7. Which of the following is an example of an inherent limitation in a client’s internal

control system?

a. The effectiveness of procedures depends on the segregation of employee duties.

b. Procedures are designed to assure the execution and recording of transactions in
accordance with management’s authorization.
c. In the performance of most control procedures, there are possibilities of errors arising
from mistakes in judgment.
d. Procedures for handling large numbers of transactions are processed by information
technology (IT) equipment.

- Answer C

8. An internal control system that is working effectively

a. Eliminates risk and potential loss of to the entity

b. Cannot be circumvented by management
c. Is unaffected by changing circumstances and conditions encountered by the entity
d. Reduces the need for management the review exception reports on a day-to-day
basis

9. This internal component is the foundation for all other components. It set the tone of
the organization, provides discipline and structure, and influences the control
consciousness of employees.

a. Control activities c. Control environment

b. Monitoring of control d. Entity's risk assessment process

10. Which of the following statements best describes “control environment”?

a. The entity’s process for identifying business risks relevant to financial reporting
objectives and deciding about actions to address those risks, and the results thereof.
b. The system for transferring information from transaction processing systems to the
general ledger or the financial reporting system.
c. Policies and procedures that help ensure that management directives are carried out.
d. This includes the governance and management functions and the attitudes,
awareness, and actions of those charged with governance and management
concerning the entity’s internal control and its importance to the entity.

11. Which of the following considered control environment elements?

Commitment Detection Organizational
To competence Risk Structure

a. Yes No b. Yes Yes c. No No d. No No

12. The information system consists of the following:

Infrastructure (physical and hardware components)

Software
People
Procedures and inputs

a. Yes Yes No Yes b.Yes Yes Yes Yes c. No Yes No No d,No Yes Yes No

13. An entity’s risk assessment process includes how management:

Identifies risk
Assesses significance and likelihood of occurrence of these identified risks
Decides upon actions to manage these risks

a.Yes Yes No b Yes Yes Yes c.Yes No Yes No

14. Risks can arise or change due to circumstances such as the following, except:

a. There is a change in the regulatory or operating environment (i.e. a new law has
been passed which prohibits the use of a chemical which is a main ingredient of the
company’s major product).
b. New employees have been hired by the company.
c. The company switched from manual information systems to a computerized system.
d. The accounting and financial reporting framework has remained stable for the past
five years, and no new pronouncements have been made.

15. Under PSA 315, monitoring of controls is an internal control component that
involves a process of assessing the quality of internal control performance over time. It
involves assessing the design and operation of controls on a timely basis and taking
necessary corrective actions. Monitoring of controls is accomplished through ongoing
monitoring activities, separate evaluations, or a combination of the two. An entity's
ongoing monitoring activities often include

a. Periodic reporting by the entity's internal auditors about the functioning of internal
control
b. Reviewing the purchasing account
c. Periodic audits by the audit committee
d. The audit of the annual financial statements

16. Control activities constitute one of the five components of internal control. Which of
the following is not included in this internal control component?

a. Segregation of duties c. An internal audit function

b. Performance reviews d. Authorization

17. Which of the following is a management control method that most likely could
improve management's ability to supervise company activities effectively?

a. Monitoring compliance with internal control requirements imposed by regulatory

bodies.
b. Limiting direct access to assets by physical segregation and protective devices.
c. Establishing budgets and forecasts to identify variances from expectations.
d. Supporting employees with the resources necessary to discharge their
responsibilities.

18. PSA 315 requires the auditor to obtain an understanding of the client’s internal
controls
a. For every audit c. For first-time audits.
b. Sufficient to find any frauds which may exist d. Whenever it would be
appropriate

19. In planning the audit, the auditor obtains a sufficient understanding of the existing
internal control. Which one of the following is not among the auditor's primary objectives
for obtaining such knowledge?
a. Identify types of material misstatements.
b. Consider the factors that affect the risk of material misstatement.
c. Make constructive suggestions to the client for imrpovement
d.Design effective substantive test.

20. The primary purpose of the auditor’s consideration of internal control is to provide a
basis for

a. Determining whether procedures and records that are concerned with the
safeguarding of assets are reliable.
b. Constructive suggestions to clients concerning deficiencies in internal control.
c. Determining the nature, timing and extent of audit tests to be applied.
d. The expression of an opinion.

21. When obtaining knowledge about an entity's internal control, it is important for the
auditor to consider the competence of its employees, because their competence bears
directly and importantly upon the

a. Cost-benefit relationship of internal control

b. Comparison of recorded accountability with assets
c. Achievement of the objectives of internal control
d. Timing of substantive tests to be performed

22. Obtaining an understanding of internal control involves:

ABCD

Evaluating the design of a control Yes Yes Yes No

Determining whether the control has been implemented Yes Yes No Yes
Testing the effectiveness of a control No Yes Yes Yes

23. Which of the following statements best describes the phrase, “evaluating the design
of a control”

a. Considering whether the control, individually or in combination with other controls, is

capable of effectively preventing, or detecting and correcting, material misstatements.
b. Determining whether the control exists and that the entity is using it.
c. Expressing an opinion as to the effectiveness of a control.
d. Observing the application of specific controls.

24. When obtaining an understanding of the accounting and internal control system the
auditor may trace a few transactions through the accounting system. This technique
is:
a. Reperformance b. Walk-through c. Control test d. Validity Test
25. When obtaining an understanding of an entity’s internal control, an auditor should
concentrate on the substance of controls rather than their form because:

a. The controls may be operating effectively but may not be documented.

b. Management may establish appropriate controls but not act on them.
c. The controls may be so inappropriate that no reliance is contemplated by the auditor.
d. Management may implement controls with costs in excess of benefits.

26. After obtaining an understanding of an entity’s internal control structure and

assessing control risk, an auditor may next:

a. Perform tests of control to verify management’s assertions that are embodied in the
financial statements.
b. Apply analytical procedures as substantive tests to validate the assessed level of
control risk.
c. Consider whether evidential matter is available to support a further reduction in the
assessed level of control risk.
d. Evaluate whether the internal control structure policies and procedures detected
material misstatements in the financial statements.

27. After obtaining an understanding of internal control and assessing control risk, an
auditor decided to perform tests of controls. The auditor most likely decided that

a. Additional evidence to support a further reduction in control risk is not available.

b. It would be efficient to perform tests of controls that would result in a reduction in
planned substantive tests.
c. An increase in the assessed level of control risk is justified for certain financial
statement assertions.
d. There were many internal control weaknesses that could allow errors to enter the
accounting system.

28. Tests of controls are used to test whether controls are:

a. Operating effectively
b. Placed in operation or implemented
c. Properly incorporated in the financial statement
d. Properly documented by the client

29. Which of the following is the auditor’s purpose of further testing internal control
procedures?

a. Provide a basis for reducing the assessed level of control risk below that which
resulted from the auditor’s initial understanding of internal control.
b. Reduce the risk that errors or fraud which are not prevented or detected by internal
control are not detected by the independent audit.
c. Provide assurance that transactions are executed in accordance with management’s
authorization and access to assets is limited by a proper segregation of functions.
d. Provide assurance that transactions are recorded as necessary to permit the
preparation of the financial statements in accordance with PFRS.

30. Which of the following procedures most likely would provide an auditor with
evidence about whether an entity's internal control activities are suitably designed to
prevent or detect material misstatements?
a. Reperforming the activities for a sample of transactions.
b. Performing analytical procedures using data aggregated at a high level.
c. Vouching a sample of transactions directly related to the activities.
d. Observing the entity's personnel applying the activities.

31. In conducting an audit in accordance with PSAs, the auditor is required to identify
and assess the risks of material misstatement at the financial statements level, and at
the assertion level for classes of transactions, account balances, and disclosure. Some
of these risks, in the auditor's judgment, require special audit consideration, such as
those that involve fraud or complex transactions. Such risks are called

a. Business risks b. Audit risks c. Significant risks d. Material risks

32. Which of the following statements concerning audit risk and its components is
incorrect?

a. Regardless of the assessed levels of inherent and control risks, the auditor should
always perform some substantive procedures for material account balances and
classes of transactions
b. The higher the assessment of inherent and control risks, the more evidence the
auditor obtain from the performance of substantive procedures
c. The assessed level of inherent risk need not be considered in determining the nature,
timing and extent of substantive procedures required to reduce audit risk to an
acceptably low level
d. After obtaining an understanding of the accounting and internal control systems, the
auditor should make a preliminary assessment of control risk, at the assertion level, for
each material account balance or class of transactions

33. Which of the following statements is correct?

a. Tests of controls are necessary if the auditor plans to use the primarily substantive
approach.
b. Tests of controls are necessary if the auditor plans to assess the level of control risk
at a HIGH (maximum) level.
c. The auditor can simultaneously obtain an understanding of internal control and
perform tests of controls.
d. After performing tests of controls, the auditor will always assess control risk at a
HIGH level.

34. Tests of controls may include the following, except:

a. Reperformance of internal control procedures

b. Inquiries about, and observation of, internal controls which leave no audit trail
c. Analytical procedures involving comparison of operating expenses with budget
amount
d. Inspection of documentary support to transactions evidencing authorization

35. Evidence of the performance of control risk assessment procedures includes all of
the following except

a. Flowcharts b. Questionnaires c. Lead schedule d. Memoranda

36. Which of the following statements regarding auditor documentation of the client’s
internal control structure is correct?

a. Documentation must include flowcharts.

b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary, and the extent of
documentation may vary.

37. When control risk is assessed at HIGH for all financial statements assertions, an
auditor should document the auditor’s

ABCD

Understanding of the entity’s internal control structure Yes Yes No Yes

Conclusion that control risk is HIGH No Yes Yes Yes
Basis for concluding that control risk is HIGH No No Yes Yes

38. A control that reduces the risk that an existing or potential control weakness will
result in a failure to meet a control objective is referred to as:

a. Compensating control
b. Non-routine control
c. Conditional control
d. Offset control

39. When a compensating control exists, a weakness in the system:

a. Is no longer a concern because the potential for misstatement has been sufficiently
reduced.
b. Is reduced but it is not removed; therefore, it is still of concern to the auditor.
c. Could cause a material loss, so it must be tested using substantive procedures.
d. Is magnified and must be removed from the sampling process and examined in its
entity.

40. If no changes have occurred since the controls were last tested, a CPA should

a. Rely on the prior year audit’s assessment of internal controls and use this
assessment in the current year.
b. Test the operating effectiveness of such controls at least once in every fourth audit.
c. Rely entirely on the performance of substantive audit procedures.
d. Test the operating effectiveness of such controls at least once in every third audit test
of controls.
Line Item : Test of Control
CPAR

1. After the auditor has prepared a flowchart of internal control for sales, and cash
receipts transactions and evaluated the design of the system, the auditor would perform
tests of controls on 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 rely on in assessing control risk.
d. That would aid in preventing irregularities.

- Answer C

2. Which of the following is not a universal rule for achieving control over cash?

a. Separate the cash-handling and record-keeping functions.

b. Deposit each day’s cash receipts by the end of the day.
c. Have bank reconciliation’s performed by employees who do not handle cash.
d. Decentralize the receiving of cash as much as possible.

- Answer D

3. The least crucial element of control over cash is Commented [b1]:

a. Separation of cash record keeping from custody of cash.

b. Preparation of the monthly bank reconciliation.
c. Separation of cash receipts from cash disbursements.
d. Batch processing of checks.

- Answer D

4. The use of fidelity bonds protects a company from embezzlement losses and also
a. Minimizes the possibility of employing persons with dubious records in positions of
trust.
b. Protects employees who make unintentional errors form possible monetary damages
resulting from such errors.
c. Allows the company to substitute the fidelity bonds for various parts of internal
control.
d. Reduces the company’s need to obtain expensive business interruption insurance.

- Answer D

5. An auditor is reviewing internal control for accounts receivable:

I. The billing function should not be assigned to the person who is responsible for
maintaining accounts receivable records.
II. Responsibility for approval of the write-off of accounts receivable that are
uncollectible should not be assigned to the cashier.

a. Only I is true c. Both I and II are true c. Both I and II are true
b. Only II is true d. Neither I nor II is true d. Neither I nor II is true

- Answer C

6. Which of the following is an effective internal control over accounts receivable?

a. Only persons who handle cash receipts should be responsible for the preparation of
documents that reduce accounts receivable balances.
b. Responsibility for approval of the write-off of uncollectible accounts receivable should
be assigned to the cashier.
c. Balances in the subsidiary accounts receivable ledger should be reconciled to the
general ledger control account once a year, preferably at year-end.
d. The billing function should be assigned to persons other than those responsible for
maintaining accounts receivable subsidiary records.

- Answer D

7. To achieve control when there is no billing department, the billing function should be
performed by the

a. Accounting department c. Shipping department

b. Sales department d. Credit and collection department

- Answer A

8. The person who opens the mail commonly prepares a remittance advice when a
customer fails to return one with a payment. Consequently, mail should be opened by
the
a. Credit manager. c. Sales manager.
b. Receptionist. d. Accounts receivable clerk.

- Answer B

9. Which of the following would the auditor consider to be an incompatible operation if

the cashier receives remittances from the mail room?

a. The cashier makes the daily deposit at a local bank.

b. The cashier prepares the daily deposit.
c. The cashier endorses the checks.
d. The cashier posts the receipts to the accounts receivable subsidiary ledger.

- Answer D

10. Which of the following would best protect a company that wishes to prevent
lapping?

a. Segregating duties so that accounting has no access to an incoming mail

b. Segregating duties so that no employee has access both to checks from customers
and to currency from daily cash receipts
c. Having customers send payments directly to the company’s bank
d. Requesting that customers checks be made payable to the company and be
addressed to the treasurer

- Answer C

11. Defective merchandise returned by customers should be presented to

a. Inventory control personnel. c. Purchasing personnel

b. Sales personnel. d. Receiving personnel

- Answer D

12. In considering internal control within the revenue/receipt cycle, what is the purpose
of a transaction walk through?
a. To assure that employees are performing assigned functions accurately.
b. To confirm the auditor’s understanding of the internal control structure.
c. To select documents for detailed tests of controls.
d. To verify the results of the auditor’s sampling plan.

- Answer B

13. To determine whether internal control operates effectively to minimize errors of

failure to bill a customer for a shipment, the auditor would select a sample of
transactions from the population represented by the
a. Shipping records file c. Sales invoice
b. Customer order file d. Subsidiary customer accounts ledger

- Answer A

14. The purpose of tests of controls over shipping is to determine whether

a. Billed goods have been shipped.

b. Shipments are billed.
c. Shipping department personnel are competent.
d. Credit is approved before goods are shipped.

- Answer B

15. The purpose of tests of controls over billing is to determine whether

a. Billed goods have been shipped.

b. Shipments are billed.
c. Billing department personnel are competent.
d. Credit is approved before goods are billed.

- Answer A

16. Which of the following control procedures could prevent or detect errors or frauds
arising from shipments made to unauthorized parties?

a. Document policies and procedures for scheduling shipments.

b. Establish procedures for reviewing and approving prices and sales terms before sale.
c. Prenumber bills of lading and assure that related billings are made on a periodic
basis.
d. Prepare and periodically update lists of authorized customers.

- Answer D

17. The accounts payable department receives a purchase order form to accomplish all
of the following except

a. Comparing invoice price to purchase order price.

b. Ensuring that the purchase had been properly authorized.
c. Comparing quantity ordered to quantity purchased.
d. Ensuring that the goods had been received by the party requesting the goods.

- Answer D

18. Which of the following is a primary function of the purchasing department?

a. Ensuring the acquisition of goods of a specified quality.
b. Authorizing the acquisition of goods.
c. Verifying the propriety of goods of a specified quality.
d. Reducing expenditures for goods acquired.

- Answer A

19. Matching the suppliers’ invoice, the purchase order, and the receiving report
normally should be the responsibility of the

a. Receiving department c. Accounting function

b. Purchasing department d. Treasury function

- Answer C

20. The accounts payable department generally should

a. Cancel supporting documentation after a cash payment is mailed

b. Approve the price and quantity of each purchase requisition
c. Assure that the quantity ordered is omitted from the receiving department’s copy of
the purchase order
d. Agree the vendor’s invoice with the receiving report and purchase order

- Answer D

RESA

21. Internal control is improved when the quantity of merchandise ordered is omitted
from the copy of the purchase order sent to the

a. Department that initiated the requisition c. Purchasing agent

b. Receiving department d. Accounts payable department

- Answer B

22. When goods are received, the receiving clerk should match the goods with the

a. Purchase order and requisition.

b. Vendor’s invoice and the receiving report.
c. Vendor’s shipping document and the purchase order.
d. Receiving report and the vendor’s shipping documents.

- Answer C
23. The accounts payable department should compare the information on each vendor’s
invoice with the

a. Receiving report and the purchase order.

b. Receiving report and the vendor.
c. Vendor’s packing slip and the purchase order.
d. Vendor’s packing slip and the voucher.

- Answer A

24. The mailing of disbursement checks and remittance advices should be controlled by
the employee who

a. Signed the checks last

b. Approved the vouchers for payment
c. Matched the receiving reports, purchase orders, and vendor invoices
d. Verified the mathematical accuracy of the vouchers and remittance advices

- Answer A

25. What is the reason for ensuring that every copy of a vendor’s invoice has a
receiving report?

a. To ascertain that merchandise billed by the vendor was received by the company.
b. To ascertain that merchandise received by the company was billed by the vendor.
c. To ascertain that the invoice was correctly prepared.
d. To ascertain that a check was prepared for every invoice.

- Answer A

26. How can an auditor test to determine whether Receiving Department procedures
are applied properly?

a. Test a sample of receiving documents.

b. Observe receiving procedures on a surprise basis.
c. Review procedures manuals.
d. Interview Receiving personnel.

- Answer B

27. Which of the following control procedures could prevent or detect payment of goods
not received?

a. Counting goods when received.

b. Matching the purchase order, receiving report, and vendor’s invoice.
c. Comparing goods received with goods requisitioned.
d. Verifying vouchers for accuracy and approval.

- Answer B

28. Which of the following would prevent a paid disbursement from being paid a second
time?
a. Individuals responsible for signing checks should prepare vouchers.
b. Disbursements should be approved by at least two responsible officials.
c. The disbursement date should be within a few days of the date the voucher is
presented for payment.
d. The official signing the check should cancel the supporting documents.

- Answer D

29. Assume an auditor’s interim consideration of internal control in the

expenditure/disbursement cycle reveals that control risk can be assessed below the
maximum and detection risk above the minimum for some assertions. Which of the
following is true about substantive tests applied to accounts payable?

a. The auditor is more apt to confirm payable balances.

b. The auditor is less apt to perform substantive tests at the balance sheet date.
c. The auditor is more apt to increase the extent of substantive tests.
d. The auditor is more apt to ignore the risk of incorrect acceptance when sampling
accounts payable.

- Answer B

30. A CPA learns that his client has paid a vendor twice for the same shipment, once
based upon the original invoice and once based upon the monthly statement. A control
procedure that should have prevented this duplicate payment is

a. Attachment of the receiving report to the disbursement support.

b. Prenumbering of disbursement vouchers.
c. Use of a limit or reasonableness test.
d. Prenumbering of receiving reports.

– Answer A

31. The authority to accept incoming goods in receiving should be based on a(n)

a. Vendor’s invoice c. Bill of lading

b. Materials requisitions d. Approved purchase order

- Answer D
32. Which of the following control procedures could best prevent direct labor from being
charged to manufacturing overhead?
a. Comparison of daily journal entries with factory labor summary.
b. Examination of routing tickets from finished goods on delivery.
c. Reconciliation of work in process inventory with cost records.
d. Recomputation of direct labor based on inspection of time cards.

- Answer A

33. For appropriate segregation of duties, journalizing and posting summary payroll
transactions should be assigned to

a. The treasurer’s department c. Payroll accounting

b. General accounting d. The timekeeping department

- Answer B

34. Low Tek, Inc. has changed from a conventional to a computerized payroll clock card
system. Factory employees now record time in and out with magnetic cards, and the
computer system automatically updates all payroll records. Because of this change,

a. The auditor must audit through the computer

b. Internal control has improved
c. Part of the audit trail has been lost
d. The potential for payroll related fraud has been diminished

- Answer C

35. To minimize the opportunities for fraud, unclaimed cash payroll should be

a. Deposited in a safe deposit box.

b. Held by the payroll custodian.
c. Deposited in a special bank account.
d. Held by the controller.

- Answer C

36. A common audit procedures in the audit of payroll transactions involves tracing
selected items from the payroll journal to employee time cards that have been approved
by supervisory personnel. This procedure is designed to provide evidence in support of
the audit proposition that

a. Only bona fide employees worked, and their pay was properly computed
b. Jobs on which employees worked were charged with the appropriate labor cost
c. Internal controls relating to payroll disbursements are operating effectively
d. All employees worked the number of hours for which their pay was computed

- Answer D

37. For internal control purposes, which of the following individuals should preferably be
responsible for the distribution of payroll checks?

a. Bookkeeper b. Payroll clerk c. Cashier d. Receptionist

-Answer D

38. The purpose of segregating the duties of hiring personnel and distributing payroll
checks is separate the

a. Human resources function from the controllership function

b. Administrative controls from the internal accounting controls
c. Authorization of transactions from the custody of related assets
d. Operational responsibility from the record keeping responsibility

- Answer C

39. Which of the following departments most likely would approve changes in pay rates
and deductions from employee salaries?

a. Personnel b. Treasurer c.C ontroller d. Payroll

- Answer A

40. Which of the following is not a common activity within personnel and payroll?

a. Initiating terminations.
b. Preparing and updating personnel records.
c. Preparing and recording payroll.
d. Distributing paychecks to employees

- Answer A
Line Item – Documentation

CPAR

1. It means the materials prepared by and for, or obtained and retained by the auditor in
connection with the performance of the audit.

a. Documentation c. Engagement letter

b. Audit evidence d. Audit report

- Answer A

2. Which of the following is not a purpose of working papers?

a. Assist in the planning and performance of the audit.
b. Assist in the supervision and review of the audit work.
c. Record the audit evidence resulting from the audit work performed to support the
auditor’s opinion.
d. Support the client’s financial statements.

- Answer D

3. Why does an auditor document audit evidence?

a. To comply with the requirements of gathering all available evidence.

b. To provide client reference for all account balances and correcting entries.
c. To support audit opinion and to provide evidence that the audit was carried out in
accordance with PSA.
d. To document all records of misstatements noted in the financial statements.

- Answer C

4. Working papers that record the procedures used by the auditor to gather evidence
should be

a. Considered the primary support for the financial statements being audited.
b. Viewed as the connecting link between the books of accounts and the financial
statements.
c. Designed to meet the circumstances of the particular engagement.
d. Destroyed when the audited entity ceases to be a client.

- Answer C

5. Which of the following conditions constitutes inappropriate working paper

preparation?

a. Flowcharts are included in the working papers.

b. Findings are cross-referenced to supporting documentation.
c. Tick marks are explained in working papers.
d. All forms and directives used by the auditee department are included in the working
papers.

- Answer D

6. An auditor’s working papers will ordinarily be least likely to include documentation

showing how the

a. Client’s schedules were prepared.

b. Engagement was planned.
c. Understanding of the client’s internal control was obtained and control risk was
assessed.
d. Unusual matters were resolved.

- Answer A

7. Which of the following is usually included or shown in the auditor’s working papers?

a. The procedures used by the auditor to verify the personal financial status of members
of the client’s management team
b. Analyses that are designed to be a part of, or a substitute for, the client’s accounting
records
c. Excerpts from authoritative pronouncements that support the underlying generally
accepted accounting principles used in preparing the financial statements
d. The manner in which exceptions and unusual matters disclosed by the auditor’s
procedures were resolved or treated

- Answer D

8. The form and content of working papers are affected by matters such as the:

I. Nature of the engagement.

II. Form of the auditor’s report.
III. Nature and complexity of the business.
IV. Nature and condition of the entity’s accounting and internal control systems.
V. Needs in the particular circumstances for direction, supervision and review of work
performed by assistants.
VI. Specific audit methodology and technology used in the course of the audit.

a. All of the above c. I, II and III only

b. All except V and VI d. All except VI

- Answer A

9. Which of the following is not generally included in the working papers file?

a. An indication as to who performed the audit procedures and when they were
performed.
b. Documentation of the auditor’s understanding of the accounting and internal control
systems.
c. Copy of the internal audit’s audit program.
d. Analyses of significant ratios and trends.

- Answer C

10. Although the quantity and content of audit working papers vary with each particular
engagement, an auditor’s permanent files most likely include

a. Schedules that support the current year’s adjusting entries.

b. Prior years’ accounts receivable confirmations that were classified as exceptions.
c. Documentation indicating that the audit work was adequately planned and
supervised.
d. Analyses of capital stock and other owners’ equity accounts.

- Answer D

11. Audit working papers are indexed by means of reference numbers. The primary
purpose of indexing is to

a. Permit cross-referencing and simplify supervisory review.

b. Support the audit report.
c. Eliminate the need for follow-up reviews.
d. Determine that working papers adequately support findings, conclusions, and reports.

- Answer A

12. The audit working paper that reflects the major components of an amount reported
in the financial statements is the
a. Interbank transfer schedule c. Supporting schedule
b. Carryforward schedule d. Lead schedule

- Answer D
13. An auditor ordinarily uses a working trial balance resembling the financial
statements without footnotes, but containing columns for

a. Cash flow increases and decreases c. Reclassifications and adjustments

b. Audit objectives and assertions d. Reconciliations and tickmarks

- Answer C

14. In the course of the audit of financial statements for the purpose of expressing an
opinion thereon, the auditor will normally prepare a schedule of unadjusted differences
for which he did not propose adjustment when they were uncovered. The primary
purpose served by this schedule is to

a. Point out to the responsible client officials the errors made by various company
personnel.
b. Summarize the adjustments that must be made before the company can prepare and
submit its income tax returns.
c. Identify the potential financial statement effects of errors or disputed items that were
considered immaterial when discovered.
d. Summarize the errors made by the company so that corrections can be made after
the audited financial statements are released.

- Answer C

15. Which of the following analyses appearing in a predecessor’s working papers is the
successor auditor least likely to be interested in reviewing?

a. Analysis of noncurrent balance sheet accounts.

b. Analysis of current balance sheet accounts.
c. Analysis of income statement accounts.
d. Analysis of contingencies.

- Answer C

16. In an internal audit, the audit supervisor determines that working papers are
complete

a. When satisfied that the audit objectives have been met and the working papers
support the conclusions.
b. When working papers refer to the steps outlined in the audit program.
c. Only after the auditor who prepared the working papers has signed and dated them.
d. When proper cross-references to other working papers are noted.

- Answer A

17. Standardized working papers are often used, chiefly because they allow working
papers to be prepared more

a. Efficiently b. Professionally c. Neatly d. Accurately

- Answer A

18. Ordinarily, the audit may use schedules, analyses and other documentation
prepared by entity personnel in order to:

a. Lessen auditor’s responsibility.

b. Eliminate the need to apply any audit procedures on verifying their correctness.
c. Emphasize that the responsibility on financial statements rests with the client
management.
d. Improve audit efficiency.

- Answer D

19. Working papers which contain information relating primarily to the audit of a single
period.

a. Current audit files c. Financial reporting files

b. Permanent audit files d. Correspondence files

- Answer A

20. Which of the following is the least required of the audit working papers?

a. Substitute for the entity’s accounting records.

b. Confidentiality of information included in the working papers.
c. Safe custody of the working papers.
d. Retention for a period sufficient to meet the needs of the practice.

- Answer A

PRTC

21. Statement 1: The auditor should prepare working papers which are sufficiently
complete and detailed to provide an overall understanding of the audit.
Statement 2: The auditor should record in the working papers information on planning
the audit work, the nature, timing and extent of the audit procedures performed, the
results thereof, and the conclusions drawn from the audit evidence obtained.

a. Only statement one is correct c. Both statements are correct

b. Only statement two is correct d. Both statements are incorrect

22. Audit working papers are used to record the results of the auditor’s evidence
gathering work. When preparing working papers, the auditor should remember that

a. Working papers should be designed to meet the circumstances and the auditor’s
need for each engagement.
b. Working papers should be kept on the client’s premises so as to provide ready
access to them by the client.
c. Working papers should be at the primary support for the financial statements being
examined.
d. Working papers should be considered as a substitute for the client’s accounting
records.

23. The primary purpose of audit working papers is to

a. Provide evidence of compliance with auditing standards.

b. Provide management with an independent copy of financial records.
c. Provide protection against litigation.
d. Document deficiencies in client policies and procedures.

24.Which of the following statements is incorrect?

a. Documentation prepared at the time the work is performed is likely to be more

accurate than documentation prepared subsequently.
b. The auditor ordinarily includes from audit documentation superseded drafts of
working papers and financial statements, notes that reflect incomplete or preliminary
thinking, previous copies of documents corrected for typographical or other errors, and
duplicates of documents.
c. It is neither necessary nor practicable to document every matter the auditor considers
during the audit.
d. Oral explanations by the auditor, on their own, do not represent adequate support for
the work the auditor performed or conclusions the auditor reached, but may be used to
explain or clarify information contained in the audit documentation.

25.. Audit working papers should not

a. Include any client-prepared papers or documents other than those prepared by the
CPA or his assistant.
b. Be kept by the CPA after review and completion of the audit except for items required
for the income tax return or the permanent file.
c. Be submitted to the client to support the financial statements and to provide evidence
of the audit work performed.
d. Be themselves be expected to provide sufficient support for the auditor’s opinion.

26.. Which of the following is not a factor affecting the independent auditor’s judgment
about the quantity, type and content of audit working papers?

a. The needs for supervision and review of the work performed by assistants.
b. The nature and condition of the client’s records and internal control.
c. The expertise of client personnel and their participation in preparing schedules.
d. The type of financial statements, schedules, or other information on which the auditor
is reporting.

27. Although the quantity, type and content of working paper will vary with the
circumstances, the working papers generally include the

a. Copies of those client records examined by the auditor during the course of the
engagement.
b. Evaluation of the efficiency and competence of the audit staff assistants by the
partner responsible for the audit.
c. Auditor’s comments concerning the efficiency and competence of client management
personnel.
d. Auditing procedures followed, and the testing performed in obtaining evidential
matter.

28. Which of the following is generally included or shown in the auditor’s working
papers?

a. The procedures used by the auditor to verify the personal financial status of members
of the client’s management’s team.
b. Analysis that are designed to be a part of, or a substitute for, the client’s accounting
records.
c. Excerpts from authoritative pronouncements that supports the underlying generally
accepted accounting principles used in preparing the financial statements.
d. The manner in which exceptions and unusual matters disclosed by the auditor’s
procedures were resolved or treated.

29.An auditor’s working papers should

a. Not be permitted to serve as a reference source for the client.

b. Not contain comments critical of management.
c. Show that the accounting records agree or reconcile with the financial statements.
d. Be considered the primary support for the financial statements being audited.

30. Using laptop computers in auditing may affect the methods used to review the work
of staff assistants because
a. Supervisory personnel may not have an understanding of the capabilities and
limitations of computers.
b. Working paper documentation may not contain readily observable details of
calculations.
c. The audit fieldwork standards for supervision may differ.
d. Documenting the supervisory review may require assistance of management services
personnel.

31. Documentation is a form of evidence

a. Used in every financial statement audit
b. Used in most financial statement audit
c. Used on the rare occasions when it is both readily available and less costly than other
procedures
d. Used when nothing is available that is more competent

32. An audit working paper that shows the detailed evidence and procedures regarding
the balance in the accumulated depreciation account in the year under audit will be
found in the

a. Current file of working papers

b. Permanent file of working papers
c. Other information working papers in the current file
d. Planning memorandum in the current file

33. In the case of recurring audits, some working papers files may be classified as audit
files which are updated with new information of continuing importance. This type of audit
file is known as:

a. Current audit file c. Electronic audit file

b. Permanent audit file d. Planning memorandum file

34. The audit working paper that reflects the major components of an amount reported
in the FS is the

a. Inter-bank transfer schedule c. Supporting schedule

b. Carry-forward schedule d. Lead schedule

35 A schedule listing account balances for the current and previous years, and columns
for adjusting and reclassifying entries proposed by the auditors to arrive at the final
amount that will appear in the financial statements, is referred to as a

a. Working trial balance c. Summarizing schedule

b. Lead schedule d. Supporting schedule
36 What do you call the type of working paper where matters of importance are noted
down for further verification?

a. Summary sheet b. Audit program c. Agenda sheet d. Supporting schedules

37. The current file of the auditor’s working papers generally should include

a. A flowchart of the internal controls c. A copy of the financial statements

b. Organization charts d. Copies of bond and note indentures

38. The permanent file portion of the auditor’s working papers generally should include
a. A copy of the engagement letter.
b. A copy of key customer confirmation.
c. Names and addresses of audit staff personnel on the engagements.
d. Time and expense reports.

39The permanent (continuing) file of an auditor’s working paper most likely would
include copies of the

a. Lead schedules b. Attorney’s letter c. Bank statements d. Debt agreements

40. The current file of an auditor’s working paper most likely would include copy of the

a. Bank reconciliation c. Articles of incorporation

b. Pension plan contract d. Flowchart of the internal control activities