Auditing A Risk Based Approach To Conducting A Quality Audit 10Th Edition by Johnstone - Test Bank

Auditing A Risk Based Approach To Conducting
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Auditing A Risk Based Approach to Conducting a
Quality Audit 10Th Edition By Johnstone – Test Bank
SAMPLE TEST
Chapter_3_Internal_Control_Over_Financial_Reporting_Responsibilities_of_Management_and_th
e_External_Auditors
1. Internal control is a process designed to guarantee the achievement of the objectives of reliable
financial reporting, compliance with laws and regulations and ineffective and inefficient operations.
a. True
b. False
ANSWER: False
POINTS: 1
NATIONAL STANDARDS: United States – BUSPORG: Analytic
STATE STANDARDS: United States – AK – AICPA BB-Critical thinking
TOPICS: COSO: A Framework for Internal Control
2. Internal control is a process, effected by an entity’s board of directors, management, and other
personnel, designed to provide reasonable assurance regarding the achievement of objectives
relating to operations, reporting, and compliance.
a. True
b. False
ANSWER: True
POINTS: 1
3. The quality of an organization’s internal control will affect both the audit approach and the
amount of testing needed for an engagement.
a. True
b. False
ANSWER: True
POINTS: 1
4. Control activities are the component of internal control that includes control actions that have
been established by policies and procedures
a. True
b. False
ANSWER: True
POINTS: 1
5. Control activities implemented to mitigate transaction processing risk that typically affect only
certain processes, transactions, accounts, and assertions are referred as transaction or
application controls.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: IT Controls Integrated into Internal Control Evaluations
6. An organization’s commitment to integrity is demonstrated through the tone set by the board
and management.
a. True
b. False
ANSWER: True
POINTS: 1
LEARNING OBJECTIVES: AUDT.JOHN.16.03-03 – LO: 03-03
TOPICS: Components and Principles of Internal Control
7. Effective control not only identifies risk but also responds to these risks appropriately.
a. True
b. False
ANSWER: True
POINTS: 1
8. Controls to monitor results of operations are considered to be transaction controls.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Defining Internal Control
9. Preventive controls are designed to prevent the occurrence of a misstatement.

a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Describe the Control Activities Component of Internal Control
10. Generally, highly regulated entities have more complex control activities than less-regulated
entities.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: COSO Component- Control Activities
11. The better the quality of the internal controls, the more an auditor can rely on the controls.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Importance of Internal Control to Financial Statement Audits
12. The five major components of an organization’s internal control are: the control environment,
risk assessment, control activities, information and communication, and monitoring.
a. True
b. False
ANSWER: True
POINTS: 1
13. A company’s internal auditing function should not be considered when assessing the
effectiveness of internal controls.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Control Environment
14. An organization’s control environment is established and maintained by the internal auditing
department.
a. True
b. False
ANSWER: False
POINTS: 1
15. A material weakness in internal control is a deficiency, or a combination of deficiencies, in

internal control over financial reporting such that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Examples of Common Internal Control Activities
16. Physical controls are necessary to protect and safeguard assets from accidental or intentional
destruction and theft.
a. True
b. False
ANSWER: True
POINTS: 1
17. Monitoring of the internal controls involves assessment by appropriate personnel of the design
and operation of controls on a timely basis and taking necessary actions.
a. True
b. False
ANSWER: True
POINTS: 1
18. An auditor needs to understand a company’s internal controls in order to anticipate the types
of material misstatements that may occur.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Importance of Internal Control Over Financial Reporting
19. Segregation of duties is a control activity that is designed to protect against the risk that an
individual could both perpetrate and cover up a fraud.
a. True
b. False
ANSWER: True
POINTS: 1
20. In addition to controls being specific, they may be broad, such as policies regarding a code of
ethics.
a. True
b. False
ANSWER: True
POINTS: 1
21. Physical controls to safeguard assets are not intended to include simple controls such as
fences and locks.
a. True
b. False
ANSWER: False
POINTS: 1
22. Self-checking digit algorithms have been developed to test for transposition errors associated
with identification numbers
a. True
b. False
ANSWER: True
POINTS: 1
23. Preventive controls are generally more cost-efficient than detective controls.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: COSO Component: Control Activities
24. A walkthrough involves following a transaction back from when it is reflected in the financial
records to when it originated to determine if the controls are effectively designed and have been
implemented.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Auditor Evaluation of Internal Controls
25. Performing a walkthrough provides an understanding of the nature of processing in important

accounting applications.
a. True
b. False
ANSWER: True
POINTS: 1
26. The payroll department should be responsible for signing payroll checks.
a. True
b. False
ANSWER: False
POINTS: 1
27. A strong control environment can reduce all the financial reporting risks to zero.
a. True
b. False
ANSWER: False
POINTS: 1
28. Management’s risk assessment process should be performed only by senior-level

management.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: COSO Component: Risk Assessment
29. Corporate policies designed to attract, train, and evaluate competent employees are
considered to be control activities in the COSO framework for internal controls.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: COSO Component- Control Environment
30. Management is obligated to report significant deficiencies in the control structure in their
annual report on internal control effectiveness required by the Sarbanes-Oxley Act.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Management’s Responsibilities Related to Internal Control over Financial Reporting
31. One of the advantages of a computerized accounting system is that the computerized system
eliminates the need for internal controls.
a. True
b. False
ANSWER: False
POINTS: 1
32. A transaction trail includes the documents and records that allow an auditor to trace a
transaction from its origination through to its final disposition, or vice versa.
a. True
b. False
ANSWER: True
POINTS: 1
33. Several significant deficiencies in internal controls may constitute a material weakness.
a. True
b. False
ANSWER: True
POINTS: 1
34. Management should test all internal controls for effectiveness when performing their annual
evaluation of the internal control structure.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Management’s Responsibilities Related to Internal Control Over Financial Reporting
35. Managers must use professional judgment to determine whether identified control deficiencies
rise to the level of a significant deficiency or material weakness.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Management Reports on Internal Control over Financial Reporting
36. Walkthroughs and inquiries are often used to obtain an understanding of internal controls.
a. True
b. False
ANSWER: True
POINTS: 1
37. A deficiency in design of internal controls exists when an existing control is not properly
designed so that, even if the control operates as designed, the control objective would not be met.
a. True
b. False
ANSWER: True
POINTS: 1
38. Segregation of duties is considered a part of the monitoring component of the COSO
framework for internal control structure.
a. True
b. False
ANSWER: False
POINTS: 1
39. A well-controlled organization has an appropriate structure and clearly defined lines of
responsibility and authority where everyone in the organization has equal responsibility for the
effective operation of internal control.
a. True
b. False
ANSWER: False
POINTS: 1
40. Transaction oriented controls are designed to ensure that transactions are properly valued.
a. True
b. False
ANSWER: True
POINTS: 1
41. All organizations should evaluates and communicates internal control deficiencies in a timely
manner to those parties responsible for taking corrective action, including senior management and
the board of directors, as appropriate.
a. True
b. False
ANSWER: True
POINTS: 1
42. Preventive controls are designed to provide reasonable assurance that the correct program is
used for processing, all transactions are processed, and the transactions update appropriate files.
a. True
b. False
ANSWER: False
POINTS: 1
43. One of the components of internal control, monitoring, refers to the process of identifying,
capturing, and exchanging information in a timely fashion to enable accomplishment of the
organization’s objectives.
a. True
b. False
ANSWER: False
POINTS: 1
44. A material control weakness is a deficiency in internal control such that a reasonable
probability exists that a material misstatement of the company’s financial statements may not be
prevented or detected on a timely basis..
a. True
b. False
ANSWER: False
POINTS: 1
45. Control activities may be implemented at the organizational level and at the transactional level.
a. True
b. False
ANSWER: True
POINTS: 1
46. The quality of an organization’s internal controls affect which of the following?
a. The reliability of financial data.
b. The ability of management to make good decisions.
c. The ability to remain in business.
d. All of the above.
ANSWER: d
POINTS: 1
47. Internal control is a process designed to achieve objectives in which one of the following
categories?
a. Reliability of financial reporting.
b. Compliance with applicable laws.
c. Operational Effectiveness.
ANSWER: d
POINTS: 1
48. Which of the following is not a reason that the auditor must gain an understanding of the
client’s internal control system?
a. Better understand the client, its risks, and how it manages those risks.
b. Assess control risk and identify the types of financial statement misstatements that are most likely to occur.
c. Plan direct tests of account balances to determine if misstatements have occurred.
d. All are reasons why auditors must gain an understanding of the client’s internal control system.
ANSWER: d
POINTS: 1
49. Which one of the following groups is interested in an organization’s control structure?
a. Board members.
b. Lenders.
c. Auditors.
ANSWER: d
POINTS: 1
50. With whom does the tone of internal control typically originate?
a. Auditors.
b. Employees.
c. Management.
d. Stockholders.
ANSWER: c
POINTS: 1
51. Which of the following is not included as a components of an organization’s internal control
structure in the COSO framework?
a. Control risk.
b. The control environment.
c. Risk assessment.
d. Control activities.
ANSWER: a
POINTS: 1
52. What is the primary benefit of effective internal control in an organization?

a. Achievement of certain organizational goals.
b. Completion of a successful audit for the entity.
c. Shareholder involvement in the company’s success.
d. Obtaining profitability and financial strength.
ANSWER: a
POINTS: 1
53. Which one of the following COSO components of internal controls influences the tone for the
organization?
a. Control risk assessment.
b. Control environment.
c. Information and communication.
d. Monitoring.
ANSWER: b
POINTS: 1
54. Which of the following is not part of the control environment?

a. Management philosophy and operating style.
b. Methods of assigning authority and responsibility.
c. Personnel policies and practices.
d. Control activities.
ANSWER: d
POINTS: 1
55. Which of the following is not one of the underlying principles of an effective control
environment as developed by COSO?
a. The organization demonstrates a commitment to integrity and ethical values.
b. The board of directors demonstrates independence from management and exercises oversight for the development and performance of
internal control.
c. Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in pursuit of
objectives.
d. The organization considers the potential for fraud in assessing risks to the achievement of objectives.
ANSWER: d
POINTS: 1
56. Which of the following is a major component of an organization’s internal control structure?
a. Major new financing.
b. The financial environment.
c. Risk assessment.
d. Telecommunication equipment.
ANSWER: c
POINTS: 1
57. Which COSO component of internal control concerns the process of identifying, capturing, and
exchanging information in a timely fashion to enable accomplishment of the organization’s
objectives?
a. Control activities.
b. Information and communication.
c. Monitoring.
d. Control environment.
ANSWER: b
POINTS: 1
58. Which of the following services does the PCAOB require auditors of public companies to
perform?
a. A financial statement audit and an attest audit.
b. A financial statement audit and an assurance audit.
c. A financial statement audit and agreed upon procedures.
d. A financial statement audit and an examination of the effectiveness of internal controls.
ANSWER: d
POINTS: 1
59. The information and communication component of internal control includes which of the
following?
a. The organization deploys control activities through policies that establish what is expected and in procedures that put policies into
action.
b. The organization obtains or generates and uses relevant, quality information to support the functioning of other components of internal
control.
c. The organization identifies and assesses changes that could significantly impact the system of internal control.
ANSWER: b
POINTS: 1
60. Which of the following best describes the purpose of personnel policies and procedures?
a. Ensure the organization hires the right people.
b. Ensure the organization complies with federal and state laws in its hiring and retention decisions.
c. Ensure the organization has employees that are properly trained and supervised.
d. Ensure the organization performs all of the above.
ANSWER: d
POINTS: 1
61. Which of the following is not part of management’s report on internal controls?
a. Management responsibility for control of financial reporting.
b. The framework used to evaluate internal control.
c. An assessment of the effectiveness of the company’s internal control.
d. A statement indicating the extent of tests performed to assess controls.
ANSWER: d
POINTS: 1
62. Which one of the following represents a control deficiency?

a. A missing control that is required for achievement of objectives.
b. A control that operates as designed.
c. A control that ensures the reliability of financial reporting.
d. A control that does not prevent immaterial errors.
ANSWER: a
POINTS: 1
63. Internal controls may be preventive or detective.Which of the following controls is preventive?
a. Requiring two persons to open mail containing payments.
b. Reconciling the accounts receivable subsidiary file with the control account.
c. Using batch totals.
d. Preparing bank reconciliations.
ANSWER: a
POINTS: 1
64. Which of the following is an inherent limitation of internal controls?

a. Lack of auditor independence.
b. Collusion.
c. Separation of duties.
d. Employee peer review.
ANSWER: b
POINTS: 1
65. In an Integrated Audit, what is the independent external auditor primary concerned with?
a. Detecting all errors.
b. Determining the effectiveness of operations.
c. Determining whether the internal controls are effective.
d. Determining whether the controls promote efficiency.
ANSWER: c
POINTS: 1
TOPICS: Importance of Internal Control Over Financial Reporting
66. The COSO principle that an organization should identify and assess changes that significantly
impact the system of internal control is related to which COSO component?
a. Control Environment
b. Risk Assessment
c. Control Activities
d. Monitoring
ANSWER: b
POINTS: 1
TOPICS: Components and Principles of Internal Control
67. Which of the following is considered to be an entity-wide control?

a. Segregation of duties.
b. Controls over management override.
c. Authorization procedures for purchasing.
d. Adequately documented transaction trails.
ANSWER: b
POINTS: 1
68. Which of the following is considered to be a transaction control?

a. Controls to monitor other controls.
b. Policies that address significant business control practices.
c. Centralized processing controls.
d. Physical controls to safeguard assets.
ANSWER: d
POINTS: 1
69. Requiring the mail clerk to prepare a listing of all checks received, with copies of the list going
to the cashier and to accounting, is an example of which type of control?
a. Preventive.
b. Corrective.
c. Detective.
d. Directive.
ANSWER: a
POINTS: 1
70. Which of the following best represents a walkthrough?

a. The controller reviews the bank reconciliation prepared by the accountant and its resulting journal entries.
b. The auditor walks the production line to find inefficiencies in the inventory process and reports them to management.
c. The controller takes a sample of recorded write-offs to ensure they have been properly approved.
d. The auditor traces three purchasing transactions from the purchase order to the financial statement for observation and understanding.
ANSWER: d
POINTS: 1
71. Which one of the following is an example of an internal risk for an organization?
a. Changes in internal information technology.
b. Increases in substitute services or products.
c. Changes in the reliability of source goods.
d. Changes in regulation that make the business model unsustainable.
ANSWER: a
POINTS: 1
TOPICS: COSO Component: Risk Assessment
72. Which of the following is another name for transaction controls?:

a. Entity-wide controls.
b. Application controls.
c. Supporting controls.
d. Detail controls.
ANSWER: b
POINTS: 1
73. Which of the following is an example of a physical control to safeguard assets?

a. Hiring only trustworthy cashiers.
b. Separation of duties.
c. Locks on the warehouse doors.
d. Safety audits on the production-line.
ANSWER: c
POINTS: 1
74. A control designed to ensure that no employee is paid for more than 80 hours of sick pay is an
example of which type of control?
a. Entity-wide control.
b. Processing control.
c. Output control.
d. Input control.
ANSWER: d
POINTS: 1
75. Which one of the following is not a control activity implemented in most accounting systems?
a. Segregation of duties.
b. Competent, trustworthy employees.
c. Authorization procedures.
d. All of these activities are normally implemented.
ANSWER: d
POINTS: 1
76. An edit test is considered to be which type of control?
a. An input control.
b. A processing control.
c. An output control
d. A supporting control.
ANSWER: a
POINTS: 1
77. Which of the following is not a way management obtains evidence regarding the effectiveness
of internal control over the accounting system?
a. Performing a walkthrough of the accounting system.
b. Making inquiries of banks and attorneys.
c. Reviewing system flowcharts.
d. Taking plant and operational tours.
ANSWER: b
POINTS: 1
78. A control designed to ensure that sales transactions are generated using the company’s most
current prices would be considered to be which type of control?
b. A processing control.
c. An output control.
d. A physical control.
ANSWER: b
POINTS: 1
79. Internal control is a process affected by the organization’s board of directors, management,
and other personnel to provide reasonable assurance of achieving certain objectives. Which of the
following does not fit into one of these categories of objectives?
a. Reliability of financial reporting.
b. Compliance with laws and regulations.
c. Continuing existence.
d. Effectiveness and efficiency of operations.
ANSWER: c
POINTS: 1
80. A control designed to ensure that the number of sales transactions recorded in the accounting
records matches the number of sales invoices entered during processing is known as which type
of control?
a. Input control.
b. Processing control.
c. Output control.
d. Edit control.
ANSWER: c
POINTS: 1
81. Requiring two signatures on any check in excess of $10,000 is an example of which type of
control?
a. Input control.
b. Preventive control.
c. Detective control.
d. Processing control.
ANSWER: b
POINTS: 1
82. Which of the following is an example of a control environment deficiency??

a. A low level of control consciousness within the organization.
b. An audit committee that does not have independent members.
c. An audit committee that is not viewed as the client of the external auditor.
ANSWER: c
POINTS: 1
83. A bank reconciliation is an example of which type of control?

b. An output control.
c. A preventive control.
d. A detective control.
ANSWER: d
POINTS: 1
84. Security management practices which limit access to technologies is a function included in
which COSO component of internal control structure?
a. Control Environment.
b. Risk Assessment.
c. Control Activities.
d. Monitoring.
ANSWER: c
POINTS: 1
85. In a large company, who usually monitors the internal control?

a. Internal auditors.
b. PCAOB.
c. CFO.
d. External auditors.
ANSWER: a
POINTS: 1
86. Which of the following is not true of internal control as defined by COSO?
a. It is narrower than internal control over financial reporting.
b. It is a process that includes all elements of internal control working together.
c. It includes all the people in the organization.
d. It starts at the top of the organization in setting a tone.
ANSWER: a
POINTS: 1
87. Which of the following is not true of the concepts that are embodied in the COSO framework of
internal controls?
a. Internal controls relate to the organization’s objectives.
b. The six components of internal control are logically and operationally intertwined.
c. Internal controls apply across all activities of the organization.
d. All of the above are true.
ANSWER: b
POINTS: 1
88. Which of the following is not a major component of an organization’s internal controls?
a. Risk assessment.
b. Control environment.
c. Control activities.
d. Control risk.
ANSWER: d
POINTS: 1
89. Which of the following is not part of the control environment of an organization?
a. Management’s philosophy and operating style.
b. Organizational structure.
c. Human resources.
d. Both A and B.
e. All of the above are part of the control environment.
ANSWER: e
POINTS: 1
90. Which of the following is an example of a detective control in an information system?

a. Automated reports to management that specifically identify delinquent receivables.
b. A requirement that salaried employees submit written requests to work overtime.
c. Assurance from top management that computer centers are kept locked.
d. The employment of trustworthy people to enter data into the information system.
ANSWER: a
POINTS: 1
91. Which statement is true concerning the documentation of internal control?

a. Documentation should be sufficient to support the design and operating effectiveness of internal controls.
b. Documentation requirements are standardized by the PCAOB.
c. Documentation of disbursements require paper and electronic documentation.
d. Documentation of all transaction controls should be tested on an annual basis.
ANSWER: a
POINTS: 1
92. Which component of COSO’s internal control system concerns the process that provides
feedback on the effectiveness of the other four components of internal control?
a. Information and communication.
b. Monitoring.
c. Control activities.
d. Risk assessment.
ANSWER: b
POINTS: 1
93. Which of the following is the most severe?

a. Material weaknesses in internal control.
b. Significant deficiencies in internal control.
c. Operational deficiencies in internal control.
d. Each is equally severe because it could result in inaccuracies in financial reporting.
ANSWER: a
POINTS: 1
TOPICS: Documenting the Auditor’s Understanding and Assessment of an Organization?s Internal Controls
94. Internal control
Define the term “internal control” and identify the major components of an internal control system.
ANSWER: Internal control is a process, effected by an entity’s board of directors, management, and other personnel,
designed to provide reasonable assurance regarding the achievement of objectives relating to operations,
reporting, and compliance.
The major components of internal control are:
1. control environment;
2. risk assessment;
3. control activities;
4. information and communication; and
5. monitoring.
POINTS: 1
United States – BUSPROG: Communication
95. Control environment

One of the elements of an organization’s control system is the “control environment.” Identify at
least four factors that the auditor should consider when reviewing the control environment and
discuss how the auditor would relate this review to the assessment of control risk.
ANSWER: The factors that an auditor should consider when reviewing the control environment would include:
• management’s philosophy and operating style.
• the entity’s organization structure.
• the functioning of the board of directors and its committees.
• methods of assigning authority and responsibility.
• management’s control methods for monitoring and following up on performance, including internal
auditing.
• personnel policies and practices.
• external influences such as bank regulatory agencies.
The auditor would examine his or her findings relating to each of the listed factors in determining whether
control risk was high, medium or low. For example, if the philosophy of management placed little priority on
internal controls the auditor would be concerned about control risk.
POINTS: 1
96. Internal control components and principles

For each of the five components of internal control, list at least two related principles of internal
control.
n gathering the information and briefly describe each one.
ANSWER: Internal Control Components and Principles
COMPONENTS PRINCIPLES
CONTROL ENVIRONMENT 1. The organization demonstrates a commitment to integrity and
ethical values.
2. The board of directors demonstrates independence of
management and exercises oversight for the development and
performance of internal control.
3. Management establishes, with board oversight, structures,
reporting lines, and appropriate authorities and responsibilities in
the pursuit of objectives.
4. The organization demonstrates a commitment to attract, develop,
and retain competent individuals in alignment with objectives.
5. The organization holds individuals accountable for their internal
control responsibilities in the pursuit of objectives.
RISK ASSESSMENT 6. The organization specifies objectives with sufficient clarity to
enable the identification and assessment of risks relating to
objectives.
7. The organization identifies risks to the achievement of its
objectives across the entity and analyzes risks as a basis for
determining how the risks should be managed.
8. The organization considers the potential for fraud in assessing
risks to the achievement of objectives.
9. The organization identifies and assesses changes that could
significantly impact the system of internal control.
CONTROL ACTIVITIES 10. The organization selects and develops control activities that
contribute to the mitigation of risks to the achievement of objectives
to acceptable levels.
11. The organization selects and develops general control activities
over technology to support the achievement of objectives.
12. The organization deploys control activities as manifested in
policies that establish what is expected and in relevant procedures
to effect the policies.
INFORMATION AND 13. The organization obtains or generates and uses relevant, quality
COMMUNICATION information to support the functioning of other components of
internal control.
14. The organization internally communicates information,
including objectives and responsibilities for internal control,
necessary to support the functioning of other components of internal
control.
15. The organization communicates with external parties regarding
matters affecting the functioning of other components of internal
control.
MONITORING 16. The organization selects, develops, and performs ongoing
and/or separate evaluations to ascertain whether the components of
internal control are present and functioning.
17. The organization evaluates and communicates internal control
deficiencies in a timely manner to those parties responsible for
taking corrective action, including senior management and the
board of directors, as appropriate.
POINTS: 1
97. Internal Control Principles

Identify and briefly describe the two principles that should govern the monitoring function.
ANSWER: 1. The organization selects, develops, and performs ongoing and/or separate evaluations to ascertain whether the
components of internal control are present and functioning.
Ongoing evaluation are procedures built into the normal recurring activities of an entity.Separate evaluations
are conducted periodically, typically by objective management personnel, internal auditors, or external
consultants.
2. The organization evaluates and communicates internal control deficiencies in a timely manner to those parties
responsible for taking corrective action, including senior management and the board of directors, as appropriate.
Control deficiencies identified through monitoring or other activities need to be communicated to appropriate
personnel such as management or the board of directors so that appropriate corrective action can be taken.
POINTS: 1
98. Integrated audit
Explain the application of an integrated audit as it relates to regulation. Discuss the reasons that
this integrated approach may occur.
ANSWER: The Sarbanes-Oxley Act of 2002 requires reporting by management of publicly-held companies on the
effectiveness of internal control over financial reporting. The Public Company Accounting Oversight Board
(PCAOB) requires the external auditor to perform an integrated audit of the effectiveness of internal controls
and financial reporting. In other words, the same auditor must attest to both the financial statements and
management’s assertions regarding the effectiveness of internal controls over financial reporting.
Because of the above mentioned regulatory requirements, auditors will perform an audit on both financial
statements and internal controls for all public clients.
POINTS: 1
99. Internal Control Principles
One of the COSO principles of internal control requires organizations to demonstrate a

commitment to attract, develop, and retain competent individuals in alignment with objectives.
Discuss how this can be done.
ANSWER: Commitment to competence includes management ’s consideration of the competence levels for particular jobs
and how those levels translate into requisite skills and knowledge. This commitment is demonstrated through
policies and procedures to attract, train, mentor, evaluate, and retain employees
POINTS: 1
TOPICS: Risk Assessment and Audit Tests
100. COSO: A Framework for Internal Control

What is internal control as defined by COSO? Also explain, the other elements of the definition
that are important to internal control
ANSWER: COSO defines internal control as a process, effected by an entity’s board of directors, management, and other
personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following
categories:
(1) reliability of financial reporting,
(2) compliance with applicable laws and regulations, and
(3) effectiveness and efficiency of operations.
Other elements of the definition that are important:
* Is a process designed to accomplish the organization’s objectives.
* Starts at the top of the organization with the board of directors and management creating and reinforcing a
structure and a tone for controls in the organization.
* Directly or indirectly includes all people in the organization, ranging from the shipping clerk to the internal
auditor to the chief financial officer.
* Is broader than internal control over financial reporting.
POINTS: 1
101. Pervasive control activities

Discuss what pervasive control activities are and provide an example of at least three.
ANSWER: Pervasive control activities are those controls activities whose implementation affects almost all accounting
systems.
Some examples of pervasive control activities include:
*segregation of duties
*authorization procedures
*documented transaction trail
*physical controls to safeguard assets
*reconciliation of control accounts with subsidiary ledgers, of transactions recorded
with transactions submitted for processing, and of physical counts of assets with
recorded assets
*competent, trustworthy employees
POINTS: 1
102. Management Evaluation of Internal Controls

What are the steps in management’s evaluation of internal control over financial reporting?
ANSWER: Integrated audit process includes the following steps:
1. Identify financial reporting risks.
2. Identify control that mitigate financial reporting risk
3. Assess design effectiveness
4. Select and perform testing procedures to evaluate operating effectiveness
5. Document operating effectiveness
6. Evaluate control deficiencies
7. Provide pubic disclosure of management report
POINTS: 1
103. IT Controls Integrated into Internal Control Evaluations
Explain input controls.

ANSWER: The control procedures designed to assure that the organization fully captures all the transactions between itself
and another entity, and to properly record those transactions, are referred to as input controls.
Input controls are designed to ensure that authorized transactions are correct, complete, and recorded in a timely
fashion and that only authorized transactions exist. They include:
* Input validation tests
* Self-checking digits
POINTS: 1
104. Relationship of the five internal control components

The five components of the COSO internal control system are conceptually and logically
integrated. List the five components of the model and describe how they are integrated with each
other in the internal control process.
Use the following format:
Components Description
1
2
3
4
5
ANSWER: 1. Control environment

The component of internal control that includes the set of standards, processes, and structures that provides the
basis for carrying out internal control across the organization.
2. Risk assessment
The component of internal control that is the process for identifying and assessing the risks that may affect an
organization from achieving its objectives.
3. Control activities
The component of internal control that includes control actions that have been established by policies and
procedures.
4. Information and communication
The component of internal control that refers to the process of identifying, capturing, and exchanging
information in a timely fashion to enable accomplishment of the organization’s objectives.
5. Monitoring
The component of internal control that determines whether the controls, including all five components, are
present and continuing to function effectively.
POINTS: 1
Chapter_5_Professional_Auditing_Standards_and_the_Audit_Opinion_Formulation_Process
1. The auditing standards issued by the PCAOB are identical to the auditing standards issued by
the AICPA.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Generally Accepted Auditing Standards and IAASB Principles
2. The standards of the PCAOB consist of seven principles.

a. True
b. False
ANSWER: False
POINTS: 1
3. The PCAOB’s general standards provide guidance to audit firms in selecting and training their
professionals.
a. True
b. False
ANSWER: True
POINTS: 1
4. The PCAOB’s second fieldwork standard requires auditors develop an understanding of the
client’s controls as an important prerequisite to developing specific audit tests.
a. True
b. False
ANSWER: True
POINTS: 1
5. The AICPA’s fundamental principles can be divided into four sections: purpose of the audit,
responsibility of the auditor, performance of the audit, and reporting of the results.
a. True
b. False
ANSWER: True
POINTS: 1
6. Auditors are responsible for having the appropriate competence and capabilities to perform the
audit, should comply with ethical requirements, and maintain professional skepticism throughout
the audit.
a. True
b. False
ANSWER: True
POINTS: 1
7. An audit must be performed by persons who can make sound judgments relating to complex
accounting issues.
a. True
b. False
ANSWER: True
POINTS: 1
8. The auditor needs to obtain absolute assurance as to whether the financial statements are free
from material misstatement.
a. True
b. False
ANSWER: False
POINTS: 1
9. The Clarity Project is an initiative of the PCAOB to clarify the links between the standards of the
PCAOB and the AICPA.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Professional Audit Standards
10. The ten standards of auditing, adopted by the PCAOB encompass three broad categories
including: general standards, fieldwork standards and reporting standards.
a. True
b. False
ANSWER: True
POINTS: 1
11. The common purpose of audit standards created by the various authorities is to provide
reasonable assurance that audits are conducted in a quality manner.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Professional Audit Standards
12. The AICPA principles governing an audit explicitly state that an audit has inherent limitations
prohibiting an auditor from obtaining reasonable assurance that the statements are free from
misstatement.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Professional Auditing Standards
13. If controls are effective, there is a higher likelihood that the financial statements are free of
material misstatement.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Overview of the Phases of the Audit Opinion Formulation Process
14. The reporting standards of the ten generally accepted audit standards of the PCAOB includes
consistency, disclosure, and due professional care.
a. True
b. False
ANSWER: False
POINTS: 1
15. Within each cycle, the audit is designed around the specific audit procedures required by the
PCAOB general standards.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Financial Statement Assertions
16. Comparability is one of the five management assertions.

a. True
b. False
ANSWER: False
POINTS: 1
17. The PCAOB requires the audit be conducted with due professional care, which is a standard of
care that would be expected of a reasonably prudent auditor.
a. True
b. False
ANSWER: True
POINTS: 1
18. An auditor should give equal emphasis to all management assertions when testing accounts.
a. True
b. False
ANSWER: False
POINTS: 1
19. The nature of an audit procedure indicates when the procedure is performed during the audit.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Audit Evidence and Procedures
20. An auditor typically indicates in the engagement letter that the audit will result in an unqualified
report on the financial statements.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Phase I Making Client Acceptance and Continuation Decisions
21. Evidence is required to be sufficient and appropriate in order to provide a reasonable basis for
audit conclusions.
a. True
b. False
ANSWER: True
POINTS: 1
22. U.S. auditing standards recommend that a successor auditor on an initial audit obtain client
permission to communicate with the predecessor auditor.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Phase I Making Client Acceptance and Continuation Decisions
23. Developing an understanding of the client’s business and industry is essential to proficiency as
discussed in the PCAOB’s general standards.
a. True
b. False
ANSWER: True
POINTS: 1
24. Test of controls are a type of substantive procedure.

a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Audit Procedures
25. The Public Company Accounting Oversight Board (PCAOB) does not set specific standards for
audits of public companies.
a. True
b. False
ANSWER: False
POINTS: 1
26. Recalculation involves independently performing procedures or controls that were originally
performed by the client, such as reperforming a bank reconciliation.
a. True
b. False
ANSWER: False
POINTS: 1
27. Scanning is a type of analytical procedure which involves reviewing accounting data to identify
significant or unusual items, such as examining a credit balance in an account that typically has a
debit balance.
a. True
b. False
ANSWER: True
POINTS: 1
28. Audit procedures can be classified as risk assessment procedures, test of controls or
substantive tests.
a. True
b. False
ANSWER: True
POINTS: 1
29. Assertions about existence address whether assets and liabilities exist and assertions about
occurrence address whether recorded transactions, such as sales transactions, have occurred
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Describe the Assertions Contained in Financial Statements
30. The first stage in an audit is performing a risk assessment.

a. True
b. False
ANSWER: False
POINTS: 1
31. Physically examining a client’s assets is an audit procedure.

a. True
b. False
ANSWER: True
POINTS: 1
32. Audit documentation is frequently called working papers.

a. True
b. False
ANSWER: True
POINTS: 1
33. Control risk refers to the risk that a misstatement could occur in an assertion about a class of
transaction, account balance, or disclosure and that could be material, either individually or when
aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely
basis by the entity’s internal control.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Overview of the Audit Process: A Standards-Based Approach
34. Inherent risk refers to the susceptibility of an assertion about a class of transaction, account
balance, or disclosure to a misstatement that could be immaterial, either individually or when
aggregated with other misstatements, before consideration of any related controls.
a. True
b. False
ANSWER: False
POINTS: 1
35. There is an inverse relationship between the assessment of risk of material misstatement in an
account and the amount of evidence required.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Phase III Performing Risk Assessment
36. The purpose of the audit program is to list the audit procedures to be followed in gathering
audit evidence and to help those in charge of the audit to monitor the progress and supervise the
work.
a. True
b. False
ANSWER: True
POINTS: 1
37. The effectiveness of entity-wide controls may reduce the extent of testing of transaction
controls.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Phase III Obtaining Evidence about Internal Control Operating Effectiveness
38. When assessing the effectiveness of controls for relevant assertions the auditor tests only
transaction controls.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Phase IV Obtaining Evidence about Internal Control Operating Effectiveness
39. The auditor is not required to test every control related to relevant assertions in a significant
account.
a. True
b. False
ANSWER: True
POINTS: 1
40. For an integrated audit, the auditor’s opinion about internal control effectiveness is based on
control effectiveness at year-end as opposed to throughout the year.
a. True
b. False
ANSWER: True
POINTS: 1
41. Research indicates that weaknesses in control components other than control activities do not
cause fraud and other misstatements in financial statements.
a. True
b. False
ANSWER: False
POINTS: 1
42. Assertions are relevant to the audit process because they are the representations of
management embodied in the financial statements.
a. True
b. False
ANSWER: True
POINTS: 1
43. Presentation and disclosure assertions imply that all transactions and balances are properly
presented, disclosures represent what actually happened, and the footnote disclosures are
appropriate and adequate.
a. True
b. False
ANSWER: True
POINTS: 1
44. The PCAOB does not currently have a mandate for convergence with other auditing standards.
a. True
b. False
ANSWER: True
POINTS: 1
45. Substantive analytical procedures are optional for significant tests and disclosures.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Phase IV Obtaining Substantive Evidence
46. In performing substantive tests on account balances, the auditor performs tests for all five
assertions.
a. True
b. False
ANSWER: False
POINTS: 1
47. If the auditor assesses internal controls to be effective, less substantive testing is likely.
a. True
b. False
ANSWER: False
POINTS: 1
48. If the auditor’s assessment is that there is high risk due to the subjectivity of the accounting
process, substantive procedures should be more rigorous.
a. True
b. False
ANSWER: True
POINTS: 1
49. An Integrated Audit requires the issuance of separate reports for the opinions expressed on
the financial statements and on internal control..
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Completing the Audit and Making Reporting Decisions
50. In an integrated audit, the auditor issues an opinion on both the financial statements and
internal control.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Phase V Completing the Audit and Making Reporting Decisions
51. The first general standard of the PCAOB requires that an audit be performed by which type of
person?
a. An auditor with seasoned judgment in varying degrees of supervision and review.
b. An auditor with appropriate technical training and proficiency.
c. An auditor with adequate knowledge of the standards of field work and reporting.
d. An auditor satisfying the independence standards.
ANSWER: b
POINTS: 1
52. Which auditing standards apply to private companies?

a. The AICPA Standards.
b. The IASSB Standards.
c. The Standards of the PCAOB.
ANSWER: a
POINTS: 1
53. The AICPA Principles Governing an Audit include which of the following categories that guide
the conduct of an audit?
a. Purpose of an audit and premise upon which an audit is conducted.
b. Responsibilities.
c. Performance.
ANSWER: d
POINTS: 1
TOPICS: Professional Auditing Standards
54. What is the scope of applicability of the auditing standards of the AICPA?
a. Nonpublic companies traded in non-U.S. markets.
b. Nonpublic companies in the U.S.
c. Public companies traded in non-U.S. markets.
d. Public companies traded in the U.S.
ANSWER: b
POINTS: 1
55. To satisfy the fieldwork standards, what must an auditor do?

a. Act with due care.
b. Gather sufficient appropriate evidence.
c. Be independent in mental attitude.
d. Have adequate knowledge about the client’s industry.
e. All of the above.
ANSWER: b
POINTS: 1
56. Which one of the following organizations provides auditing standards for public companies?
a. GAO.
b. AICPA.
c. GAAP.
d. PCAOB.
ANSWER: d
POINTS: 1
57. Which one of the following has the most affect on the reliability of financial statements?
a. The size of the client
b. The industry of the client
c. The client’s internal control structure.
d. The client’s trend of earnings.
ANSWER: c
POINTS: 1
TOPICS: An Overview of the Phases in the Audit Opinion Formulation Process
58. The standards of competence, independence, and due professional care are covered by which
section of the generally accepted auditing standards?
a. General standards.
b. Standards of fieldwork.
c. Reporting standards.
d. None of the above.
ANSWER: a
POINTS: 1
59. What are the PCAOB standards that present guidance in testing assertions and planning for
the audit are known as?
a. General standards.
b. Fieldwork standards.
c. Reporting standards.
ANSWER: b
POINTS: 1
60. Which of the following is the primary assertion related to testing inventory on hand to see if it
includes consignment goods ?
a. Existence
b. Completeness
c. Valuation
d. Rights and Obligations
ANSWER: d
POINTS: 1
61. Which assertion is most closely related to the determination of the adequacy of the allowance
for doubtful accounts?
a. Existence
b. Valuation
c. Rights and Obligations
d. Presentation and Disclosure
ANSWER: b
POINTS: 1
62. Which assertion addresses whether all transactions and accounts that should be included in
the financial statements are included?
a. Existence.
b. Valuation.
c. Completeness.
d. Rights and Obligations
ANSWER: c
POINTS: 1
63. Which assertion addresses whether the financial statements items are properly classified in
the financial statements?
a. Completeness.
b. Existence.
c. Valuation.
d. Presentation and Disclosure.
ANSWER: d
POINTS: 1
64. Which of the following groups are committed to the convergence of the auditing standards?
a. IAASB.
b. PCAOB.
c. AICPA.
d. Both A and C.
ANSWER: d
POINTS: 1
65. Which of the following is a procedure that requests a direct written response to the auditor
form a third party?
a. Inquiry
b. Confirmation
c. Inspection
d. Observation
ANSWER: b
POINTS: 1
TOPICS: Audit Evidence and Audit Procedures
66. Which of the following is a procedure which analyzes plausible relationships among financial
and nonfinancial data?
a. Analytical procedures.
b. Scanning.
c. Reviewing.
d. Observation.
ANSWER: a
POINTS: 1
67. What does the quality of the evidence an auditor collects depend upon?
a. The nature of the procedures.
b. The extent of the procedures.
c. The timing of the procedures.
d. Both A and C.
ANSWER: e
POINTS: 1
68. Which of the following terms describes procedures designed to detect material misstatements
in accounts ?
a. Substantive procedures.
b. Control Tests
c. Risk assessment procedures
d. Business risk procedures.
ANSWER: a
POINTS: 1
69. The proper supervision of audit assistants is a requirement found in which section of the
Generally Accepted Auditing Standards?
a. General Standards.
b. Standards of Fieldwork.
c. Standards of Reporting.
d. Standards of Quality Control.
ANSWER: b
POINTS: 1
70. Which one of the following is a requirement pf the reporting standards included in the generally
accepted auditing standards?
a. The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial
reporting framework.
b. The auditor will identify in the auditor’s report, those circumstances in which auditing principles have not been consistently observed
in the current period in comparison to the preceding period.
c. The auditor will review adjusting journal entries for accuracy, and if the auditor concludes those entries are not reasonable accurate,
the auditor must so state in the auditor’s report.
d. The auditor will express an unqualified opinion on the financial statements, or will conduct additional audit procedures until such an
opinion can be expressed.
ANSWER: a
POINTS: 1
71. Which of the following statements about the auditing standards issued by the AICPA is true?
a. The auditing standards issued by the AICPA are no longer recognized by the PCAOB.
b. The auditing standards issued by the AICPA are no longer recognized by the profession because the AICPA voted itself out of
existence.
c. The auditing standards issued by the AICPA continue to be issued by that organization for audits of public companies.
d. The auditing standards issued by the AICPA were used by the PCAOB as a starting point.
ANSWER: d
POINTS: 1
72. Which of the following is a reason why an auditor needs an understanding of internal controls?
a. To provide individual comments on internal control non-compliance.
b. To become comfortable that the client will pay its audit bills.
c. To assess materiality.
d. To assess the risk of possible misstatements in the financial statements.
ANSWER: d
POINTS: 1
73. Which of the following is not a reason why an auditor obtains an understanding of internal
controls?
a. Understanding the entity’s internal control is a requirement of GAAS.
b. The auditor must use the information to assess the risk of material misstatements arising from the lack of internal control.
c. It is the primary basis for the audit report.
d. It assists the auditor in designing the nature, timing and extent of further audit procedures.
ANSWER: c
POINTS: 1
74. Which type of audit documentation is required by PCAOB standards?
a. Flowcharts
b. Narratives
c. Questionnaires
d. A specific form of documentation is not required.
ANSWER: d
POINTS: 1
TOPICS: Audit Documentation
75. Which of the following is not a typical accounting cycle?

a. Revenue.
b. Inventory.
c. Cash.
d. Internal Controls.
ANSWER: d
POINTS: 1
76. Which of the following statements about assertions is true?

a. All assertions are equally important for all accounts.
b. The importance of an assertion depends upon the account.
c. Assertions are not related to accounts.
ANSWER: b
POINTS: 1
77. Which of the following assertions would the auditor usually consider most relevant for accounts
payable?
a. Existence.
b. Valuation.
c. Disclosure.
d. Completeness.
ANSWER: d
POINTS: 1
78. Which of the following is a use of audit documentation?

a. Assisting the engagement team in planning and performing the audit.
b. Assisting members of the engagement team responsible for supervising and reviewing the audit work.
c. Retaining a record of matters of continuing significance to future audits of the same organization.
ANSWER: d
POINTS: 1
79. Which of the following factors influence the risk of material misstatement?
a. The business risks.
b. Management incentives.
c. IT risks.
ANSWER: d
POINTS: 1
80. What does business risk include?

a. Economic factors.
b. Competitive factors.
c. Regulatory risk.
ANSWER: d
POINTS: 1
81. At what level does the auditor assess the risk of material misstatement?
a. The financial statement level.
b. The company level.
c. The assertion level.
d. Both A and C.
ANSWER: d
POINTS: 1
82. What does the effectiveness of internal controls influence?
a. Inherent risk.
b. Control risk.
c. Risk of material misstatement.
d. Both B and C.
ANSWER: d
POINTS: 1
83. Which of the following is not a control that the PCAOB has identified that auditors should
consider in evaluating whether or not an organization has sufficiently addressed fraud risk?
a. Controls over significant, unusual transaction.
b. Controls over related-party transactions.
c. Controls related to marketable securities.
d. Controls related to significant management estimates.
ANSWER: c
POINTS: 1
TOPICS: Phase II Performing Risk Assessment
84. Which statement is true concerning materiality?

a. Misstatements are material if they could reasonably be expected to influence the decisions of users of the financial statements.
b. Materiality guidelines are specifically prescribed by the PCAOB.
c. Materiality is not a useful concept in assessing internal control effectiveness.
d. Materiality is a concept applied to financial statement presentation but not to disclosures.
ANSWER: a
POINTS: 1
TOPICS: Phase II Performing Risk Assessment
85. Which document is used by auditors to formally accept a new client?

a. Management representation letter.
b. Audit Report.
c. Engagement Letter.
d. Audit Contract.
ANSWER: c
POINTS: 1
86. Which of the following items is not included in the engagement letter?
a. The responsibilities of the auditor.
b. The responsibilities of management.
c. The objective of the financial statements.
d. Identification of the applicable financial reporting framework for the preparation of the financial statements.
ANSWER: c
POINTS: 1
87. With a substantive audit strategy, what is an auditor likely to do?

a. Extensively tests internal controls.
b. Limit the testing of internal controls.
c. Not assess control risks.
d. Issue an adverse opinion on the financial statements.
ANSWER: b
POINTS: 1
88. Which of the following is not a question an auditor considers in deciding whether to pursue a
lower control risk approach prior to substantive testing?
a. Is the design of the control effective?
b. Does the control promote operational efficiency?
c. Is it cost effective to test controls?
d. Are controls operating effectively?
ANSWER: b
POINTS: 1
TOPICS: Phase III Obtaining Evidence about Internal Control Effectiveness
89. Which of the following would not affect an auditor’s judgment concerning internal controls?
a. The assertion being tested.
b. The design of the control.
c. The operation of the control.
d. The level of inherent risk.
ANSWER: d
POINTS: 1
90. With a dual purpose test, what is an auditor likely to do?

a. Perform a substantive procedure concurrently with a test of a control.
b. Perform a substantive procedure concurrently with a risk assessment test.
c. Perform a risk assessment test concurrently with a test of a control.
ANSWER: a
POINTS: 1
91. Which statement is correct?

a. Assertions affected by highly objective estimates usually require direct tests of balances.
b. The materiality of the account totally dictates the substantive procedures to be performed.
c. The evidence the auditor obtains from risk assessment procedures does not influence the substantive procedures to be performed.
d. The extent and results of control tests performed by the auditor will influence the substantive procedures to be performed.
ANSWER: d
POINTS: 1
TOPICS: Phase IV Obtaining Substantive Evidence about Accounts
92. Which of the following factors affect the substantive procedures performed in an audit?
a. The subjectivity of accounting process.
b. Size of the account.
c. Effectiveness of the relevant controls.
d. All of the above affect the substantive procedure that are performed.
ANSWER: d
POINTS: 1
93. If the auditor’s assessment of the materiality of the account balance is high, what would be the
respective effect on the extent of substantive testing and the nature of procedures performed?
Extent of Tests Nature of Procedures
a. Less More rigorous
b. Less Less rigorous.
c. More Less rigorous
d. More More rigorous
ANSWER: d
POINTS: 1
TOPICS: Phase IV Obtaining Substantive Evidence about Accounts
94. An auditor gathers evidence on internal controls for which respective time periods for the
purposes of expressing an opinion on control effectiveness and for testing controls in the financial
statement period?
Control Effectiveness Financial Statement
a. As of year end As of year end
b. As of year end Throughout the year
c. Throughout the year As of year end
d. Throughout the year Throughout the year
ANSWER: b
POINTS: 1
TOPICS: Audit Example: Assessing Control Design Effectiveness
95. Which of the following would not be a factor in whether a control weakness would be
considered to be a material weakness as opposed to a significant deficiency?
a. The materiality of the related balance.
b. The volume of transactions affected.
c. The subjectivity of the account balance.
d. The nature of the client’s industry.
ANSWER: d
POINTS: 1
TOPICS: Audit Example: Assessing Control Effectiveness
96. Which of the following statements is correct concerning the auditor’s opinion on internal control
effectiveness?
a. The report describes any material weaknesses and discusses actions taken by management to remediate the problems.
b. The report does not discuss whether the control weaknesses were first identified by management or the auditor.
c. The report does not recognize the integrated nature of the audit and the affect of the material weakness on the planning of the financial
statement audit.
d. The report identifies management’s actions to remedy the prior year’s control weaknesses.
ANSWER: b
POINTS: 1
TOPICS: Phase V Completing the Audit and Making Reporting Decisions
97. The auditing standards
Under the clarified auditing standards, what is the structure of each auditing standard issued by
the ASB? What is the purpose of each section?
ANSWER: Introduction explains the purpose and scope of the standard.
Objective defines the context in which the requirements are set.
Definitions include, where relevant, specific meanings of terms in the standards.
Requirements identify what the auditor is required to do to achieve the objective of the standard. Requirements
are expressed using the words “the auditor should ” or “the auditor must.”
Application and Other Explanatory Material include cross-references to the requirements and provide further
guidance for applying the requirements of the standard
POINTS: 1
98. What are the AICPA’s fundamental principles?

ANSWER: In place of the ten historical standards that governed the auditing profession, as part of the clarity project the
AICPA developed seven fundamental principles that govern audits. The four categories, with their specific
principles, are:
Purpose of an Audit and Premise upon Which an Audit Is Conducted
1. The purpose of an audit is to enhance the degree of confidence that users can place in the financial statement.
This purpose is achieved when an auditor expresses an opinion on the financial statements.
2. An audit is based on the premise that management has responsibility to prepare the financial statements,
maintain internal control over financial reporting, and provide the auditor with relevant information and access
to personnel.
Responsibilities
3. Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should
comply with ethical requirements, and maintain professional skepticism throughout the audit.
Performance
4. The auditor needs to obtain reasonable assurance as to whether the financial statements are free from material
misstatement.
5. Obtaining reasonable assurance requires the auditor to plan and supervise the work, determine materiality
levels, identify risks of material misstatement, and design and implement appropriate audit responses to the
assessed risks.
6. An audit has inherent limitations such that the auditor is not able to obtain absolute assurance about whether
the financial statements are free from misstatement.
Reporting
7. The auditor expresses an opinion as to whether the financial statements are free of material misstatement or
states that an opinion cannot be
expressed.
POINTS: 1
99. Audit phases
Identify at least five steps involved in an audit.
ANSWER: Phase I Making Client Acceptance and Continuance Decisions
Phase II Performing Risk Assessment
Phase III Obtaining Evidence about Internal Control Operating Effectiveness
Phase IV Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions
Phase V Completing the Audit and Making Reporting Decisions
POINTS: 1
100. PCAOB Assertions

Discuss the five management financial statement assertions identified in the PCAOB Standards.
Provide examples.
ANSWER: Existence or Occurrence: Assertions about existence address whether assets and liabilities exist and assertions
about occurrence address whether recorded transactions, such as sales transactions, have occurred.
Example: Management asserts that sales recorded in the income statement represent transactions in which the
exchange of goods or services with customers for cash or other consideration had occurred.
Completeness: Assertions about completeness address whether all transactions and accounts that should be
included in the financial statements are included.
Example: Management asserts that notes payable in the balance sheet include all such obligations of the
organization.
Valuation or Allocation: Assertions about valuation or allocation address whether accounts have been included
in the financial statements at appropriate amounts.
Example: Management asserts that trade accounts receivable included in the balance sheet are stated at net
realizable value.
Rights and Obligations: Assertions about rights address whether assets are the rights of the organization, while
assertions about obligations address whether liabilities are the obligations of the organization.
Example: Management asserts that amounts capitalized for leases in the balance sheet represent the cost of the
entity’s rights to leased property and that the corresponding lease liability represents an obligation of the entity.
Presentation and Disclosure: Assertions about presentation and disclosure address whether components of the
financial statements are properly classified, described, and disclosed.
Example: Management asserts that obligations classified as long-term liabilities in the balance sheet will not
mature within one year
POINTS: 1
101. Write the three general auditing standards of the PCAOB.
ANSWER: The general audit standards are:
1. Technical Training and proficiency: The examination is to be performed by a person or persons
having adequate technical training and proficiency as an auditor.
2. Independence: An independence is mental attitude is to be maintained by the auditor or auditors.
3. Due Professional Care: Due professional care is to be exercised in the performance of the examination
and the preparation of the report.
POINTS: 1
102. Explain the meaning of due professional care.

ANSWER: Due professional care refers to the skill and care of a professional expected in an audit. Following Generally
Accepted Auditing Standards (GAAS) is one benchmark for due professional care. However, following GAAS is
not always sufficient. If a reasonably prudent person would have done more, the professional should do at least
as much. Due professional care is also determined by evaluating whether someone with similar skills in a similar
situation would have performed the same way as the auditor.
POINTS: 1
103. What are the three broad types of audit procedures? What is the purpose of each test?
ANSWER: Risk assessment procedures. Procedures performed by the auditor to obtain information for identifying and
assessing the risks of material misstatement in the financial statements whether due to error or fraud. Risk
assessment procedures by themselves do not provide sufficient appropriate evidence on which to base an audit
opinion, but are used for purposes of planning the audit.
Tests of controls. Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or
detecting and correcting, material misstatements, typically at the assertion level.
Substantive procedures. Audit procedures designed to detect material misstatements in accounts which include
tests of details and substantive analytical procedures.
POINTS: 1
104. There are nine specific actions an auditor can undertake to collect evidence. Identify
each action and provide an example.
ANSWER: Types of Audit Procedure (examples in italics)
Inspection of documentation
Examining a client document for evidence of authorization
Inspection of assets
Physically examining a client’s equipment
Observation
Looking at a process or procedure, such as observing the client use of a restricted access area
External confirmation
Obtaining a direct written response to the auditor from a third party, such the client’s customers, confirming the
amount owed to the client
Recalculation
Checking the mathematical accuracy of a document or record, such as an inventory count sheet
Reperformance
Independently performing procedures or controls that were originally performed by the client, such as
reperforming a bank reconciliation
Analytical procedures
Analyzing plausible relationships among both financial and non-financial data
Scanning
Performing a type of analytical procedure which involves reviewing accounting data to identify significant or
unusual items, such as examining a credit balance in an account that typically has a debit balance
Inquiry
Seeking information of persons within or outside of the client organization, such as communicating with the
CFO or general counsel about changes in accounting policy
POINTS: 1

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9. Preventive controls are designed to prevent the occurrence of a misstatement.

15. A material weakness in internal control is a deficiency, or a combination of deficiencies, in

25. Performing a walkthrough provides an understanding of the nature of processing in important

28. Management’s risk assessment process should be performed only by senior-level

52. What is the primary benefit of effective internal control in an organization?

54. Which of the following is not part of the control environment?

62. Which one of the following represents a control deficiency?

64. Which of the following is an inherent limitation of internal controls?

67. Which of the following is considered to be an entity-wide control?

68. Which of the following is considered to be a transaction control?

70. Which of the following best represents a walkthrough?

72. Which of the following is another name for transaction controls?:

73. Which of the following is an example of a physical control to safeguard assets?

82. Which of the following is an example of a control environment deficiency??

83. A bank reconciliation is an example of which type of control?

85. In a large company, who usually monitors the internal control?

90. Which of the following is an example of a detective control in an information system?

91. Which statement is true concerning the documentation of internal control?

93. Which of the following is the most severe?

95. Control environment

96. Internal control components and principles

97. Internal Control Principles

98. Integrated audit

99. Internal Control Principles

One of the COSO principles of internal control requires organizations to demonstrate a

100. COSO: A Framework for Internal Control

101. Pervasive control activities

102. Management Evaluation of Internal Controls

Explain input controls.

104. Relationship of the five internal control components

ANSWER: 1. Control environment

2. The standards of the PCAOB consist of seven principles.

16. Comparability is one of the five management assertions.

24. Test of controls are a type of substantive procedure.

30. The first stage in an audit is performing a risk assessment.

31. Physically examining a client’s assets is an audit procedure.

32. Audit documentation is frequently called working papers.

52. Which auditing standards apply to private companies?

55. To satisfy the fieldwork standards, what must an auditor do?

75. Which of the following is not a typical accounting cycle?

76. Which of the following statements about assertions is true?

78. Which of the following is a use of audit documentation?

80. What does business risk include?

84. Which statement is true concerning materiality?

85. Which document is used by auditors to formally accept a new client?

87. With a substantive audit strategy, what is an auditor likely to do?

90. With a dual purpose test, what is an auditor likely to do?

91. Which statement is correct?

97. The auditing standards

98. What are the AICPA’s fundamental principles?

100. PCAOB Assertions

102. Explain the meaning of due professional care.

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