Week 7: Evaluation of Internal Control - ShortQuiz006

When obtaining an understanding of controls that are relevant to the audit, the auditor shall evaluate the design of
those controls and determine whether they have been implemented, by performing procedures in addition to inquiry
of the entity's personnel.

Internal control, no matter how effective, can provide an entity with only reasonable assurance about achieving the
entity's financial reporting objectives.

Auditors may use different terminology or frameworks to describe the various aspects of internal control, and their
effect on the audit than those used in this PSA, provided all the components described in this PSA are addressed.

The entity's risk assessment process is not the basis for how management determines the risks to be managed.

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. Having all dispositions approved by the vice president of sales
d. Imprinting a controlled identification number on each tool.

Which of the following statements about internal control is correct?

a. Exceptionally strong control allows the auditor to eliminate substantive tests.

b. Establishing and maintaining internal control is the internal auditor's responsibility.
c. The cost-benefit relationship should be considered in designing internal control.
d. Properly maintained internal controls reasonably assure that collusion among employees cannot occur.

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

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

a. Control environment, risk assessment, control activities, information and communication systems, and monitoring.
b. Legal environment of the firm, management philosophy, and organizational structure.
c. Risk assessment, backup facilities, responsibility accounting and natural laws.
d. Organizational structure, management philosophy, and planning.
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. Entity policies may be overridden by senior management.
c. Specified controls requiring segregation of duties may be circumvented by collusion.
d. Material misstatements may exist in the financial statements.
According to PSA 400, which of the following is correct regarding internal control system?

a. A strong environment, by itself, ensure the effectiveness of the internal control system.
b. The internal control system is confined to those matters which relate directly to the functions of the accounting system.
c. Internal control system refers to all the policies and procedures adopted by the auditor to assist in achieving
management's objective.
d. 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.