Chapter 6: Internal Control in a Financial Statement Audit

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1. TRUE The concept of internal control includes IT systems and

manual systems.

2. FALSE The auditor must understand internal control before as-

sessing inherent risk.

3. TRUE The extent of an entity's use of IT can affect any of the

components of internal control.

4. TRUE One of the risks associated with internal control from IT is

potential loss of data.

5. FALSE Internal control consists of six components.

6. TRUE Internal control includes monitoring of controls.

7. FALSE A reliance strategy is used when control risk has been set
at high.

8. TRUE A substantive strategy is used when control risk has been

set at high.

9. FALSE Once a level of control risk has been established, it cannot

be changed.

10. TRUE Tests of controls must be performed if control risk is set at

a lower level.

11. D. Meet objec- A primary purpose of internal controls is to

tives of main- A. Form a basis for evaluating employees.
taining reliable B. Monitor production quality.
documents and C. Avoid clerical errors.
records and ac- D. Meet objectives of maintaining reliable documents and
curate financial records and accurate financial reporting.
reporting

12. B. Embezzlement Internal controls are not designed to provide reasonable

will be eliminat- assurance that
ed. A. Transactions are executed in accordance with manage-
ment's authorization.
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B. Embezzlement will be eliminated.
C. Access to assets is permitted only in accordance with
management's authorization.
D. Amounts recorded for assets are compared with the
actual existing assets at reasonable intervals.

13. A. Reasonable The basic concept of internal control that recognizes the
assurance. cost of internal control should not exceed the
benefits expected to be derived is known as
A. Reasonable assurance.
B. Management responsibility.
C. Limited liability.
D. Management by exception.

14. D. Entity's abil- An auditor would most likely be concerned with internal
ity to accurate- control policies and procedures that provide
ly process and reasonable assurance about the
summarize finan- A. Efficiency of management's decision-making process.
cial data. B. Appropriate prices that the entity should charge for its
products.
C. Methods of assigning production tasks to employees.
D. Entity's ability to accurately process and summarize
financial data.

15. B. Management Management's attitude toward aggressive financial report-

is dominated by ing and its emphasis on meeting projected
one individual. profit goals most likely would significantly influence an
entity's control environment when
A. External policies established by parties outside the
entity affect its accounting practices.
B. Management is dominated by one individual.
C. Internal audit personnel have direct access to the board
of directors and the entity's management.
D. The audit committee is active in overseeing the entity's
financial reporting policies.

16. B. Management Management philosophy and operating style most likely

is dominated by would have a significant influence on an
one individual. entity's control environment when
A. The internal audit function reports directly to manage-
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 Chapter 6: Internal Control in a Financial Statement Audit
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ment.
B. Management is dominated by one individual.
C. Accurate management job descriptions delineate spe-
cific duties.
D. The audit committee actively oversees the financial
reporting process.

17. D. The internal Proper monitoring within an internal control framework

revenue service. may include all of the following except:
A. An external auditor.
B. An effective audit committee.
C. An internal audit function.
D. The internal revenue service.

18. C. External audi- An entity's control activities include all of the following
tor's tests of con- except:
trols. A. Performance reviews.
B. Information processing.
C. External auditor's tests of controls.
D. Segregation of duties.

19. B. More accurate Potential benefits of an entity's controls in an IT environ-

accounting esti- ment include all of the following except:
mates. A. Reduction in the risk that controls will be circumvented.
B. More accurate accounting estimates.
C. Consistent application of predefined business rules.
D. More timely information.

20. A. Hardware An entity's IT infrastructure refers to

components. A. Hardware components.
B. Programmers.
C. Software.
D. Data provided by the system.

21. B. For nonre- Auditors are most likely to gather audit evidence solely
curring, unusual using substantive procedures
transactions. A. If transactions are recurring.
B. For nonrecurring, unusual transactions.
C. If control risk is very low.
D. If the entity has a well-designed automated system.
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22. B. Authorization, Proper segregation of functional responsibilities in an ef-

recording, and fective system of internal control calls for
custody. separation of the functions of
A. Authorization, execution, and payment.
B. Authorization, recording, and custody.
C. Custody, execution, and reporting.
D. Authorization, payment, and recording.

23. B. Factors that the auditor should consider as increasing the

It is comprised effectiveness of the audit committee include
almost exclusive- all of the following except whether:
ly of members A. It is independent of management
of management, B.
ensuring detailed It is comprised almost exclusively of members of manage-
knowledge of the ment, ensuring detailed knowledge of the
company's oper- company's operations.
ations. C. It asks management difficult questions.
D. It interacts regularly with internal audit personnel.

24. D. Can include The documentation of an auditor's understanding of inter-

any combina- nal controls
tion of narra- A. Is optional.
tives, question- B. Must be exclusively in either narrative, questionnaires,
naires, or flow- or flowchart form.
charts. C. Must include flowcharts.
D. Can include any combination of narratives, question-
naires, or flowcharts.

25. C. Perform walk- A well-prepared flowchart should make it easier for the
throughs. auditor to
A. Prepare audit procedure manuals.
B. Prepare detailed job descriptions.
C. Perform walkthroughs.
D. Assess the degree of accuracy of financial data.

26. B. Review of the A flowchart is most frequently used by an auditor in con-

entity's internal nection with the
controls. A. Preparation of generalized computer audit programs.
B. Review of the entity's internal controls.
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C. Use of statistical sampling in performing an audit.
D. Performance of analytical procedures of account bal-
ances.

27. B. Provide a vi- An advantage of using systems flowcharts to document

sual depiction of information about internal control instead of
the entity's activ- using internal control questionnaires is that systems flow-
ities. charts
A. Identify whether segregation of duties prevent collusion.
B. Provide a visual depiction of the entity's activities.
C. Indicate whether controls are operating effectively.
D. Reduce the need to observe the entity's employees
performing routine tasks.

28. C. Tests of the Which of the following audit tests would be regarded as a
signatures on test of controls?
canceled checks A. Tests of the specific items making up the balance in a
to the board of given general ledger account.
directors' autho- B. Tests comparing inventory pricing to vendors' invoices.
rizations. C. Tests of the signatures on canceled checks to the board
of directors' authorizations.
D. Tests of the additions to property, plant, and equipment
by physical inspections.

29. B. Test of con- 29. The independent auditor selects several transactions
trols in each functional area and traces them through
the entire system, paying special attention to evidence
about whether or not the control activities are in
operation. This is an example of a(n)
A. Analytical procedure.
B. Test of controls.
C. Substantive procedure.
D. Functional test.

30. A. Inquiry. To obtain evidential matter about control risk, an auditor

selects tests from a variety of techniques
including
A. Inquiry.
B. Analytical procedures.

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C. Calculation.
D. Confirmation.

31. D. Observing the Which of the following procedures most likely would pro-
entity's person- vide an auditor with evidence about whether
nel applying the an entity's internal control is suitably designed to prevent
controls. or detect material misstatements?
A. Scanning the journals produced by the internal control
system.
B. Performing analytical procedures using data aggregat-
ed at a high level.
C. Vouching a sample of transactions directly related to the
controls.
D. Observing the entity's personnel applying the controls.

32. D. Reports on service organizations typically

Assess whether A. Provide reasonable assurance that their financial state-
the service or- ments are free of material misstatements.
ganization's con- B. Ensure that the entity will not have any misstatements
trols are suit- in areas related to the service organization's
ably designed to activities.
achieve internal C. Ensure that the auditee is billed correctly.
control D.
objectives. Assess whether the service organization's controls are
suitably designed to achieve internal control
objectives.

33. C. Application. Where computer processing is used in significant account-

ing applications, internal control activities
may be defined by classifying control activities into two
types: general and
A. Administrative.
B. Specific.
C. Application.
D. Authorization.

34. D. Check digit. Which of the following input controls is a numeric value
computed to provide assurance that the
original value has not been altered in construction or trans-
mission?
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A. Hash total.
B. Parity check.
C. Encryption.
D. Check digit.

35. B. Data validation General controls include all of the following except:
controls. A. Organizational controls.
B. Data validation controls.
C. Access security controls.
D. Application system acquisition controls.

36. A. Test to en- A limit test is a

sure that a A. Test to ensure that a numerical value does not exceed
numerical value some predetermined value.
does not exceed B. Check to ensure that the value in a field falls within an
some predeter- allowable range of values.
mined value. C. Check to ensure that the data in a field have the proper
arithmetic sign.
D. Check on a field to ensure that it contains either all
numeric or alphabetic characters.

37. D. Check on a A field test is a

field to ensure A. Test to ensure that a numerical value in a field does not
that it contains exceed some predetermined value.
either all numeric B. Check to ensure that the value in a field falls within an
or all alphabetic allowable range of values.
characters. C. Check to ensure that the data in a field have the proper
arithmetic sign.
D. Check on a field to ensure that it contains either all
numeric or all alphabetic characters.

38. A. Affect the An auditor's primary consideration regarding an entity's

financial state- internal controls is whether the policies and
ment assertions. procedures
A. Affect the financial statement assertions.
B. Prevent management override.
C. Relate to the control environment.
D. Reflect management's philosophy and operating style.

39.
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B. Errors and In evaluating internal control, the auditor is basically con-
fraud have been cerned that the system provides reasonable
prevented, or de- assurance that
tected and cor- A. Operational efficiency has been achieved in accor-
rected. dance with management plans.
B. Errors and fraud have been prevented, or detected and
corrected.
C. Controls have not been circumvented by collusion.
D. Management can not override the system.

40. C. Of the following statements about an internal control sys-

Because of the tem, which one is correct?
cost/benefit rela- A.
tionship, tests of The maintenance of the system of internal control is an
controls may be important responsibility of the internal audit
applied on a test function.
basis in some B. Administrative controls relate directly to the safeguard-
circumstances. ing of assets.
C.
Because of the cost/benefit relationship, tests of controls
may be applied on a test basis in some
circumstances.
D. Well designed internal control activities always prevent
collusion among employees.

41. D. The costs of The concept of reasonable assurance in the context of an

some controls entity's internal controls recognizes that
may be too high A. Auditors may fail to detect material misstatements.
to implement in B. Proper internal controls guarantee that material mis-
relation to poten- statements will not occur.
tial benefits. C. Proper internal controls preclude fraud.
D. The costs of some controls may be too high to imple-
ment in relation to potential benefits.

42. B. Creates a com- An effective control environment

mitment to com- A. Allows management to identify all relevant risks.
petence. B. Creates a commitment to competence.
C. Guarantees that all controls are followed as prescribed.
D. Requires an internal audit function.

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43. B. Access to The control environment component of internal control
computer pro- includes all of the following except:
grams. A. Management's operating style.
B. Access to computer programs.
C. Organizational structure.
D. Human resource policies and practices.

44. C. Communi- Information and communication includes all of the follow-

cating price ing except:
changes to cus- A. Identifying and recording all valid transactions.
tomers. B. Determining the time period in which transactions oc-
curred.
C. Communicating price changes to customers.
D. Properly presenting transactions and related disclo-
sures in the financial statements.

45. D. Ensuring a An organizational structure is important for all of the fol-

proper commit- lowing reasons except:
ment to controls. A. Ensuring proper accountability.
B. Defining areas of authority.
C. Creating clear lines of reporting.
D. Ensuring a proper commitment to controls.

46. C. The enti- The risk assessment component of internal control refers
ty's identification to
and analysis of A. The auditor's assessment of control risk.
risks relevant to B. The auditor's assessment of client risk.
achievement of C. The entity's identification and analysis of risks relevant
its objectives. to achievement of its objectives.
D. The entity's monitoring of the potential for material mis-
statements.

47. B. Should func- As opposed to a manual control, an automated control

tion consistent- A. Can never be circumvented.
ly in the ab- B. Should function consistently in the absence of program
sence of program changes.
changes. C. Need not be tested by the auditor.
D. Must be tested using the same techniques as a manual
control.

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48. C. The system An IT specialist is least likely to be necessary when
has not changed A. Data are shared extensively among systems.
from the prior B. The entity participates heavily in electronic commerce.
year. C. The system has not changed from the prior year.
D. Significant audit evidence is in electronic form.

49. A. Influence the In planning an audit of a new client, an auditor most likely
design of internal would consider the methods used to
controls. process accounting information because such methods
A. Influence the design of internal controls.
B. Affect the auditor's overall materiality levels.
C. Assist in evaluating the planned audit assertions.
D. Determine the auditor's acceptable level of audit risk.

50. A. Increased im- A substantive strategy differs from a reliance strategy in

plementation of that a substantive strategy includes
detailed tests of A. Increased implementation of detailed tests of transac-
transactions and tions and balances.
balances. B. Extra tests of controls.
C. Increased emphasis on verbal representations from
management.
D. Setting control risk at a minimum level.

51. A. Which of the following statements concerning control risk

Assessing con- is correct?
trol risk and ob- A.
taining an under- Assessing control risk and obtaining an understanding of
standing of an an entity's internal controls may be
entity's internal performed concurrently.
controls may be B. When control risk is high, an auditor is required to
performed con- document the basis for that assessment.
currently. C. Control risk may be assessed sufficiently low to elimi-
nate substantive procedures for significant
accounts.
D.
When assessing control risk, an auditor should not con-
sider evidence obtained in prior audits about
the operation of control activities.

52.
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B. Identifying Assessing control risk at a lower level most likely would
specific internal involve
controls relevant A.
to specific asser- Changing the timing of substantive procedures by omitting
tions. interim testing and performing the tests
at year-end.
B. Identifying specific internal controls relevant to specific
assertions.
C. Performing more extensive substantive procedures with
larger sample sizes than originally
planned.
D. Reducing inherent risk for most of the assertions rele-
vant to significant account balances.

53. B. Affects man- In the audit of financial statements, an auditor's primary

agement's finan- consideration regarding an internal control
cial statement as- policy or procedure is whether the policy or procedure
sertions. 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.

54. A. Incompatible Which of the following most likely would not be considered
duties. an inherent limitation of the potential
effectiveness of an entity's internal controls?
A. Incompatible duties.
B. Management override.
C. Mistakes in judgment.
D. Collusion among employees.

55. B. Achievement It is important for the CPA to consider the competence of

of the objectives the entity's employees because their
of the system of competence bears directly and importantly upon the
internal control. A. Cost/benefit relationship of the system of internal con-
trol.
B. Achievement of the objectives of the system of internal
control.
C. Comparison of recorded accountability with assets.
D. Timing of the tests to be performed.

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56. D. Obtain knowl- As part of gaining an initial understanding of internal con-
edge about the trol, an auditor is required to do all of the
operating effec- following except:
tiveness of the A. Consider factors that affect the risk of material misstate-
internal control. ment.
B. Ascertain whether internal control policies and proce-
dures have been placed in operation.
C. Identify the types of potential misstatements that can
occur.
D. Obtain knowledge about the operating effectiveness of
the internal control.

57. B. Direct par- Effective internal control in a small company that has an
ticipation by insufficient number of employees to permit
the owner of proper division of responsibilities can best be enhanced
the business in by
the recordkeep- A. Employment of temporary personnel to aid in the sep-
ing activities of aration of duties.
the business. B. Direct participation by the owner of the business in the
recordkeeping activities of the business.
C. Engaging a CPA to perform monthly bookkeeping.
D. Delegation of full, clear-cut responsibility to each em-
ployee for the functions assigned to each.

58. C. The independent auditor should acquire an understanding

The work per- of the internal audit function as it relates to
formed by inter- the assessment of control risk because
nal audit person- A.
nel may be a fac- Internal audit programs, audit documents, and reports can
tor in determin- eliminate the need for the independent
ing the nature, auditor's staff.
timing, B.
and extent of The procedures performed by the internal audit staff may
the independent eliminate the independent auditor's need
auditor's proce- for an extensive study and evaluation of internal control.
dures. C.
The work performed by internal audit personnel may be a
factor in determining the nature, timing,
and extent of the independent auditor's procedures.

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D.
The understanding of the internal audit function is an
important substantive procedure to be
performed by the independent auditor.

59. D. Search for sig- In obtaining an understanding of an entity's internal control

nificant deficien- in a financial statement audit of a
cies in the oper- nonpublic company, an auditor is not obligated to
ation of the inter- A. Determine whether the control activities have been
nal control. placed in operation.
B. Perform procedures to understand the design of the
internal control policies.
C. Document the understanding of the entity's internal
control components.
D. Search for significant deficiencies in the operation of the
internal control.

60. A. Understanding After completing the preliminary phase of the review of

of the internal internal control, the auditor decides not
control. to rely on the system to restrict substantive procedures.
Documentation may be limited to the
auditor's
A. Understanding of the internal control.
B. Reasons for deciding not to extend the review.
C. Basis for concluding that errors and fraud will be pre-
vented.
D. Completed internal control questionnaire.

61. D. Document the In an audit of financial statements of a private company in

auditor's under- accordance with generally accepted
standing of the auditing standards, an auditor is required to
entity's internal A. Identify specific internal control activities relevant to
control. management's financial statement assertions.
B. Perform tests of controls to evaluate the effectiveness
of the entity's accounting system.
C. Determine whether procedures are suitably designed
to prevent or detect material misstatements.
D. Document the auditor's understanding of the entity's
internal control.

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62. A. Narratives. For a complex IT system, auditors are least likely to use
which of the following when documenting
their understanding of internal controls?
A. Narratives.
B. Internal control questionnaires.
C. Flowcharts.
D. Organization charts.

63. B. Concluding Assessing control risk at a lower level involves all of the
that controls are following except:
ineffective. A. Identifying specific controls to rely on.
B. Concluding that controls are ineffective.
C. Performing tests of controls.
D. Analyzing the achieved level of control risk after per-
forming tests of controls.

64. A. Extent of tests When an auditor increases the planned assessed level of
of details. control risk because certain control activities
were determined to be ineffective, the auditor would most
likely increase the
A. Extent of tests of details.
B. Level of inherent risk.
C. Extent of tests of controls.
D. Level of detection risk.

65. A. Inspection. Which of the following procedures most likely would be

included as part of an auditor's tests of
controls?
A. Inspection.
B. Reconciliation.
C. Confirmation.
D. Analytical procedures.

66. B. Classification An auditor is least likely to test the internal controls that
of revenue and provide for
expense transac- A. Approval of the purchase and sale of marketable secu-
tions by product rities.
line. B. Classification of revenue and expense transactions by
product line.
C. Segregation of the functions of recording disburse-
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ments and reconciling the bank account.
D. Comparison of receiving reports and vendors' invoices
with purchase orders.

67. B. Observation For certain controls, such as segregation of duties, docu-

and inquiry. mentary evidence may not exist. An auditor
would most likely test the procedures by
A. Reperformance and corroboration.
B. Observation and inquiry.
C. Inspection and vouching.
D. Confirmation and recomputation.

68. A. Reperfor- Walkthroughs usually involve all of the following audit pro-
mance. cedures except:
A. Reperformance.
B. Inquiry.
C. Observation.
D. Inspection.

69. C. Before applying substantive procedures to the details of

Consider the accounts at an interim date (a date prior to the
availability of in- balance sheet date), an auditor should
formation at a lat- A. Assess control risk at high for the assertions embodied
er date that will in the accounts selected for interim testing.
be necessary for B.
the auditor's Determine that the accounts selected for interim testing
procedures (e.g., are not material to the financial statements
electronic data). taken as a whole.
C.
Consider the availability of information at a later date that
will be necessary for the auditor's
procedures (e.g., electronic data).
D.
Obtain written representations from management that all
financial records and related data will be
made available.

70. D. Audit work A high detection risk strategy includes all of the following
only completed except:
at year-end A. Interim testing.
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B. Reduced testing of transactions.
C. Heavy reliance on analytical procedures as substantive
procedures.
D. Audit work only completed at year-end.

71. B. Scheduling The auditor should consider all of the following when de-
conflicts in the ciding whether substantive procedures will be
audit firm that performed at an interim date except:
make interim A. The level of control risk.
testing more con- B. Scheduling conflicts in the audit firm that make interim
venient. testing more convenient.
C. Whether business conditions will change after the inter-
im date.
D. The ability to examine the remaining period.

72. D. Additional If auditors conduct substantive procedures as of 10/31 for

tests likely will an entity with a 12/31 year-end
be performed in A. Additional tests are seldom conducted for the remaining
the remaining pe- period.
riod. B. Additional control tests are required in the remaining
period.
C. The entity's controls likely are ineffective.
D. Additional tests likely will be performed in the remaining
period.

73. D. Based on a study and evaluation completed at an interim

Inquiries and ob- date, the auditor concludes that no significant
servations lead internal control weaknesses exist. The records and proce-
the auditor to be- dures would most likely be tested again at
lieve that condi- year-end if
tions within the A. Compliance tests were not performed by the internal
internal control audit staff during the remaining period.
system have B. The internal control system provides a basis for reliance
changed. in reducing the extent of substantive
procedures.
C. The auditor used nonstatistical sampling during interim
compliance testing.
D.
Inquiries and observations lead the auditor to believe that

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conditions within the internal control
system have changed.

74. C. The auditor's communication of material weaknesses in

Incidental to the internal control for a nonpublic company
auditor's objec- is
tive of forming an A.
opinion as to the Required to enable the auditor to state that the examina-
fair presentation tion has been made in accordance with
of the financial generally accepted auditing standards.
statements. B. The principle reason for studying and evaluating the
system of internal controls.
C.
Incidental to the auditor's objective of forming an opinion
as to the fair presentation of the financial
statements.
D. Required to be included as part of the audit opinion.

75. C. Significant de- Significant deficiencies are matters that come to an audi-
sign flaws in in- tor's attention that should be communicated to
ternal controls or an entity's audit committee because they represent
poor implemen- A. Disclosures of information that significantly contradict
tation of internal the auditor's going concern assumption.
controls. B. Material fraud or illegal acts perpetrated by high-level
management.
C. Significant design flaws in internal controls or poor
implementation of internal controls.
D.
Manipulation or falsification of accounting records or doc-
uments from which financial statements
are prepared.

76. D. Inventory is All of the following are significant deficiencies except:

highly subject to A. Absence of appropriate reviews of transactions.
obsolescence. B. Evidence of willful wrongdoing by lower-level employ-
ees.
C. Inadequate provisions for safeguarding assets.
D. Inventory is highly subject to obsolescence.

77.
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A. Top to bottom The normal sequence of documents and operations on a
and left to right. well-prepared systems flowchart is
A. Top to bottom and left to right.
B. Bottom to top and left to right.
C. Top to bottom and right to left.
D. Bottom to top and right to left.

78. D. Symbolic rep- When documenting an entity's internal control, the inde-
resentation of a pendent auditor sometimes uses a systems
system or se- flowchart, which can best be described as a
ries of sequential A. Pictorial presentation of the flow of instructions in an
processes. entity's internal computer system.
B. Diagram which clearly indicates an organization's inter-
nal reporting structure.
C.
Graphic illustration of the flow of operations which is used
to replace the auditor's internal control
questionnaire.
D. Symbolic representation of a system or series of se-
quential processes.

79. D. The posting of Which of the following is not a characteristic of a batch

a transaction, as processed computer system?
it occurs, to sev- A. The collection of like transactions which are sorted and
eral files, with- processed sequentially against a master
out intermediate file.
printouts. B. Keypunching of transactions, followed by machine pro-
cessing.
C. The production of numerous printouts.
D. The posting of a transaction, as it occurs, to several files,
without intermediate printouts.

80. C. Systems docu- Which of the following is a general control that would most
mentation. likely assist an entity whose systems
analyst left the entity in the middle of a major project?
A. Grandfather-father-son record retention.
B. Input and output validation routines.
C. Systems documentation.
D. Check digit verification.

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81. A. Check digit A customer intended to order 100 units of product Z96014,
verification but incorrectly ordered 100 units of a
nonexistent product Z96015. Which of the following con-
trols most likely would detect this error?
A. Check digit verification.
B. Record count.
C. Hash total.
D. Redundant data check.

82. D. One transac- Assume that an auditor estimates that 10,000 checks were
tion. issued during the accounting period. If an
IT application control which performs a limit check for each
check request is to be subjected to the
auditor's test data approach, the sample should include
A. Approximately 1,000 test items.
B. A number of test items determined by the auditor to be
sufficient under the circumstances.
C. A number of test items determined by the auditor's
reference to the appropriate sampling tables.
D. One transaction.

83. C. After obtaining an understanding of internal controls and

It would be inef- assessing control risk of an entity, an auditor
ficient to perform decided not to perform tests of controls for purposes of the
tests of controls audit. The auditor most likely decided
that would result that
in a reduction in A.
planned The available evidential matter obtained through tests of
substantive pro- controls would not support an increased
cedures. level of control risk.
B. A reduction in the assessed level of control risk is
justified for certain financial statement
assertions.
C.
It would be inefficient to perform tests of controls that
would result in a reduction in planned
substantive procedures.
D. The assessed level of inherent risk exceeded the as-
sessed level of control risk.

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84. C. That the audi- After the auditor has prepared a flowchart of the internal
tor plans to rely controls surrounding sales and evaluated the
on. design of the system, the auditor would perform tests of
controls on all control activities
A. Documented in the flowchart.
B. Considered to be weaknesses that might allow errors to
enter the accounting system.
C. That the auditor plans to rely on.
D. That would aid in preventing fraud.

85. C. Timing of As the acceptable level of detection risk increases, an

substantive pro- auditor may change the
cedures from A. Assessed level of control risk from a lower level to a
year-end to an in- higher level.
terim date. B. Assurance provided by tests of controls by using a
larger sample size than planned.
C. Timing of substantive procedures from year-end to an
interim date.
D. Nature of substantive procedures from less effective to
more effective procedures.

86. D. Sign checks In a properly designed internal control system, the same
and also cancel employee may be permitted to
supporting docu- A. Receive and deposit checks and also approve write-offs
ments. of customer accounts.
B. Approve vouchers for payment and also sign checks.
C. Reconcile the bank statements and also receive and
deposit cash.
D. Sign checks and also cancel supporting documents.

87. B. Observation. A procedure that would most likely be used by an auditor

in performing tests of control activities that
involve segregation of functions but which leave no trans-
action trail is
A. Inspection.
B. Observation.
C. Reperformance.
D. Reconciliation.

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88. A. Search for sig- During consideration of internal control in a financial state-
nificant deficien- ment audit of a nonpublic company, an
cies in the oper- auditor is not obligated to
ation of internal A. Search for significant deficiencies in the operation of
control. internal control.
B. Understand the internal control environment and the
information system.
C. Determine whether the controls relevant to audit plan-
ning have been placed in operation.
D. Perform procedures to understand the design of internal
control.

89. D. Direct per- Audit evidence concerning proper segregation of duties

sonal observa- ordinarily is best obtained by
tion of the em- A. Preparation of a flowchart of duties performed by avail-
ployees who ap- able personnel.
ply the control B. Inquiring whether control activities operated consistent-
activities. ly throughout the period.
C. Reviewing job descriptions prepared by the Personnel
Department.
D. Direct personal observation of the employees who ap-
ply the control activities.

90. B. The records While substantive procedures may support the accuracy
may be accu- of underlying records, these tests frequently
rate even though provide no affirmative evidence of segregation of duties
they are main- because
tained by per- A.
sons having in- Substantive procedures rarely guarantee the accuracy of
compatible the records if only a sample of the
functions. transactions has been tested.
B. The records may be accurate even though they are
maintained by persons having incompatible
functions.
C
.
Substantive procedures relate to the entire period under
audit, but compliance tests ordinarily are
confined to the period during which the auditor is on the

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 Chapter 6: Internal Control in a Financial Statement Audit
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entity's premises.
D.
Many computerized procedures leave no audit trail of who
performed them, so substantive
procedures may necessarily be limited to inquiries and
observation of office personnel.

91. A. Assess the dif- Before applying substantive procedures to the details of
ficulty in control- asset and liability accounts at an interim date,
ling achieved au- the auditor should
dit risk for the A. Assess the difficulty in controlling achieved audit risk for
remainder of the the remainder of the period.
period. B.
Investigate significant fluctuations that have occurred in
the asset and liability accounts since the
previous balance sheet date.
C. Select only those accounts which can effectively be
sampled during year-end audit work.
D.
Consider the compliance tests that must be applied at the
balance sheet date to extend the audit
conclusions reached at the interim date.

92. D. When communicating internal control-related matters not-

The purpose of ed in an audit of a nonpublic company, an
the audit was auditor's report issued on significant deficiencies should
to report on the indicate that
financial state- A.
ments and not Errors or fraud may occur and not be detected because
to provide assur- there are inherent limitations in any internal
ance on control system.
internal control. B.
The issuance of an unqualified opinion on the financial
statements may depend on corrective
follow-up action.
C.
The deficiencies noted were not detected within a timely
period by employees in the normal course
of performing their assigned functions.

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D.
The purpose of the audit was to report on the financial
statements and not to provide assurance on
internal control.

93. D. Diamond. The program flowcharting symbol representing a decision

is a
A. Triangle.
B. Circle.
C. Rectangle.
D. Diamond.

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