Name: Date: Score:

I. MULTIPLE CHOICE (10 items x 2 points)

Encircle the letter of the correct answer.

1. After considering the client’s internal control structure, the auditor has concluded that the structure is well designed
and functioning as anticipated. Under these circumstances, the auditors would most likely
a. Cease to perform further substantive tests.
b. Reduce substantive tests in areas where the internal control was found to be effective.
c. Increase the extent of anticipated analytical procedures.
d. Perform all tests of controls to the extent outlined in the pre-planned audit program.
2. In consideration of internal control, the operating effectiveness of controls is tested by
a. Flowcharts
b. Tests of controls
c. Substantive tests
d. Decision tables
3. The scope of substantive tests as compared to the scope of tests of controls generally vary
a. In a parallel manner
b. Inversely
c. Directly
d. Equally
4. Which of the following audit tests would be regarded as a test of control?
a. Tests of the specific items making up the balance in a given general ledger account
b. Tests confirming receivables
c. Tests of the signatures on cancelled checks to board of director’s authorizations
d. Tests of the additions to property, plant, and equipment by physical inspection
5. Proper segregation of functional responsibilities in an effective structure of internal control calls for 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
6. Which of the following statements about an internal control system is NOT valid?
a. No one person should be responsible for the custodial responsibility and the recording responsibility for an
asset.
b. Transactions must be properly authorized before such transactions are processed.
c. Because of the cost-benefit relationship, a client may apply control procedures on a test basis.
d. Control procedures reasonably ensure that collusion among employees cannot occur.
7. The statement that best describes the CPA’s primary objective in reviewing internal control is that the review is
intended to provide:
a. Reasonable protection against client fraud and defalcations by client employees
b. Basis for reliance on the system and determining the scope of other auditing procedures
c. Basis for constructive suggestions to the client for improving the accounting system
d. Method for safeguarding data, promoting operational efficiency, and encouraging adherence to prescribed
managerial policies
8. Which of the following controls would most likely help ensure that all credit sales transactions of an entity are
recorded?
a. The billing department supervisor sends copies of approved sales orders to the credit department for
comparison to authorized credit limits and current customer account balances.
b. The accounting department supervisor independently reconciles the account receivable subsidiary ledger to
the accounts receivable control account monthly.
c. The accounting department supervisor controls the mailing of monthly statements to customers and
investigates any differences reported by customers.
d. The billing department supervisor matches prenumbered shipping documents with entries in the sales
journal.
 9. During the review of a small business client’s internal control structure, the auditor discovered that the accounts
receivable clerk approves credit memos and has access to cash. Which of the following controls would be most
effective in offsetting this weakness?
a. The owner reviews errors in billings to customers and postings to the subsidiary ledger.
b. The controller receives the monthly bank statement directly and reconciles the checking accounts.
c. The owner reviews credit memos after they are recorded.
d. The controller reconciles the total of the details accounts receivable accounts to the amount shown in the
ledger.
10. An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared.
This test is performed to satisfy the audit objective of
a. Accuracy
b. Completeness
c. Control
d. Existence

II. TRUE OR FALSE (5 items x 2 points)

Write TRUE if the statement is correct; otherwise, write FALSE on the space provided.

1. In general, a material internal control weakness may be defined as a condition in which material errors
or irregularities would ordinarily not be detected within a time period by employees in the normal
course of performing their assigned functions.
2. The primary purpose of the auditor’s consideration of internal control is to provide a basis for the
expression of an opinion.
3. After considering a client’s internal control structure, an auditor has concluded that it is well designed
and functioning as intended. Under these circumstances, that auditor would most likely not increase the
extent of predetermined substantive tests.
4. An audit requires an understanding of all the control activities related to each significant class of
transactions, account balance, and disclosure in the financial statements or to every assertion relevant to
them
5. The auditor should consider weakness a scope limitation and therefore disclaim an opinion. Assessing
control risk and obtaining an understanding of an entity’s internal control structure may be performed
concurrently.