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T.B - CH10

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Text of T.B - CH10

Chapter 10

CHAPTER 10

Multiple-Choice Questions1.Which of the following parties is responsible for establishing an entitys internal controls?

easya.Management.

ac.Auditors.

b.Management and auditors.

d.Committee of Sponsoring Organizations.

2.Which of the following is not one of the three primary objectives of effective internal control?

easya.Reliability of financial reporting

db.Efficiency and effectiveness of operations

c.Compliance with laws and regulations

d.Each of the above is a primary objective of effective internal control.

3. (Public)The PCAOB states that reasonable assurance allows for

easya.a nominal likelihood of ineffective internal controls.

bb.a remote likelihood that material misstatements will not be prevented or detected by internal control.

c.a likelihood that material misstatements will not be prevented or detected by internal control.

d.a high likelihood that material misstatements will not be prevented or detected by internal control.

4.Internal controls can never be considered as absolutely effective because

easya.their effectiveness is limited by the competency and dependability of employees.

ab.controls always have inherent weaknesses that can be exploited.

c.controls are designed to prevent and detect only material misstatements.

d.none of the above.

5.A major control available in a small company, which might not be feasible in a large company, is

easya.a wider segregation of duties.

db.a voucher system.

c.fewer transactions to process.

d.the owner-managers personal interest and close relationship with personnel.

6.An act of two or more employees to steal assets or misstate records is frequently referred to as

easya.collusion.

ab.a material weakness.

c.a control deficiency.

d.Any of the above.

7.

easyWhen the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, this is referred to as

ca.tracing.

b.vouching.

c.a walk-through.

d.tests of controls.

8. (SOX)

easyWhich section of the Sarbanes-Oxley Act requires management to issue an internal control report?

ca.202

b.203

c.404

d.408

9. (SOX)

easySarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements?

aa.A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.

b.A statement that management and the board of directors are responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.

c.A statement that management, the board of directors, and the external auditors for establishing and maintaining an adequate internal control structure and procedures for financial reporting.

d.None of the above is correct.

10. (Public)

easyWhen management is evaluating the design of internal control, management evaluates whether the control can do all but which of the following?

ca.Prevent material misstatements.

b.Detect material misstatements.

c.Correct material misstatements.

d.None of the above is correct.

11. (Public)

easy

bInternal control reports issued by public companies must identify the framework used to evaluate the effectiveness of internal control. Which of the following is the most common framework in the U.S.?

a.Effective Internal Control Framework - AICPA

b.Internal Control - Integrated Framework - COSO

c.Enterprise Internal Control - COSO

d.There is no single common framework used in the U.S.

12. (Public)

easyAuditors tests of operating effectiveness of internal controls might include which of the following types of procedures?

da.Inspection of relevant documentation

b.Inquiries of personnel

c.Reperformance of the application of controls

d.All of the above

13.

easyWith which one of managements concerns with respect to implementing internal controls is the auditor primarily concerned?

ba.Efficiency of operations.

b.Reliability of financial reporting.

c.Effectiveness of operations.

d.Compliance with applicable laws and regulations.

14.

easyWhich of the following activities would be least likely to strengthen a companys internal control?

ba.Separating accounting from other financial operations.

b.Maintaining insurance for fire and theft.

c.Fixing responsibility for the performance of employee duties.

d.Carefully selecting and training employees.

15. (Public)Management must disclose material weaknesses in internal control

easya.whenever the weakness is deemed significant to a single class of transactions.

cb.whenever the weakness is significant to overall financial reporting objectives.

c.even if just one weakness is found.

d.only if the auditor identifies the weakness as significant.

16.

easyWhen auditing a nonpublic company, the auditor should obtain an understanding of internal control sufficient

ba.to provide reasonable protection against client fraud and defalcations by client employees.

b.to assess control risk.

c.to provide a basis for constructive suggestions to the client for improving the accounting system.

d.to provide a method for safeguarding assets, checking the accuracy and reliability of accounting data, promoting operational efficiency, and encouraging adherence to prescribed managerial policies.

17.Which of the following audit tests would be regarded as a test of a control?

easya.Tests of the specific items making up the balance in a given general ledger account.

cb.Tests of the inventory pricing to vendors invoices.

c.Tests of the signatures on canceled checks to managements authorizations.

d.Tests of the additions to property, plant, and equipment by physical inspections.

18.During which part of an audit examination is the preparation of flowcharts most appropriate?

easya.When performing preliminary analytical procedures.

db.When performing tests of controls.

c.When evaluating the system of administrative control.

d.When reviewing the system of internal control.

19.

easyThe ______ consists of the actions, policies, and procedures that reflect the overall attitudes of top management.

ca.control activities.

b.management philosophy.

c.control environment.

d.monitoring function.

20. (Public)An auditors primary emphasis is internal controls over

mediuma. material account balances

bb. classes of transactions

c. account balances and classes of transactions

d. immaterial and material account balances

21.The auditors study of a nonpublic clients internal control is

mediuma.required by GAAP.

bb.required by GAAS.

c.required by the IRS.

d.recommended by the AICPA.

22.

mediumInternal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the

da.adequacy of the computer system.

b.proper implementation by management.

c.ability of the internal audit staff to maintain it.

d.competency and dependability of the people using it.

23.

mediumEven with the most effectively designed internal control, the auditor must obtain audit evidence, beyond testing the controls, for every

ca.transaction.

b.financial statement account.

c.material financial statement account.

d.financial statement account that will be relied upon by third parties.

24. (Public)

mediumTo express an opinion on internal controls, an auditor obtains an understanding of and performs tests of controls related to all but which of the following?

aa.Account balances.

b.Significant account balances.

c.Classes of transactions.

d.Disclosures and related assertions in the financial statements.

25.The essence of an effectively controlled organization lies in the

mediuma.effectiveness of its independent auditor.

db.effectiveness of its internal auditor.

c.attitude of its employees.

d.attitude of its management.

26. (Public)

mediumTo issue a report on internal control over financial reporting for a public company, an auditor must

ca.evaluate managements assessment process.

b.independently assess the design and operating effectiveness of internal control.

c.evaluate managements assessment process and independently assess the design and operating effectiveness of internal control.

d.test controls over significant account balances.

27. (Public)

mediumWhich of the stock exchanges require listed companies to have an audit committee composed entirely of independent directors?

da.AMEX and NYSE

b.NASDAQ only

c.AMEX and NASDAQ

d.AMEX, NASDAQ, and NYSE

28.Which of the following factors may increase risks to an organization?

mediuma.Geographic dispersion of company operations.

db.Decreasing quality of personnel.

c.Presence of new information technologies.

d.All of the above.

29.Which of the following statements is correct with respect to se