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1.

The primary responsibility


for establishing and maintaining an internal control rests
with
a. The external auditors
b. The internal auditors
c. Management and those charged with governance
d. The controller or the treasurer

2.

The fundamental purpose of an internal control is to


a. Safeguard the resources of the organization
b. Provide reasonable assurance that the objectives of the organization are achieved
c. Encourage compliance with organization objectives
d. Ensure the accuracy, reliability, and timeliness of information

3.

Which of the following is not one of the three primary objectives of effective internal
control?
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations
c. Compliance with laws and regulations
d. Assurance of elimination of business risk

4.

Which of the following internal control objectives would be most relevant to the audit?
a. Operational objective
b. Compliance objective
c. Financial reporting objective
d. Administrative control objective

5.

Which statement is correct concerning the relevance of various types of controls to a


financial audit?
a. An auditor may ordinarily ignore a consideration of controls when a substantive
audit approach is taken
b. Controls over the reliability of financial reporting are ordinarily most directly
relevant to an audit but other controls may also be relevant
c. Controls over safeguarding of assets and liabilities are of primary importance,
while controls over the reliability of financial reporting may also be relevant
d. All controls are ordinarily relevant to an audit.

6.

An auditor would most likely be concerned with internal control policies and procedures
that provide reasonable assurance about the
a. Efficiency of managements decision-making process
b. Appropriate prices the entity should charge for its products
c. Methods of assigning production tasks to employees
d. Entitys ability to process and summarize financial data

7.

In an audit of financial statements, an auditors primary consideration regarding an


internal control activity is whether the control
a. Reflects managements philosophy and operating style
b. Affects managements financial statement assertion
c. Provides adequate safeguards over access to assets
d. Enhances managements decision-making process

8.

Two key concepts that underlie managements design and implementation of internal control
are:
a. Costs and materiality
b. Absolute assurance and costs
c. Inherent limitations and reasonable assurance
d. Collusion and materiality

9.

Internal control can provide only reasonable assurance of achieving entitys control
objectives. One factor limiting the likelihood of achieving those objectives is that
a. The auditors primary responsibility is the detection of fraud
b. The board of directors is active and independent
c. The cost of internal control should not exceed its benefits
d. Management monitors internal control

10. An act of two or more employees to steal assets and cover their theft by misstating the
accounting records would be referred to as:
a. Collusion
b. A material weakness
c. A control deficiency
d. A significant deficiency

11. Inherent limitations in an internal control must be considered in evaluating its


effectiveness in preventing and detecting errors and fraud. Inherent limitations do not
include
a. Misunderstanding of instructions, mistakes of judgment, personal carelessness,
distraction, or fatigue.
b. Incompatible functions performed by the same person.
c. Collusion among employees.
d. Management override of certain policies or procedures.
12. Which of the following best describes an inherent limitation that should be recognized by
an auditor when considering the potential effectiveness of an internal control structure?
a. Procedures whose effectiveness depends on segregation of duties can be
circumvented by collusion.
b. The competence and integrity of client personnel provide an environment conducive
to control and provides assurance that effective control will be achieved.
c. Procedures designed to assure the execution and recording of transactions in
accordance with proper authorizations are effective against fraud perpetrated by
management.
d. The benefits expected to be derived from effective internal control usually do not
exceed the cost of such control.
13. When considering the effectiveness of a system of internal control, the auditor should
recognize that inherent limitations do exist. Which of the following is an example of an
inherent limitation in a system of internal accounting control?
a. The effectiveness of procedures depends on the segregation of employee duties.
b. Procedures are designed to assure the execution and recording of transactions in
accordance with managements authorization.
c. In the performance of most control procedures, there are possibilities of errors
arising from mistakes in judgment.
d. Procedures for handling large numbers of transactions are processed by electronic
data processing equipment.
14. An effective system of internal control
a. Cannot be circumvented by management
b. Can reduce the cost of an external audit
c. Can prevent collusion among employees
d. Eliminates risks and potential loss to the organization
15. Internal controls are not designed to provide reasonable assurance that:
a. All frauds will be detected
b. Transactions are executed in accordance with managements authorization
c. Access to assets is permitted only in accordance with managements authorization
d. Company personnel comply with applicable rules and regulations
16. The internal control cannot be designed to provide reasonable assurance that:
a. Transactions are executed in accordance with managements authorization
b. Fraud will be eliminated
c. Access to assets is permitted only in accordance with managements authorization
d. The recorded accountability for assets is compared with the existing assets at
reasonable intervals
17. Which of the following statements about internal control is correct?
a. Properly maintained internal control reasonably ensures that collusion among
employees cannot occur.
b. The
establishment
and
maintenance
of
internal
control
are
important
responsibilities of the internal auditor.
c. Exceptionally strong internal control is enough for the auditor to eliminate
substantive tests on a significant account balance.
d. The cost-benefit relationship is a primary criterion that should be considered in
designing internal control.
18. Which of the following is correct about internal control?
a. Accounting and internal control systems provide management with conclusive
evidence that objectives are reached.
b. One of the inherent limitations of accounting and internal control systems is the
possibility that the procedures may become inadequate due to changes in
conditions, and compliance with procedures may deteriorate.
c. Most internal controls tend to be directed at non-routine transactions.
d. Management does not consider costs of the accounting and internal control systems.

19. Internal control, no matter how well designed and operated can only provide an entity with
reasonable assurance about achieving the entitys objectives. The likelihood of
achievement is affected by limitations inherent to internal control. These limitations don
not include:
a. Collusion among employees
b. Inappropriate management override of internal control
c. Human failures
d. Incompatible functions
20. Internal controls can never be regarded as completely effective. Even if company personnel
could design an ideal system, its effectiveness depends on the:
a. 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
21. Which of the following best describes the interrelated components of internal control?
a. Organizational structure, management, philosophy, and planning
b. Control environment, risk assessment, control activities, information and
communication systems, and monitoring
c. Risk assessment, back up facilities, responsibility accounting, and natural laws.
d. Internal audit and managements philosophy and operating style.
22. Which of the following is not one of the components of an entitys internal control?
a. Control risk
b. Control activities
c. Information and communication
d. The control environment
23. The overall attitude and awareness of an entitys board of directors concerning the
importance of the internal control usually is reflected in its
a. Computer-based controls
b. System of segregation of duties
c. Control environment
d. Safeguards over access to assets
24. When obtaining an understanding of an entitys control environment, an auditor should
concentrate on the substance of managements policies and procedures rather than their
form because
a. The auditor may believe that the policies and procedures are inappropriate for
that particular entity
b. The board of directors may not be aware of managements attitude toward the
control environment
c. Management environment may establish appropriate policies and procedures but not
act on them
d. The policies and procedures may be so ineffective that the auditor may assess
control risk at a high level
25. Basic to a proper control environment are the quality and integrity of personnel who must
perform the prescribed procedures. Which is not a factor in providing for competent
personnel?
a. Segregation of duties
b. Hiring practices
c. Training programs
d. Performance evaluations
26. In evaluating the design of the entitys internal control environment, the auditor
considers the certain subcomponents of control environment and how they have been
incorporated into the entitys processes. Subcomponents of control environment would not
include
a. Integrity and ethical values
b. Commitment to competence
c. Organizational structure
d. Information and communications system
27. It is important for the auditor to consider the competence of the audit
employees, because their competence bears directly and importantly upon the
a. Cost-benefit relationship of internal control
b. Achievement of the objectives of internal control
c. Comparison of recorded accountability with assets
d. Timing of the tests to be performed

clients

28. Which of the following components of an entitys internal control structure includes the
development of employee promotion and training policies?
a. Control activities
b. Control environment
c. Information and communication
d. Quality and control system
29. Which of the following subcomponents of the control environment define the existing lines
of responsibility and authority?
a. Organizational structure
b. Management philosophy and operating style
c. Human resource policies and practices
d. Management integrity and ethical value
30. Which of the following is not one of the subcomponents of the control environment?
a. Managements philosophy and operating style
b. Organizational structure
c. Adequate separation of duties
d. Commitment to competence
31. Management philosophy and operating style most likely would have a significant influence
on an entitys control environment when
a. The internal auditor reports directly to management.
b. Management is dominated by one individual
c. Accurate management job descriptions delineate specific duties.
d. The audit committee actively oversees the financial reporting process.
32. A proper segregation of duties requires
a. An individual authorizing a transaction records it
b. An individual authorizing a transaction maintains a custody of the asset that
resulted from the transaction.
c. An individual maintaining custody of an asset be entitled to access the accounting
records for the asset
d. An individual recording a transaction not compare the accounting record of the
asset with the asset itself
33. The single most effective control procedure established to avoid allowing any person to
be in a position to perpetrate and then conceal errors or fraud is
a. The separation of the functional responsibilities custodianship, record keeping,
operation, and authorization.
b. Require each employee to take a vacation each year
c. Establish an internal audit department
d. Require the bonding of personnel in positions that necessitate handling of cash and
other universally desirable valuables
34. Which of the following statements is most correct with respect to separation of duties?
a. Employees should not have temporary and permanent custody of assets
b. Employees who authorize transactions should not have custody of related assets
c. It is permissible to allow an employee to open cash receipts and record those
receipts.
d. Employees who authorize transactions should have recording responsibility for these
transactions.
35. Which of the following would contribute most to the safeguarding of assets?
a. Access to computer facilities and records is limited to authorized personnel.
b. Training programs are conducted to develop competence of newly hired personnel.
c. Control and subsidiary accounts are reconciled on a regularly scheduled basis.
d. Blank stock of all purchase orders and sales invoices are pre-numbered
36. Accounting information system:
Initiates transactions
a.
b.
c.
d.

Yes
Yes
No
No

Processes transactions

Monitors transactions

Yes
Yes
Yes
No

Yes
No
No
Yes

37. Which of the following statements best describes the entitys risk assessment process?

a.
b.
c.
d.

Entitys process of identifying business risks relevant to financial reporting


objectives and deciding about actions to address those risks.
Entitys assessment of audit risks affecting the financial statements
Entitys process of evaluating the risks of misstatements due to fraud.
Entitys assessment of risks that internal control may fail to detect misstatements
affecting the financial statements.

38. Which of the following deal with ongoing or periodic assessment of the quality of internal
control by management?
a. Quality control activities
b. Monitoring activities
c. Oversight activities
d. Management activities
39. An entitys ongoing monitoring activities often include
a. Periodic audits by the audit committee
b. Reviewing the purchasing function
c. The audit of the annual financial statements.
d. Control risk assessment in conjunction with quarterly reviews.
40. The
are
a.
b.
c.
d.

policies and procedures that help ensure that management directives are carried out
referred to as the:
Control environment
Control activities
Monitoring of controls
Information system

41. Which of the following is not one of the specific control activities that are relevant to
financial statement audit?
a. Performance reviews
b. Physical controls
c. Segregation of duties
d. Monitoring
42. 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
43. Which of the following activities would be least likely to strengthen a companys internal
control
a. Separating accounting from other financial operation
b. Maintaining insurance for fire and theft
c. Fixing responsibility for the performance of employee duties
d. Carefully selecting and training employees
44. Which of the following best describes the purpose of control activities?
a. The actions, policies and procedures that reflect the overall attitudes of management
b. The identification and analysis of risks relevant to the preparation of financial
statements.
c. The policies and procedures that help ensure that necessary actions are taken in order
to achieve the entitys objectives
d. Activities that deal with the ongoing assessment of the quality of internal control by
management
45. A small entity may use less formal means to ensure that internal control objectives are
achieved. For example, extensive accounting procedures, sophisticated accounting records,
or formal controls are least likely to be needed if.
a. Management is closely involved in operations
b. The entity is involved in complex transactions
c. The entity is subject to legal or regulatory requirements also found in larger
entities.
d. Financial reporting objectives have been established
46. Which of the following may represent the biggest challenge smaller public companies face
in implementing effective internal control?
a. A lack of expertise
b. Reduced importance
c. Limited resources

d.

Limited available guidance

Consideration of internal control


47. The
a.
b.
c.
d.

auditors consideration of a companys internal control is.


Required under the Philippine Accountancy Act
Required by PSA
Required by the Code of Ethics
Recommended by the SEC

48. The auditors primary purpose in auditing the clients system of internal control over
financial reporting is:
a. To prevent fraudulent financial statements from being issued to the public.
b. To evaluate the effectiveness of the companys internal controls over all relevant
assertions in the financial statements
c. To report to management that the internal controls are effective in preventing
misstatements from appearing on the financial statements.
d. To efficiently conduct the audit of financial statements.
49. Auditing standards require the auditor to obtain an understanding of the clients internal
control structure
a. For every audit
b. For first time audits.
c. Sufficient to find any frauds which may exist
d. Whenever it would be appropriate
50. When auditing a private company, the auditor should obtain an understanding of internal
control sufficient to:
a. Provide reasonable protection against client fraud and defalcations by client
employees.
b. Assess control risk
c. Provide a basis for suggestions to the client for improving the accounting system
d. Provide a method for safeguarding assets, checking the accuracy and reliability of
accounting data, promoting operating efficiency, and encouraging adherence to
prescribed managerial policies.
51. Evaluating the design of the entitys internal control would involve
a. Considering whether the control, individually or in combination with other controls,
is capable of effectively preventing, or detecting and correcting, material
misstatements.
b. Determining whether control exists and the entity is using it.
c. Determining whether the control is operating effectively.
d. Determining the consistency of application of internal control procedures
52. Obtaining knowledge about whether the control is implemented can best be obtained by
a. Inquiry of clients personnel
b. Reading procedures manual
c. Tracing transactions through the information system relevant to financial reporting.
d. Performing tests of control
53. An auditor should consider two key issues when obtaining an understanding of a clients
internal controls. These issues are:
a. The effectiveness and efficiency of the controls
b. The frequency and effectiveness of the controls
c. The design and implementation of the controls
d. The implementation and efficiency of the controls

54. The auditor uses his understanding of accounting and internal control systems together
with the inherent and control risks assessments to perform all of the following except
a. Identify the types of misstatements that could occur
b. Consider factors that affect the risk of material misstatements
c. Design appropriate audit procedures
d. Evaluate the effectiveness of the accounting and control systems
55. When obtaining an understanding of the accounting and internal control systems to plan the
audit, the auditor should obtain knowledge about the

Design of the accounting and internal control


systems
a.
YES
b.
YES
c.
NO
d.

NO

Operation
systems

of

accounting

and

internal

YES
NO
NO
YES

56. When the auditor attempts to understand the operation of the accounting system by tracing
a few transactions through the accounting system, the auditor is said to be:
a. Tracing
b. Vouching
c. Performing a walk-through
d. Testing controls
57. Which of the following statements is incorrect about walk-through tests?
a. It involves tracing a few transactions through the accounting systems
b. This procedure may form part of test of control.
c. The nature and extent of walk-through tests performed by the auditor are such that
they alone would provide sufficient appropriate audit evidence to support a low
assessment of control risk.
d. This procedure is performed to determine whether the controls are being implemented.
58. The
the
the
a.
b.
c.
d.

auditors understanding of the accounting and internal control systems significant to


audit is ordinarily obtained through previous experience with the entity. In addition,
auditor may perform the following procedures, except
Inquiries of appropriate management, supervisory and other personnel at various
organizational levels within the entity, together with reference to documentation, job
descriptions and flow charts
Inspection of documents and records produced by the accounting and internal control
system
Observation of the entitys activities and operations, including observation of the
organization of computer operations, management personnel and the nature of
transaction processing.
Reperformance of internal control procedures.

59. When obtaining understanding of the entitys internal control, the auditor should obtain
knowledge about the systems
Design
a.
b.
c.
d.

YES
YES
YES
NO

Implementation
YES
NO
NO
NO

Operating Effectiveness
YES
NO
NO
YES

60. Which of the following would an auditor least likely perform when obtaining understanding
of the entitys accounting and internal control systems?
a. Inquiries of appropriate personnel
b. Inspection of documents and record
c. Observation of the entitys activities and operations
d. Performing analytical review procedures
61. After obtaining sufficient understanding of the entitys accounting and internal control
systems, the auditor should make a preliminary assessment of
a. Audit risk
b. Control risk
c. Inherent risk
d. Detection risk
62. Which of the following is not a medium that can normally be used by an auditor to record
information concerning a clients internal control policies and procedures?
a. Narrative memorandum
b. Flowchart
c. Procedures manual
d. Questionnaire
63. The auditor observes client employees while gaining an understanding of the internal
control structure to
a. Prepare a flowchart

control

b.
c.
d.

Update information contained in the organization and procedure manuals


Gain knowledge of the design and application of relevant policies, procedures, and
records relating to the control structure
Determine the extent of compliance with quality control standards

64. Which of the following statements regarding auditors documentation of the clients
internal control structure is correct?
a. Documentation must include flowcharts
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable
d. No one particular form of documentation is necessary, and the extent of documentation
may vary
65. In gaining an understanding of the internal control structure, the auditor may trace
several transactions through the control process. The primary purpose of this task is to
a. Replace substantive tests
b. Detect fraud
c. Determine the effectiveness of the control procedures
d. Determine whether the controls have been placed in operation
66. The
a.
b.
c.
d.

conclusion reached as a result of assessing control risk is referred to as the:


Assurance provided by internal control structure
Determined level of acceptable detection risk
Product of the understanding of internal control
Assessed level of control risk

67. An auditor assesses control risk because it


a. Is relevant to the auditors understanding of the control environment
b. Provides assurance that the auditors materiality levels are appropriate
c. Indicates to the auditor where inherent risk may be the greatest
d. Affects the level of detection risk that the auditor may accept
68. When an auditor increases the assessed level of control risk because certain control
activities were determined to be ineffective, the auditor would most likely increases the
a. Extent of tests of controls
b. Level of detection risk
c. Extent of test of details
d. Level of inherent risk
69. An auditor uses the knowledge provided by the understanding of the internal control and
the assessed level of the risk of material misstatement primarily to
a. Determine whether procedures and records concerning the safeguarding of assets are
reliable.
b. Ascertain whether the opportunities to allow any person to both perpetrate and conceal
fraud are minimized
c. Modify the initial assessments of inherent risk and preliminary judgments about
materiality levels.
d. Determine the nature, timing and extent of substantive tests for financial statements
assertions.
70. Which of the following statements concerning control risk is correct?
a. Assessing control risk and obtaining an understanding of an entitys internal control
structure may be performed concurrently
b. When control risk is at a high level, an auditor is required to document the basis for
that assessment
c. Control risk may be assessed sufficiently low to eliminate substantive testing for
significant transaction classes
d. When assessing control risk, an auditor should not consider evidence obtained in prior
audits about the operation of control procedures.
71. Which of the following is a step in an auditors decision to assess control risk at a less
than high level?
a. Apply analytical procedures to both financial data and nonfinancial information to
detect conditions that may indicate weak controls
b. Perform tests of details of transactions and accounts balances to identify potential
errors and fraud
c. Identify specific internal control policies and procedures that are likely to detect
or prevent material misstatements
d. Documents that the additional audit effort to perform tests of controls exceeds the
potential reduction in substantive testing

72. If, after obtaining an initial understanding of a clients internal control, the auditor
wishes to further reduce the assessed level of control risk relating to plant asset
transactions, the auditor should next
a. Make extensive substantive test of plant asset balances
b. Establish the physical existence of current year additions
c. Complete the plant asset section of the internal accounting control questionnaire
d. Further test those internal control procedures relating to processing and recording
plant asset transactions
73. An auditor uses the knowledge provided by the understanding of internal control and the
final assessed level of control risk primarily to determine the nature, timing and extent
of the
a. Attribute tests
b. Test of controls
c. Compliance tests
d. Substantive tests
74. Control testing is performed in order to determine whether or not
a. The assessed level of control risk can be reduced
b. Necessary controls are absent
c. Incompatible function exist
d. Material peso error exist
75. Tests of controls do not include
a. Reperformace of internal control procedures
b. Inquiries about, and observation of, internal control which leave no audit trail
c. Inspection of documentary support for transactions evidencing authorization
d. Analytical procedures involving comparison of operating expenses with budgeted amounts
76. To obtain evidential matter about control risk, an auditor selects tests from a variety of
techniques including
a. Inquiry
b. Analytical procedures
c. Calculation
d. Confirmation
77. For certain controls, such as segregation of duties, documentary 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
78. Audit evidence concerning proper segregation of duties normally is best obtained by:
a. Direct personal observation of the employee who applies control procedures
b. Making inquiries of co-workers about the employee who applies control procedures
c. Preparation of a flowchart of duties performed and available personnel
d. Inspection of third-party documents containing the initials of who applied control
procedures
79. Based on a study and evaluation completed at an interim date, the auditor concludes that
no significant internal accounting control weaknesses exist. The records and procedures
would most likely be tested again at year-end if
a. Compliance tests were not performed by the internal auditor during the remaining
period
b. The internal accounting control system provides a basis for reliance in reducing the
extent of substantive testing.
c. The auditor used non-statistical sampling during the interim period compliance testing
d. Inquiries and observations lead the auditor to believe that conditions have changed
80. Before relying on the system of internal control, the auditor obtains a reasonable degree
of assurance that the internal control procedures are in use and operating as planned. The
auditor obtains this assurance by performing planned
a. Substantive tests
b. Tests of controls
c. Transaction tests
d. Tests of trends and ratios
81. After obtaining an understanding of the internal control structure and assessing control
risk, an auditor decided to perform tests of controls. The auditor most likely decided
that

a.
b.
c.
d.

It would be efficient to perform tests of controls that would result in a reduction in


planned substantive tests
Additional evidence to support further reduction in control risk is not available
An increase in the assessed level of control risk is justified for certain financial
statement assertions
There were many internal control weaknesses that could allow errors to enter the
accounting system

82. After studying and evaluating a clients existing internal control, an auditor has
concluded that the policies and procedures are well designed and functioning as intended.
Under these circumstances, the auditor would most likely
a. Perform further control tests to the extent outlined in the audit program.
b. Determine the control policies and procedures that should prevent or detect errors and
fraud.
c. Set detection risk at a higher level than would be set under conditions of weak
internal control
d. Set detection risk at a lower level than would be set under conditions of weak
internal control.
83. After considering a clients internal control, an auditor has concluded that the system is
well designed and is functioning as anticipated. Under these circumstances, the auditor
would most likely
a. Cease to perform further substantive tests
b. Not increase the extent of planned substantive tests
c. Increase the extent of anticipated analytical procedures
d. Perform all tests of controls to the extent outlined in the pre-planned audit program
84. After considering internal control, an auditor might decide to
a. Increase the extent of tests of controls and substantive tests in areas where internal
control is strong
b. Increase the extent of substantive tests in areas where internal control is weak
c. Reduce the extent of tests of controls in areas where internal control is strong
d. Reduce the extent of both substantive tests and tests of controls in areas where
internal control is strong
85. The
a.
b.
c.
d.

auditor would most likely assess control risk at a high level when
It would be efficient to perform test of control
The entitys accounting and internal control systems are not reliable
The auditor wishes to rely on the entitys accounting and internal control systems
The auditor wants to restrict substantive tests

86. The
a.
b.
c.
d.

primary emphasis by auditors is on controls over


Classes of transactions
Account balances
Both A and B, because they are equally important
Both A and B, because they vary from client to client

87. When obtaining audit evidence about the effective operation of internal controls, the
auditor considers all of the following except
a. How they were applied
b. The consistency with which they were applied during the period
c. By whom they were applied
d. Why they were applied
88. When control risk is assessed at a high level, the auditor should document his
Understanding of internal
control components
a.
YES
b.
YES
c.
YES
d.
NO

Conclusion that control risk is


at a high level
YES
YES
NO
YES

Basis for concluding that


control risk is at a high level
YES
NO
NO
NO

89. When control risk is assessed at less than high level, the auditor should document his
Understanding of internal control components
a.

YES

Basis for assessing control risk at less than


high level
YES

b.
c.
d.

YES
NO
NO

NO
YES
NO

90. The auditor will perform tests of controls when controls are initially assessed as:
a.
b.
c.
d.

Low
YES
YES
NO
YES

Moderate
YES
NO
YES
YES

High
YES
YES
NO
NO

91. Which of the following may not be required on a particular audit of a company?
a. Tests of controls
b. Analytical procedures
c. Substantive procedures
d. Risk assessment procedures
92. Control risks should be assessed in terms of
a. Specific controls
b. Types of potential fraud
c. Control environment factors
d. Financial statement assertions
93. After assessing control risk, an auditor desires to seek a further reduction in the
assessed level of control risk. At this time, the auditor would consider whether
a. The entitys controls have been implemented
b. The entitys controls pertain to any financial statements assertions
c. It would be efficient to obtain an understanding of the entitys information system
d. Additional audit evidence sufficient to support a further reduction is likely to be
available
94. Based on the requirement of PSA 330, how frequently must an auditor test operating
effectiveness of controls that appear to functions as they have in past years and on which
the auditor wishes to rely in the current year?
a. Monthly
b. Each audit
c. at least every second audit
d. at least every third audit
95. Before assessing control risk at a level lower than the maximum, the auditor obtains
reasonable assurance that controls are in use and effectively. This assurance is most
likely obtained in part by
a. Preparing flowcharts
b. Performing substantive tests.
c. Analyzing tests of threads and ratios
d. Inspection of documents
96. An auditor generally tests the segregation of duties related to inventory by
a. Personal inquiry and observation
b. Test counts and cutoff procedures
c. Analytical procedures and invoice recomputation
d. Document inspection and reconciliation
97. The auditor may decide to perform some tests of control during an interim visit in advance
of the period end. However, the auditor cannot rely on the results of such test without
considering the need to obtain further audit evidence relating to the remainder of the
period. Factors to be considered in deciding whether to perform tests of controls for the
remaining period would not include
a. The results of the interim tests
b. The length of remaining period
c. Whether any changes have occurred in the accounting and internal control systems
during the remaining period
d. The results of substantive tests
98. Which of the following is correct when the auditor assess control risk at a high level?
a. The auditor should document the basis for his assessment
b. The auditor should perform tests of controls
c. The auditor should document his conclusion that control risks is at a high level
d. The auditor need not document his understanding of internal control

99. The auditor ordinarily assesses control risk at a high level for some or all assertions
when
The entitys internal control is effective
a.
b.
c.
d.

Evaluating the effectiveness of the control


would not be efficient
YES
NO
NO
YES

YES
YES
NO
NO

100.
The objective of tests of details of transactions performed as tests of controls
is to
a. Monitor the design and use of entity documents such as prenumbered shipping form
b. Determine whether controls have been placed in operation
c. Detect material misstatements in the account balances of the financial statements
d. Evaluate whether controls operated effectively
101.
Tests of controls are
assessment of control risk
a. At a high level
b. At less than high level
c. At zero level
d. At the maximum level

designed

to

obtain

evidence

to

support

the

auditors

102.
An auditor is likely to use four types of procedures to support the operating
effectiveness of internal controls. Which of the following would generally NOT be used?
a. Make inquiries of appropriate client personnel
b. Examine documents, records, and reports
c. Reperform client procedures
d. Inspect the design of documents
103.
Material weaknesses in internal control of a public company must be reported in
writing to which of the following?
a. The SEC
b. Members of the management who are responsible for the related area of the company
c. Audit committee of the companys board of directors
d. The PICPA
104.
a.
b.
c.
d.

When a compensating control exists, the absence of a key control:


Is no longer a concern because there is no longer a significant deficiency or material
weakness
Is still a major concern to the auditor
Could cause a material loss, so it must be tested using substantive procedures
Is magnified and must be removed from the sampling process and examined in its
entirety

105.
In general, a material weakness in internal control may be defined as a condition
in which material errors or irregularities may occur and not be detected within a timely
period by
a. An independent auditor during tests of controls
b. Management when reviewing interim financial statements and reconciling account
balances
c. Employees in the normal course of performing their assigned functions
d. Outside consultants who issue a special-purpose report on internal control structure
106.
A consideration of internal control made during an audit is usually not sufficient
to express an opinion on an entitys controls because
a. Weaknesses in the system may go unnoticed during the audit engagement
b. A consideration of internal control is not necessarily made during an audit engagement
c. Only those controls on which an auditor intends to rely are reviewed, tested and
evaluated
d. Controls can change each year
107.
During the consideration of internal control in a financial statement audit, an
auditor is not obligated to
a. Search for significant deficiencies in the operation of the internal control
b. Understand the internal control and the information system
c. Determine whether the control activities relevant to audit planning have been
implemented

d.
108.
a.
b.
c.

d.

Perform procedures to understand the design of internal control


The management letter is used
To allow management to corroborate oral representations to the auditor
To confirm the terms of the audit engagement
To document the auditors consideration of internal controls
To make recommendations to the client based on observations made during the audit.