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I.

1. It is the process designed and effected by those charged with governance, management and other
personnel to provide reasonable assurance about the achievement of the entity’s objectives
a. Internal auditing c. Business strategy
b. Internal control d. Accounting process

2. The primary objective of procedures performed to obtain an understanding of internal control is to


provide an auditor with
a. Knowledge necessary to plan the audit c. Information necessary to prepare flowcharts
b. A basis for modifying tests of controls d. Evidence to use in reducing detection risk

3. The auditor uses the understanding of internal control to


I. Identify types of potential misstatements
II. Consider factors that affect the risks of material misstatement
III. Design the nature, timing and extent of further audit procedures
a. I and II only c. II and III only
b. I and III only d. I, II and III

4. 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

5. Auditing standards require the auditor to obtain an understanding of the client’s internal control
structure
a. For every audit c. Sufficient to find any frauds which may exist
b. For first time audits d. Whenever it would be appropriate

6. Which of the following is a reason to establish internal control?


a. To provide reasonable assurance that the entity’s objectives are achieved
b. To safeguard the resources of the organization
c. To encourage compliance with organizational objectives
d. To ensure the accuracy, reliability and timeliness of information

7. When obtaining an understanding of controls that are relevant to the audit, the auditor is required
to a. Evaluate the design of those controls
b. Determine whether those controls have been implemented
c. Evaluate the design of those controls and determine whether they have been implemented
d. Evaluate the design of those controls and determine whether they have been implemented
by performing tests of controls

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

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

10. When obtaining an understanding of an entity’s control environment, an auditor should concentrate
on the substance of management’s policies and procedures rather than their form because

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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 management’s attitude toward the control
environment
c. Management 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
as a high level

11. In obtaining an understanding of internal control relevant to the audit, an auditor is required to
obtain knowledge about the
a. Effectiveness of controls that have been implemented
b. Consistency with which controls are currently being applied
c. Design of the controls pertaining to internal control components
d. Controls related to each class of transactions and account balance

12. An auditor's flowchart of a client's information system relevant to financial reporting is a


diagrammatic representation that depicts the auditor's
a. Assessment of control risk
b. Identification of weaknesses in the system
c. Assessment of the control environment's effectiveness
d. Understanding of the system

13. As part of understanding internal control, an auditor is not required to


a. Consider factors that affect the risk of material misstatement
b. Ascertain whether internal controls have been implemented
c. Identify the types of potential misstatements that can occur
d. Obtain knowledge about the operating effectiveness of internal control

14. 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, backup facilities, responsibility accounting and natural laws
d. Internal audit and management’s philosophy and operating style

15. This internal control component is the foundation for all other components. It sets the tone of the
organization, provides discipline and structure, and influences the control consciousness of
employees
a. Control activities c. Control environment
b. Monitoring of controls d. The entity’s risk assessment process

16. Management philosophy and operating style most likely would have a significant influence on an
entity's 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. Those charged with governance actively oversee the financial reporting process

17. Which of the following statements best describes the entity’s risk assessment process
a. Entity’s process of identifying business risks relevant to financial reporting objectives and
deciding about actions to address those risks
b. Entity’s assessment of audit risks affecting the financial statements
c. Entity’s process of evaluating the risks of misstatements due to fraud
d. Entity’s assessment of risks that internal control may fail to detect misstatements affecting
the financial statements

18. The policies and procedures that help ensure that management directives are carried out are
referred to as the
a. Control environment c. Monitoring of controls

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b. Control activities d. Information system

19. Which of the following is not one of the specific control procedures that are relevant to financial
statement audit?
a. Performance reviews c. Segregation of duties
b. Physical controls d. Monitoring

20. As a result of obtaining an understanding of an entity’s internal control system, the auditor may
become aware of material weaknesses in the design or implementation of internal control. The
auditor is required to communicate this matter to
a. Those charged with governance or management c. Securities and Exchange Commission
b. Chief executive officer d. Board of Accountancy

II.
1. Controls that enhance the reliability of the financial statements may be classified as prevention
controls and detection controls. Which of the following is primarily a detection control?
a. Separation of duties between recording cash receipts and depositing cash
b. Bank accounts are reconciled monthly by persons independent of cash recording and cash
custody
c. The human resources department authorizes the hiring of only those persons for accounting
positions that meet the written job requirements specified by the corporate controller
d. An accounting manual, accompanied by a detailed chart of accounts, carefully and clearly
describes each type of transaction affecting the entity

2. Which of the following is an effective internal accounting control over cash payments?
a. Signed checks should be mailed under the supervision of the check signer
b. Spoiled checks which have been voided should be disposed of immediately
c. Checks should be prepared only by persons responsible for cash receipts and cash
disbursements
d. A check signing machine with two signatures should be utilized

3. Which of the following is of least concern to an auditor in assessing the risks of material
misstatements?
a. Signed checks are distributed by the controller to approved payees
b. Checks are signed by one person
c. Cash receipts are not deposited intact daily
d. Treasurer does not verify the names and addresses of check payees

4. Which of the following controls would an entity most likely use in safeguarding against the loss of
trading securities?
a. The independent auditor traces all purchases and sales of trading securities through the
subsidiary ledgers to the general ledger
b. An independent trust company has no direct contact with the employees who have record-
keeping responsibilities has possession of the securities
c. The internal auditor inspects the trading securities in the entity’s safe each year on the
balance sheet date
d. A designated member of the board of directors controls the securities in a bank safe-deposit
box

5. The following are directly involved in the revenue/receipt cycle, except


a. Treasurer and controller c. Billing clerk
b. Receiving department clerk d. Sales manager and the credit manager

6. For effective internal control, employees maintaining the accounts receivable subsidiary ledger
should not also approve
a. Cash disbursements c. Granting of credit to customers
b. Write-offs of customer accounts d. None of the above

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7. Which of the following control activities in an entity’s revenue/receipt cycle would provide
reasonable assurance that all billed sales are correctly posted to the accounts receivable ledger?
a. Each shipment of goods on credit is supported by a prenumbered sales invoice
b. The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable
control account in the general ledger
c. Daily sales summaries are compared to daily postings to the accounts receivable ledger
d. Each sales invoice is supported by a prenumbered shipping document

8. Which of the following controls most likely would provide reasonable assurance that all credit sales
transactions of an entity are recorded?
a. The accounting department supervisor controls the mailing of monthly statements to
customers and investigates any differences reported by customers
b. The accounting department supervisor independently reconciles, on a monthly basis, the
accounts receivable subsidiary ledger to the accounts receivable control account
c. The billing department supervisor matches prenumbered shipping documents with entries
in the sales journal
d. 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

9. Which of the following control procedures may prevent the failure to bill customers for some
shipments?
a. Each shipment should be supported by a prenumbered sales invoice that is accounted for
b. Each sales order should be approved by authorized personnel
c. Sales journal entries should be reconciled to daily sales summaries
d. Each sales invoice should be supported by a shipping document

10. The most effective control for ensuring that customers are billed only for goods shipped is to
a. Require that carriers sign properly completed bills of lading
b. Implement a policy that prevents the mailing of sales invoices to customers in the absence
of a properly approved shipping order and a bill of lading signed by the carrier
c. Require that all shipments be approved by accounting
d. Prohibit goods from leaving the warehouse without being accompanied by a signed bill of
lading and a properly approved shipping order

11. A company uses its sales invoices for posting perpetual inventory records. Inadequate internal
control over the invoicing function allows goods to be shipped but not invoiced. The inadequate
controls could cause what type of misstatement in each of the following accounts?
Revenues Receivables Inventories

a. Understatement Understatement Understatement


b. Overstatement Overstatement Understatement
c. Understatement Understatement Overstatement
d. Overstatement Overstatement Overstatement

12. Effective controls relevant to purchasing of raw materials should usually include all of the following,
except
a. Determining the need for the raw materials prior to preparing the purchase order
b. Systematic reporting of product changes that will affect raw materials
c. Obtaining financial approval prior to making a commitment
d. Obtaining third-party written quality and quantity reports prior to payment for the raw
materials

13. Which of the following is the most effective control procedure to detect vouchers that were prepared
for the payment of goods that were not received?
a. Count goods upon receipt in storeroom
b. Match purchase order, receiving report, and vendor's invoice for each voucher in accounts
payable department

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c. Compare goods received with goods requisitioned in receiving department
d. Verify vouchers for accuracy and approval in internal audit department

14. In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase
order, requisition, and receiving report are verified. The next step in the system is to
a. Cancel the supporting documents
b. Enter the check amount in the check register
c. Approve the voucher for payment
d. Post the voucher amount to the expense ledger

15. Which of the following is an internal control procedure that would prevent a paid disbursement
voucher from being presented for payment a second time?
a. Vouchers should be prepared by individuals who are responsible for signing disbursement
checks
b. Disbursement vouchers should be approved by at least two responsible management
officials
c. The date on a disbursement voucher should be within a few days of the date the voucher is
presented for payment
d. The official signing the check should cancel the paid voucher after examining the
documentation supporting the disbursement

16. Internal control procedures are strengthened when the quantity of merchandise ordered is omitted
from the copy of the purchase order sent to the
a. Department that initiated the requisition c. Purchasing agent
b. Receiving department d. Accounts payable department

17. Which of the following is an essential control procedure to ensure the accuracy of the recorded
inventory quantities?
a. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with
inventory policy
b. Testing inventory extensions
c. Performing a gross profit test
d. Establish a cutoff for goods received and shipped

18. Which of the following controls most likely would be implemented to achieve the production cycle
control objective of maintaining accurate inventory records?
a. Periodic inventory counts are used to adjust the perpetual inventory records
b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum
c. Perpetual inventory records are periodically compared with the net realizable value of
individual inventory items
d. Purchase requisitions, receiving reports, purchase orders and vendor invoices are
independently matched before payment is approved

19. When there are numerous property and equipment transactions during the year, an auditor who
plans to assess control risk at a low level usually performs
a. Tests of controls and extensive tests of property and equipment balances at the end of the
year
b. Analytical procedures for current year property and equipment transactions
c. Tests of controls and limited tests of current year property and equipment transactions
d. Analytical procedures for property and equipment balances at the end of the year

20. The following controls are appropriate for property, plant and equipment, except
a. Written policies for capitalization and expenditure and review of application of depreciation
methods
b. Disposal of fully depreciated PPE items
c. Proper authority for acquisition and retirement of PPE items
d. Detailed PPE records and physical controls over PPE items

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