45.

Which of the following is correct concerning the level of assistance auditors may
provide in assisting management with its assessment of internal control?
a. No assistance of any type may be provided. Only very limited assistance my be
provided
b. No limitations on assistance exist.
c. Only very limited assistance may be provided.
d. As less risk is assumed by the auditors, a higher level of assistance is appropriate

66. In an integrated audit, what must the auditor communicate to the audit committee?
1) Known material weaknesses 2) All control Deficiencies

a. Yes Yes
Known material weaknesses (yes) All
b. Yes No
c. No Yes
control deficiencies (no)
d. No No

According to Public Company Accounting Oversight Board Auditing Standard 5, what

type of transaction involves establishing a loan loss reserve?

estimation transaction
a. Substantive transaction.
b. Routine transaction.
c. Nonroutine transaction.
d. Estimation transaction.

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. It would be efficient to obtain an understanding of the entity's information system.
b. The entity's controls have been implemented.
additional audit evidence sufficient to
c. The entity's controls pertain to any financial statement assertions.
d. Additional audit evidence sufficient to support a further reduction is likely to be
support a further reduction is available
available.

After obtaining an understanding of internal control and assessing the risk of material misstatement, an auditor decided
to perform tests of controls. The auditor most likely decided that
It would be efficient to perform tests of
controls that would result in a reduction
a. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.
b. Additional evidence to support a further reduction in the risk of material misstatement is not available.
c. An increase in the assessed level of the risk of material misstatement is justified for certain financial statement
assertions.
d. There were many internal control weaknesses that could allow misstatements to enter the accounting system.
in planned substantive tests

Alpha Company uses its sales invoices for posting perpetual inventory records.
Inadequate controls over the invoicing function allow goods to be shipped that are not Understatement of revenues and
invoiced. The inadequate controls could cause an
a. Understatement of revenues, receivables, and inventory.
b. Overstatement of revenues and receivables, and an understatement of inventory.
receivables, and an overstatement of
c. Understatement of revenues and receivables, and an overstatement of inventory.
d. Overstatement of revenues, receivables, and inventory.
inventory

Assessing control risk at a low level most likely would involve

a. Performing more extensive substantive tests with larger sample sizes than originally planned.
b. Reducing inherent risk for most of the assertions relevant to significant account balances. Identifying specific controls relevant to
c. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at
year-end.
d. Identifying specific controls relevant to specific assertions.
specific assertions

Assume that a company has a control deficiency regarding the processing of cash receipts.
Reconciliation of cash accounts by a competent individual otherwise independent of the cash function
might make the likelihood of a significant misstatement due to the control deficiency remote. In this

compensating
situation, reconciliation may be referred to as what type of control?
a. Compensating.
b. Preventive.
c. Adjustive.
d. Nonroutine.

An auditor assesses control risk because it

a. Is relevant to the auditor's understanding of the control environment.
b. Provides assurance that the auditor's materiality levels are appropriate.
affects the level of detection risk that
c. Indicates to the auditor where inherent risk may be the greatest.
d. Affects the level of detection risk that the auditor may accept
the auditor may accept

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.
personal inquiry and observation
d. Document inspection and reconciliation.
An auditor identified a material weakness in December. The client was informed and corrected it shortly
after the "as of date" (December 31); the auditor agrees that the correction eliminates the material
weakness as of January 31. The appropriate report under a PCAOB Standard 5 audit of internal control is
a. Adverse.
b. Unqualified.
Adverse
c. Unqualified with explanatory language relating to the material weakness.
d. Qualified.

An auditor may compensate for a weakness in internal control by increasing

the
a. Level of detection risk.
b. Extent of tests of controls. extent of analytical procedures
c. Preliminary judgment about audit risk.
d. Extent of analytical procedures.

An auditor should obtain sufficient knowledge of an entity's information

system to understand the
a. Safeguards used to limit access to computer facilities. Process used to prepare significant
b. Process used to prepare significant accounting estimates.
c. Controls used to assure proper authorization of transactions. accounting estimates
d. Controls used to detect the concealment of fraud.

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping
customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor
most likely would compare the
dates checks are deposited per bank
statements with the dates remittance
a. Dates checks are deposited per bank statements with the dates remittance credits are recorded.
b. Daily cash summaries with the sums of the cash receipts journal entries.
c. Individual bank deposit slips with the details of the monthly bank statements.
d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually
recorded.
credits are recorded

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without
recording the purchase or receipt of the merchandise. When vendor's invoices arrive, one of the employees approves
the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In
gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all
a. Cash disbursements.
b. Approved vouchers.
cash disbursements
c. Receiving reports.
d. Vendor's invoices

An auditor tests an entity's policy of obtaining credit approval before shipping goods to
customers in support of management's financial statement assertion of
a. Valuation or allocation.
b. Completeness. valuation of allocation
c. Existence or occurrence.
d. Rights and obligations

An auditor uses the knowledge provided by the understanding of internal control and the assessed level
of the risk of material misstatement primarily to Determine the nature, timing, and extent
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.
of substantive tests for financial
statement assertions
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 statement assertions.

Before assessing control risk at a level lower than the maximum, the auditor obtains
reasonable assurance that controls are in use and operating effectively. This assurance is
most likely obtained in part by
a. Preparing flowcharts.
b. Performing substantive tests.
inspection of documents
c. Analyzing tests of trends and ratios.
d. Inspection of documents.

A client erroneously recorded a large purchase twice. Which of the following internal control measures
would be most likely to detect this error in a timely and efficient manner?
a. Footing the purchase journal. Reconciling vendors' monthly statements
b. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.
c. Tracing totals from the purchases journal to the ledger accounts.
d. Sending written quarterly confirmations to all vendors.
with subsidiary payable ledger accounts

A client maintains perpetual inventory records in both quantities and dollars. If the
assessed level of control risk is high, an auditor would probably
a. Insist that the client perform physical counts of inventory items several times during the
Request the client to schedule the
year.
b. Apply gross profit tests to ascertain the reasonableness of the physical counts.
physical inventory count at the end of
c. Increase the extent of tests of controls of the inventory cycle.
d. Request the client to schedule the physical inventory count at the end of the year
the year
Consider an issuer (public) company whose purchases are made through the Internet and by telephone.
Which of the following is correct? These types of purchases represent two
a. These types of purchases represent control objectives for the audit of internet control.
b. These purchases are the assertions related to the purchase class of transactions.
c. These types of purchases represent two major classes of transactions within the purchases process.
major classes of transactions within the
purchases process
d. These two types of transactions represent routine transactions that must always be investigated in
extreme detail.

A control deficiency that is more than a significant deficiency is most likely

to result in what form of audit opinion relating to internal control?
a. Adverse.
b. Qualified. Adverse
c. Unqualified.
d. Unqualified with explanatory language.

Control risk should be assessed in terms of

a. Specific controls.
b. Types of potential fraud. Financial statement assertions
c. Financial statement assertions.
d. Control environment factors.

Decision tables differ from program flowcharts in that decision tables

emphasize
a. Ease of manageability for complex programs. Logical relationships among conditions
b. Logical relationships among conditions and actions.
c. Cost benefit factors justifying the program. and actions
d. The sequence in which operations are performed.

During the consideration of a small business client's internal control, 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 billing to customers and posting to the subsidiary ledger. The owner reviews credit memos after
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 detail accounts receivable accounts to the amount shown in
they are recorded.
the ledger.

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.
Search for significan deficiencies in the
c. Determine whether the control activities relevant to audit planning have been
implemented.
operation of the internal control
d. Perform procedures to understand the design of internal control.

Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of
employing dishonest individuals and
a. Protect employees who make unintentional misstatements from possible monetary damages
Deter hishonesty by making employees
resulting from their misstatements.
b. Deter dishonesty by making employees aware that insurance companies may investigate and
prosecute dishonest acts.
aware that insurance companies may
c. Facilitate an independent monitoring of the receiving and depositing of cash receipts.
d. Force employees in positions of trust to take periodic vacations and rotate their assigned duties. investigate and prosecute dishonest acts

An entity's internal control requires for every check request that there be an approved voucher,
supported by a prenumbered purchase order and a prenumbered receiving report. To determine
whether checks are being issued for unauthorized expenditures, an auditor most likely would select
items for testing from the population of all
a. Purchase orders. cleared payments (i.e, canceled checks)
b. Cleared payments (i.e., canceled checks).
c. Receiving reports.
d. Approved vouchers.

An entity's ongoing monitoring activities often include

a. Periodic audits by the audit committee.
b. Reviewing the purchase function.
c. The audit of the annual financial statement.
Reviewing the purchase function.
d. Control risk assessment in conjunction with quarterly reviews.

For an issuer (public) company audit of internal control, walkthroughs provide the auditor with primary
evidence to
1) Evaluate the effectiveness of the design of controls 2) Confirm whether
controls have been placed in operation
a. Yes Yes
b. Yes No
Yes Yes
c. No Yes
d. No No
For effective internal control, the accounts payable department generally should
a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
Establish the agreement of the vendor's
b. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized
employee.
c. Obliterate the quantity ordered on the receiving department copy of the purchase order.
invoice with the receiving report and
d. Establish the agreement of the vendor's invoice with the receiving report and purchase order.
purchase order

For purposes of an audit of internal control performed under Public Company Accounting Oversight
Board requirements, an account is significant if it is
a. Reasonably possible that it could contain immaterial or material misstatements. Reasonably possible that it could contain
b. Reasonably possible that it could contain material misstatements.
c. Remotely or reasonably possible, or probable, that it could contain material misstatements.
d. Reasonably possible that it could contain one or more control deficiencies no matter how severe.
material misstatments

For purposes of an audit of internal control performed under Public Company Accounting
Oversight Board standards, the "as of date" is ordinarily
a. The first day of the year.
b. The last day of the fiscal period. the last day of the fiscal period
c. The last day of the auditor's fieldwork.
d. The average date for the entire fiscal period

The framework most likely to be used by management in its internal control

assessment under requirements of the Sarbanes-Oxley Act of 2002 is the
a. COSO internal control framework.
b. COSO enterprise risk management framework. COSO internal control framework
c. FASB 37 internal control definitional framework.
d. AICPA internal control analysis manager.

How frequently must an auditor test the operating effectiveness of controls that appear to
function as they have in past years and on which the auditor wishes to rely in the current
year?
a. Monthly.
b. Each audit.
each audit
c. At least every second audit.
d. At least every third audit.

How large must the actual loss identified by the auditor be for a control deficiency to possibly be
considered a material weakness?
1) Immaterial 2)Material

a. Yes Yes
b. Yes No
Yes Yes
c. No Yes
d. No No

Inability to evaluate internal control due to a circumstance-caused scope limitation

relating to a significant account in a Sarbanes-Oxley Section 404 internal control audit is
most likely to result in a(n)
a. Adverse opinion.
b. Disclaimer of opinion.
Disclaimer of opinion
c. Unqualified opinion with explanatory language.
d. Qualified opinion.

In an audit of financial statements in accordance with generally accepted auditing

standards, an auditor is required to a.) Document the auditor's understanding of the
a. Document the auditor's understanding of the entity's internal control. entity's internal control d.)Determine whether
b. Search for significant deficiencies in the operation of internal control.
c. Perform tests of controls to evaluate the effectiveness of the entity's internal control. controls are suitably designed to prevent or detect
d. Determine whether controls are suitably designed to prevent or detect material
misstatements. material mistatements

In an integrated audit, which must the auditor communicate in writing to management?

a. Only material weaknesses. material weaknesses, significant
b. Material weaknesses and significant deficiencies.
c. Material weaknesses, significant deficiencies and other control deficiencies. deficiencies and other control
d. Material weaknesses, significant deficiencies, other control deficiencies, and all
suspected and possible employee law violations. deficiencies

In an integrated audit, which of the following is defined as a weakness in internal control

that is less severe than a material weakness, yet important enough to merit attention by
those responsible for oversight of the company's financial reporting?
a. Control deficiency.
b. Material weakness.
significant deficiency
c. Unusual deficiency.
d. Significant deficiency.
In an integrated audit, which of the following lead(s) to an adverse opinion on internal
control?
1) Material Weakness 2) Significant Deficiencies
a. Yes Yes
Material weakness (yes) Significant
b. Yes No
c. No Yes
Deficiencies (No)
d. No No

In assessing control risk, an auditor ordinarily selects from a variety of

techniques, including
a. Inquiry and analytical procedures.
b. Reperformance and observation. Re-performance and observation
c. Comparison and confirmation.
d. Inspection and verification

In assessing control risk for purchases, an auditor vouches a sample of entries in the
voucher register to the supporting documents. Which assertion would this test of controls
most likely support?
a. Completeness.
b. Existence or occurrence.
existence of occurance
c. Valuation or allocation.
d. Rights and obligations

In obtaining an understanding of a manufacturing entity's internal control

over inventory balances, an auditor most likely would
a. Analyze the liquidity and turnover ratios of the inventory. Review the entity's descriptions of
b. Perform analytical procedures designed to identify cost variances.
c. Review the entity's descriptions of inventory policies and procedures. inventory policies and procedures
d. Perform test counts of inventory during the entity's physical count.

In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge

about the
1) Operating effectiveness of controls 2)Design of controls

a. Yes Yes
b. No Yes
1 No 2 Yes
c. Yes No
d. No No

In obtaining an understanding of an entity's internal control relevant to audit

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

Internal control is 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.
b. Receiving department. Receiving department
c. Purchasing agent.
d. Accounts payable department

The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which
companies in the United States?
a. All companies.
b. SEC registrants.
c. All issuer (public) companies and nonissuer (nonpublic) companies with more than
SEC registrants
$100,000,000 of net worth.
d. All nonissuer companies.

In testing controls over cash disbursements, an auditor most likely would

determine that the person who signs checks also
a. Reviews the monthly bank reconciliation.
b. Returns the checks to accounts payable. Is responsible for mailing the checks
c. Is denied access to the supporting documents.
d. Is responsible for mailing the checks

In which manner are significant deficiencies communicated by the auditors to the audit
committee under Public Company Accounting Oversight Board Standard 5?
a. The communication may either be orally or in written form. The communication must be in written
form
b. The communication must be oral, and not in written form.
c. The communication must be in written form.
d. No such communication is required as only material weaknesses must be communicated.
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. Management is dominated by one
b. Management is dominated by one individual.
c. Accurate management job descriptions delineate specific duties. individual
d. The audit committee actively oversees the financial reporting process

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial

reporting, such that there is a reasonable possibility that a misstatement of the company's annual or
interim financial statements of at least what amount will not be prevented or detected on a timely basis?
a. An amount greater than zero.
b. An amount greater than zero, but not significant.
a material amount
c. A significant amount.
d. A material amount.

The minimum likelihood of loss involved in the consideration of a control

deficiency is
a. Remote.
b. Reasonably possible. not explicitly considered
c. Probable.
d. Not explicitly considered.

The objective of tests of details of transactions performed as tests of control is to

a. Monitor the design and use of entity documents such as prenumbered shipping forms.
b. Determine whether controls have been implemented.
Evaluate whether controls operated
c. Detect material misstatements in the accounting balances of the financial statements.
d. Evaluate whether controls operated effectively.
effectively

The objectives of internal control for a production cycle are to provide assurance that transactions are
properly executed and recorded, and that

a. Production orders are prenumbered and signed by a supervisor. Custody of work in process and of
b. Custody of work in process and of finished goods is properly maintained.
c. Independent internal verification of activity reports is established.
d. Transfers to finished goods are documented by a completed production report and a quality control
finished goods is properly maintained
report.

The overall attitude and awareness of an entity's board of directors

concerning the importance of internal control usually is reflected in its
a. Computer-based controls.
b. System of segregation of duties. control environment
c. Control environment.
d. Safeguards over access to assets

A primary objective of procedures performed to obtain an understanding of

internal control is to provide an auditor with
a. Knowledge necessary to assess the risks of material misstatements. Knowledge necessary to assess the risks
b. Evidence to use in assessing inherent risk.
c. A basis for modifying tests of controls. of material mistatements
d. An evaluation of the consistency of application of management's policies.

A procedure that involves the auditor's following a transaction from its origination through the company's
processes, including information systems, until it is reflected in the company's financial records, using
the same documents and information technology that company personnel use, is referred to as a(an)
a. Analytical analysis.
b. Substantive procedure.
Walkthrough
c. Test of control.
d. Walk-through.

Proper authorization of write-offs of uncollectible accounts should be

approved in which of the following departments?
a. Accounts receivable.
b. Credit. treasurer
c. Accounts payable.
d. Treasurer.

Proper segregation of functional responsibilities calls for separation of the

functions of
a. Authorization, execution, and payment.
b. Authorization, recording, and custody. Authorization, recording, and custody
c. Custody, execution, and reporting.
d. Authorization, payment, and recording
Regardless of the assessed level of control risk, an auditor would perform some
a. Tests of controls to determine the effectiveness of internal control policies.
b. Analytical procedures to verify the design of internal control. substantive tests to restrict detection risk
for significant transaction classes
c. Substantive tests to restrict detection risk for significant transaction classes.
d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary
control risk.

Sound internal control dictates that defective merchandise returned by

customers should be presented initially to the
a. Sales clerk.
b. Purchasing clerk. receiving clerk
c. Receiving clerk.
d. Inventory control clerk.

Sound internal control dictates that immediately upon receiving checks from
customers by mail, a responsible employee should
a. Add the checks to the daily cash summary. Prepare a duplicate listing of checks
b. Verify that each check is supported by a prenumbered sales invoice.
c. Prepare a duplicate listing of checks received. received
d. Record the checks in the cash receipts journal.

To obtain audit evidence about control risk, an auditor selects tests from a
variety of techniques including
a. Inquiry.
b. Analytical procedures. Inquiry
c. Calculation.
d. Confirmation.

To provide assurance that each voucher is submitted and paid only once, an auditor most
likely would examine a sample of paid vouchers and determine whether each voucher is
a. Supported by a vendor's invoice.
b. Stamped "paid" by the check signer. Stamped "paid" by the check signer
c. Prenumbered and accounted for.
d. Approved for authorized purchases.

Tracing shipping documents to prenumbered sales invoices provides

evidence that
a. No duplicate shipments or billings occurred. Shipments to customers were properly
b. Shipments to customers were properly invoiced.
c. All goods ordered by customers were shipped. invoiced
d. All prenumbered sales invoices were accounted for.

Upon receipt of customers' checks in the mailroom, a responsible employee should

prepare a remittance listing that is forwarded to the cashier. A copy of the listing should accounts receivable bookkeeper to
be sent to the
a. Internal auditor to investigate the listing for unusual transactions.
b. Treasurer to compare the listing with the monthly bank statement.
update the subsidiary accounts
c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
d. Entity's bank to compare the listing with the cashier's deposit slip.
receivable records

Walk-throughs ordinarily provide evidence that helps the auditor to

1 Evaluate design effectiveness of controls 2) Confirm whether controls have been placed in operations

a. Yes Yes Yes Yes

b. Yes No
c. No Yes
d. No No

When a customer fails to include a remittance advice with a payment, it is common

practice for the person opening the mail to prepare one. Consequently, mail should be
opened by which of the following four company employees?
a. Credit manager.
b. Receptionist.
Receptionist
c. Sales manager.
d. Accounts receivable check

When an auditor increases the assessed level of control risk because certain control
activities were determined to be ineffective, the auditor would most likely increase the

Extent of tests of details

a. Extent of tests of controls.
b. Level of detection risk.
c. Extent of tests of details.
d. Level of inherent risk.
When considering internal control, an auditor should be aware of the concept of reasonable assurance,
which recognizes that d. The cost of an entity's internal control
a. Internal control may be ineffective due to mistakes in judgment and personal carelessness.
b. Adequate safeguards over access to assets and records should permit an entity to maintain proper
accountability.
should not exceed the benefits expected
to be derived.
c. Establishing and maintaining internal control is an important responsibility of management.
d. The cost of an entity's internal control should not exceed the benefits expected to be derived.

When obtaining an understanding of an entity's internal control, an auditor should

concentrate on the substance of controls rather than their form because Management may establish appropriate
a. The controls may be operating effectively but may not be documented.
b. Management may establish appropriate controls but not enforce compliance with them. controls but not enforce compliance with
c. The controls may be so inappropriate that no reliance is contemplated by the auditor.
d. Management may implement controls whose costs exceed their benefits. them.

Which is correct concerning the external auditor's use of the work of others in an audit of internal control
performed for a public company?
a. It is not allowed.
Ordinarily the work of internal auditors
and others is used primarily in low risk
b. The work of internal auditors may be used, but only when those internal auditors report directly to the
audit committee.
c. Ordinarily the work of internal auditors and others is used primarily in low-risk areas.
d. There is no limitation and is likely to reduce auditor liability since the auditors will then share legal
responsibility with those who have performed the service.
areas

Which is most likely to be a question asked of employee personnel during a walk-through

in an audit of the internal control of an issuer (public) company?
a. Have you ever been asked to override the process? Have you ever been asked to override
the process
b. Do you believe that you are underpaid?
c. What do you do when you find a fraudulent transaction?
d. Who trained you for this job?

Which of the following audit procedures would an auditor most likely perform to test controls relating to
management's assertion concerning the completeness of sales transactions?
a. Verify that extensions and footings on the entity's sales invoices and monthly customers statements Inspect the entity's reports of prenumbered
shipping documents that have not been
have been recomputed.
b. Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the
sales journal.
c. Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.
d. Inquire about the entity's credit granting policies and the consistent application of credit checks.
recorded in the sales journal

Which of the following controls is not usually performed in the vouchers payable
department?
a. Matching the vendor's invoice with the related receiving report. accounting for unused prenumbered
purchase orders and receiving reports
b. Approving vouchers for payment by having an authorized employee sign the vouchers.
c. Indicating the asset and expense accounts to be debited.
d. Accounting for unused prenumbered purchase orders and receiving reports

Receiving reports are prenumbered and

Which of the following controls most likely addresses the completeness assertion for inventory?
a. Work in process account is periodically reconciled with subsidiary records.
b. Employees responsible for custody of finished goods do not perform the receiving function.
c. Receiving reports are prenumbered and periodically reconciled.
d. There is a separation of duties between payroll department and inventory accounting personnel. periodically reconciled

Which of the following controls most likely would assure that all billed sales are correctly posted to the
accounts receivable ledger?
daily sales summaries are compared to
a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
b. Each sales invoice is supported by a prenumbered shipping document. daily postings to the accounts receivable
c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
d. Each shipment on credit is supported by a prenumbered sales invoice.
ledger

Which of the following controls most likely would be effective in offsetting the tendency of sales
personal to maximize sales volume at the expense of high bad debt write-offs?
a. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.
employees involved in the credit granting
function are separated from the sales
b. Shipping documents and sales invoices are matched by an employee who does not have authority to
write off bad debts.
c. Employees involved in the credit-granting function are separated from the sales function.
d. Subsidiary accounts receivable records are reconciled to the control account by an employee
independent of the authorization of credit.
function

Which of the following controls most likely would be used to maintain accurate inventory records?

periodic inventory counts are used to

a. Perpetual inventory records are periodically compared with the current cost of individual inventory
items.
b. A just-in-time inventory ordering system keeps inventory levels to a desirable minimum.
c. Requisitions, receiving reports, and purchase orders are independently matched before payment is
approved. adjust the perpetual inventory records
d. Periodic inventory counts are used to adjust the perpetual inventory records.
Which of the following controls most likely would 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 the billing department supervisor matches
authorized credit limits and current customer account balances.
b. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the
accounts receivable control account monthly. matches prenumbered shipping documents
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. with entries in the sales journal

Which of the following controls most likely would reduce the risk of
diversion of customer receipts by an entity's employees?
a. A bank lockbox system
b. Prenumbered remittance advices. a bank lockbox system
c. Monthly bank reconciliations.
d. Daily deposit of cash receipts

Which of the following factors are included in an entity's control environment?

1)AuditCommittee 2)Integrity and ethical values 3)Organizational

a. Yes Yes No
b. Yes No Yes
Yes Yes Yes
c. No Yes Yes
d. Yes Yes Yes

Which of the following is an accurate statement about internal control weaknesses?

a. Material weaknesses are also control deficiencies.
b. Significant deficiencies are also material weaknesses. material weaknesses are also control
deficiencies
c. Control deficiencies are also reportable conditions.
d. Control deficiencies always merit attention by those responsible for oversight of the
company's financial reporting.

Which of the following is a provision of the Foreign Corrupt Practices Act?

a. It is a criminal offense for an audit to fail to detect and report a bribe paid by an American business entity to a Every publicly held company must devise,
foreign official for the purpose of obtaining business.
b. The auditor's detection of illegal acts committed by official of the auditor's publicly held client in conjunction with
foreign officials should be reported to the Enforcement Division of the Securities and Exchange Commission.
document, and maintain internal control sufficient to
c. If the auditor of a publicly held company concludes that the effects on the financial statements of a bribe given to a
foreign official are not susceptible of reasonable estimation, the auditor's report should be modified. provide reasonable assurances that internal control
d. Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable
assurances that internal control objectives are met. objectives are met.

Are all releases by storekeepers of raw

Which of the following is a question that the auditor would expect to find on the production cycle section of an internal
control questionnaire?
a. Are vendors' invoices for raw materials approved for payment by an employee who is independent of the cash

materials from storage based on

disbursements function?
b. Are signed checks for the purchase of raw materials mailed directly after signing without being returned to the
person who authorized the invoice processing?
c. Are all releases by storekeepers of raw materials from storage based on approved requisition documents?
d. Are details of individual disbursements for raw materials balanced with the total to be posted to the appropriate
general ledger account? approved requisition documents

Which of the following is correct when applying a top-down approach to identify controls to test in an integrated audit?
a. For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those
For certain assertions, strong entity level
controls may allow the auditor to omit
controls.
b. Starting at the top--controls over specific assertions--the author should link to major accounts and reporting items.
c. The goal is to focus on details of accounting controls, while avoiding consideration of overall entity-level controls.
d. The goal is to focus on all controls related to assertions, omitting consideration of controls related to the financial
statements
additional testing beyond those controls

Which of the following is least likely to be evidence the auditor examines to

determine whether controls are operating effectively?
a. Records documenting usage of computer programs.
b. Canceled supporting documents. confirmations of accounts receivable
c. Confirmations of accounts receivable.
d. Signatures on authorization forms

Which of the following is most likely to be considered a material weakness in internal

control for purposes of an internal control audit of an issuer (public) company.
a. An ineffective internal audit function.
b. Restatement of previously issued financial statements due to a change in accounting
principles.
an ineffective internal audit function
c. Inadequate segregation of recordkeeping from accounting.
d. Weaknesses in control activities.

Which of the following is most likely to indicate a significant deficiency relating to a

client's antifraud program?
a. A broad scope of internal audit activities. audit committee passivity when
conducting oversight functions
b. A "whistle-blower" program that encourages anonymous submissions.
c. Audit committee passivity when conducting oversight functions.
d. Lack of performance of criminal background investigations for likely customers
Which of the following is not a component of an entity's internal control?
a. Control risk.
b. Control activities.
c. Monitoring.
control risk
d. Control environment.

Which of the following is not a step in an auditor's assessment of control risk?

a. Evaluate the effectiveness of internal control with tests of controls. perform tests of details of transactions
to detect material misstatements in the
b. Obtain an understanding of the entity's information system and control environment.
c. Perform tests of details of transactions to detect material misstatements in the financial
statements.
d. Consider whether controls can have a pervasive effect on financial statement assertions. financial statements

The (company name) management and audit

Which of the following is not included in a standard unqualified opinion on internal control over financial reporting
performed under PCAOB requirements?
a. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

committee are responsible for maintaining

b. In our opinion, [company name] maintained, in all material respects, effective internal control over financial
reporting.
c. Our audit included obtaining an understanding of internal control over financial reporting.
d. The [company name] management and audit committee are responsible for maintaining effective internal control
over financial reporting. effective internal control over financial reporting

Which of the following may not be required on a particular audit of a

nonissuer (nonpublic) company?
a. Risk assessment procedures.
b. Tests of controls. Tests of controls
c. Substantive procedures.
d. Analytical procedures

Which of the following most likely would not be considered an inherent

limitation of the potential effectiveness of an entity's internal control?
a. Incompatible duties.
b. Management override. incompatible duties
c. Mistakes in judgment.
d. Collusion among employees

Which of the following need not be included in management's report on internal control under Section
404a of the Sarbanes-Oxley Act of 2002?
a. A statement that the company's auditor has issued an audit report on the company's internal control Management's statement of responsibility to
establish and maintain internal control that
over financial reporting.
b. Identification of the framework for evaluating internal control.
c. Management's assessment of the effectiveness of internal control.
d. Management's statement of responsibility to establish and maintain internal control that has no
significant deficiencies.
has no significant deficiencies

Which of the following procedures concerning accounts receivable would an auditor most likely perform
to obtain evidence in support of an assessed level of control risk below the maximum? Observing an entity's employee prepare
a. Observing an entity's employee prepare the schedule of past due accounts receivable.
b. Sending confirmation request to an entity's principle customers to verify the existence of account
receivable.
the schedule of past due accounts
receivable
c. Inspecting an entity's analysis of accounts receivable for unusual balances.
d. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable.

Which of the following procedures most likely would not be a control designed to reduce the risk of
misstatements in the billing process?
Reconciling the control totals for sales
invoices with the accounts receivable
a. Comparing control totals for shipping documents with corresponding totals for sales invoices.
b. Using computer programmed controls on the pricing and mathematical accuracy of sales invoices.
c. Matching shipping documents with approved sales orders before invoice preparation.
d. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
subsidiary ledger

Which of the following procedures most likely would provide an auditor with evidence
about whether an entity's internal control activities are suitably designed to prevent or
detect material misstatements?
a. Reperforming the activities for a sample of transactions.
Observing the entity's personal applying
b. Performing analytical procedures using data aggregated at a high level.
c. Vouching a sample of transactions directly related to the activities.
the activities
d. Observing the entity's personal applying the activities.

Which of the following procedures would an auditor most likely perform to test controls
relating to management's assertion about the completeness of cash receipts for cash sales Observe the consistency of the
at a retail outlet?
a. Observe the consistency of the employee's use of cash registers and tapes.
b. Inquire about employee's access to recorded but undeposited cash.
employee's use of cash registers and
c. Trace deposits in the cash receipts journal to the cash balance in the general ledger.
d. Compare the cash balance in the general ledger with the bank confirmation request.
tapes
Which of the following questions would most likely be included in an internal control questionnaire
concerning the completeness assertion for purchases?
a. Is an authorized purchase order required before the receiving department can accept a shipment or
are purchase orders, receiving reports,
and vouchers prenumbered and
the vouchers payable department can record a voucher?
b. Are purchase requisitions prenumbered and independently matched with vendor invoices?
c. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not
have access to purchase requisitions?
d. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for? periodically accounted for?

Which of the following statements is correct concerning an auditor's assessment of control risk?
a. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity's
internal control. Assessing control risk may be performed
b. Evidence about the operation of internal control in prior audits may not be considered during the current year's
assessment of control risk.
c. The basis for an auditor's conclusions about the assessed level of control risk need not be documented unless control concurrently during an audit with obtaining an
understanding of the entity's internal control
risk is assessed at the maximum level.
d. The lower the assessed level of control risk, the less assurance the evidence must provide that the control
procedures are operating effectively.

Which of the following statements regarding auditor documentation of the client's internal
control is correct?
a. Documentation must include flowcharts.
No one particular form of
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is desirable.
documentation is necessary, and the
d. No one particular form of documentation is necessary, and the extent of documentation
may vary.
extent of documentation may vary

Which of the following types of evidence would an auditor most likely

examine to determine whether controls are operating as designed?
a. Confirmations of receivables verifying account balances. client records documenting the use of
b. Letters of representations corroborating inventory pricing.
c. Attorneys' responses to the auditor's inquiries. computer programs
d. Client records documenting the use of computer programs

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
Controls over the reliability of financial
other controls may also be relevant.
c. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the
reporting are ordinarily most directly relevant,
reliability of financial reporting may also be relevant.
d. All controls are ordinarily relevant to an audit. but other controls may also be relevant

With properly designed internal control, the same employee most likely
would match vendor's invoices with receiving reports and also
a. Post the detailed accounts payable records. recompute the calculation on vendors
b. Recompute the calculation on vendors' invoices.
c. Reconcile the accounts payable ledger. invoices
d. Cancel vendors' invoices after payment

With well-designed internal control, employees in the same department

most likely would approve purchase orders, and also
a. Reconcile the open invoice file.
b. Inspect goods upon receipt. Negotiate terms with vendors
c. Authorize requisitions of goods.
d. Negotiate terms with vendors.