Chapter 11 - Questions

Auditing and Assurance Services, 17e (Arens/Elder/Beasley)
Chapter 11 Internal Control and COSO Framework
11.1 Learning Objective 11-1
1) 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
Terms: Internal control objectives

Difficulty: Easy
Objective: LO 11-1
AACSB: Analytic thinking
2) With which of management's assertions with respect to implementing internal controls is the
auditor primarily concerned?
A) efficiency of operations
B) reliability of financial reporting
C) effectiveness of operations
D) compliance with applicable laws and regulations
Terms: Management's assertions and internal control

Difficulty: Easy
Objective: LO 11-1
AACSB: Reflective thinking
3) Internal controls
A) are implemented by and are the responsibility of the auditors.
B) consist of policies and procedures designed to provide reasonable assurance that the
company achieves its objectives and goals.
C) guarantee that the company complies with all laws and regulations.
D) only apply to SEC companies.
Terms: Internal controls

Difficulty: Moderate
Objective: LO 11-1
4) Internal controls are not designed to provide reasonable assurance that

A) all frauds will be detected.
B) transactions are executed in accordance with management's authorization.
C) the company's resources are used efficiently and effectively.
D) company personnel comply with applicable rules and regulations.
Terms: Internal controls; Reasonable assurance

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Objective: LO 11-1
5) Section 404 of the Sarbanes-Oxley Act requires that both private and public companies issue
an internal control report.
(FALSE => Only public companies)
Terms: Sarbanes-Oxley Act
Difficulty: Easy
Objective: LO 11-1
6) Management has a legal and professional responsibility to be sure that the financial
statements are prepared in accordance with reporting requirements of applicable accounting
frameworks. (TRUE)

Objective: LO 11-1
7) Deficiencies in internal controls may cause significant losses, delay financial reporting, but
cannot result in material misstatements in the financial statements.
FALSE
Difficulty: Easy
Objective: LO 11-1
8) The Sarbanes-Oxley Act requires either management of U.S. public companies or their
auditors to report on the effectiveness of internal controls over financial reporting.
(FALSE => It only requires the management)
Difficulty: Easy
Objective: LO 11-1
9) Other countries around the world have passed similar legislation to the Sarbanes-Oxley Act
regarding mandating management and auditor reporting on internal controls over financial
reporting. (TRUE)

Objective: LO 11-1
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10) A system of internal controls consisting of policies and procedures are designed to provide
management with reasonable assurance that the company can achieve its goals and objectives.
(TRUE)
Difficulty: Easy
Objective: LO 11-1
11) Management has a legal and a professional responsibility to be sure external financial
information, and the information contained therein, are fairly presented in accordance with
generally accepted accounting principles and International Financial Reporting Standards, when
required. (TRUE)

Difficulty: Easy
Objective: LO 11-1
12) One of management's broad objectives in designing an effective internal control system is to
help ensure that the organization follows laws and regulations impacting the organization.
(TRUE)

Difficulty: Easy
Objective: LO 11-1
13) Describe each of the three broad objectives management typically has for internal control.
With which of these objectives is the auditor primarily concerned?
Terms: Three broad objectives management has for internal control
Difficulty: Easy
Objective: LO 11-1
1) Who is responsible for establishing a private company's internal control?

A) senior management
B) internal auditors
C) FASB
D) audit committee

Difficulty: Easy
Objective: LO 11-2
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2) Two key concepts that underlie management's 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.
Terms: Internal control design and implementation

Difficulty: Easy
Objective: LO 11-2
3) The PCAOB places responsibility for the reliability of internal controls over the financial
reporting process on
A) the company's board of directors.
B) the audit committee of the board of directors.
C) management.
D) the CFO and the independent auditors.
Terms: PCAOB; internal control responsibility

Difficulty: Easy
Objective: LO 11-2
4) Which of the following parties provides an assessment of the effectiveness of internal

control over financial reporting for public companies?
A)
Financial statement
Management auditors
Yes Yes
B)
Management Financial statement auditors
No No
C)
Yes No
D)
No Yes
Terms: Internal control effectiveness

Difficulty: Easy
Objective: LO 11-2
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5) 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.
Terms: Collusion
Difficulty: Easy
Objective: LO 11-2
6) Sarbanes-Oxley requires management to issue an internal control report that includes two
specific items. Which of the following is one of these two requirements?
A) a statement that management is responsible for establishing and maintaining an
adequate internal control structure and procedures for financial reporting
B) a statement that management and the board of directors are jointly responsible for establishing
and maintaining an adequate internal control structure and procedures for financial reporting
C) a statement that management, the board of directors, and the external auditors are jointly
responsible for establishing and maintaining an adequate internal control structure and
procedures for financial reporting
D) a statement that the external auditors are solely responsible for establishing and maintaining
an adequate system of internal control
Terms: Sarbanes-Oxley; Internal control report

Difficulty: Easy
Objective: LO 11-2
7) When management is evaluating the design of internal control, management evaluates

whether the control can do which of the following?
A)
Detect material Correct material
misstatements misstatements
Yes Yes
B)
No No
C)
Yes No
D)
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No Yes
Terms: Internal control design

Difficulty: Easy
Objective: LO 11-2
8) When one material weakness is present at the end of the year, management of a public
company must conclude that internal control over financial reporting is
A) insufficient.
B) inadequate.
C) ineffective.
D) inefficient.
Terms: Internal control weakness; Public company

Difficulty: Easy
Objective: LO 11-2
9) The auditor's primary purpose in auditing the client's 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 company's 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.
Terms: Primary purpose to audit system of internal control

Objective: LO 11-2
10) The internal control framework used by most U.S. companies is the ________ framework.
A) FASB
B) PCAOB
C) COSO
D) SEC
Terms: Internal control framework; COSO

Objective: LO 11-2
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11) In performing the audit of internal control over financial reporting, the auditor emphasizes
internal control over classes of transactions because
A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs
and processing.
B) the class of transaction is where most fraud schemes occur.
C) account balances are less important to the auditor then the changes in the account balances.
D) classes of transactions tests are the most efficient manner to compensate for inherent risk.
Terms: Internal control over class of transactions

Objective: LO 11-2
12) 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.
Terms: Internal control effectiveness

Objective: LO 11-2
AACSB: Ethical understanding and reasoning
13) When considering internal controls,

A) auditors can ignore controls affecting internal management information.
B) auditors are concerned with the client's internal controls over the safeguarding of assets
if they affect the financial statements.
C) management is responsible for understanding and testing internal control over financial
reporting.
D) companies must use the COSO framework to establish internal controls.
Terms: Effectively designed internal controls; testing of controls

Objective: LO 11-2
14) Of the following statements about internal controls, which one is least likely to be correct?
A) No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
B) Transactions must be properly authorized before such transactions are processed.
C) Because of the cost-benefit relationship, a client may apply controls on a test basis.
D) Control procedures reasonably ensure that collusion among employees cannot occur.

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Objective: LO 11-2
15) The Sarbanes-Oxley Act requires

A) all public companies to issue reports on internal controls.
B) all public companies to define adequate internal controls.
C) the auditor of public companies to design effective internal controls.
D) the auditor of public companies to withdraw from an engagement if internal controls are
weak.
Terms: Sarbanes-Oxley Act

Difficulty: Challenging
Objective: LO 11-2
16) Which of the following is an accurate statement regarding the auditor's responsibility for
understanding internal control?
A) Transaction-related audit objectives typically have no impact on the rights and
obligations objectives.
B) Transaction-related audit objectives typically have a significant impact on the balance-related
audit objective of realizable value.
C) Auditors generally emphasize internal control over account balances rather than classes of
transactions.
D) Auditors and management are both equally concerned about controls that affect the efficiency
and effectiveness of company operations.
Terms: Auditor responsibilities for understanding internal control

Objective: LO 11-2
17) The primary emphasis by auditors is on controls over

A) classes of transactions.
B) account balances.
C) both A and B, because they are equally important.
D) both A and B, because they vary from client to client.
Terms: Primary emphasis by auditors on controls

Objective: LO 11-2
18) An auditor should consider two key issues when obtaining an understanding of a client's
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 operating effectiveness of the controls.
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D) the implementation and operating effectiveness of the controls.
Terms: Key issues understanding client's internal controls

Objective: LO 11-2
19) Reasonable assurance allows for

A) low likelihood that material misstatements will not be prevented or detected by internal
controls.
B) no likelihood that material misstatements will not be prevented or detected by internal
control.
C) moderate likelihood that material misstatements will not be prevented or detected by internal
control.
D) high likelihood that material misstatements will not be prevented or detected by internal
control.
Terms: Reasonable assurance

Difficulty: Easy
Objective: LO 11-2
20) Which of the following is most correct regarding the requirements under Section 404 of the
Sarbanes-Oxley Act?
A) The audits of internal control and the financial statements provide reasonable assurance
as to misstatements.
B) The audit of internal control provides absolute assurance of misstatement.
C) The audit of financial statements provides absolute assurance of misstatement.
D) The audits of internal control and the financial statements provide absolute assurance as to
misstatements.
Terms: Section 404 of the Sarbanes-Oxley Act

Difficulty: Easy
Objective: LO 11-2
21) Under the Dodd-Frank federal financial reform legislation, all public companies are
required to obtain an audit report on internal control over financial reporting.
(FALSE => Only larger public companies)
Terms: Internal control over financial reporting for public company
Objective: LO 11-2
22) When a company designs and implements internal controls, the cost of the controls is not a
valid consideration. (FALSE)
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Terms: Design and implement internal control; cost
Difficulty: Easy
Objective: LO 11-2
23) The auditor's responsibilities for internal control include understanding and testing the audit
client's internal controls over financial reporting. (TRUE)
Terms: Auditor responsibilities for internal control

Difficulty: Easy
Objective: LO 11-2
24) If required under special circumstances, an auditor must step in at an audit client and
establish and maintain the audit client's system of internal controls to ensure reliable financial
reporting. (FALSE)
Terms: Auditor responsibilities for internal control

Difficulty: Easy
Objective: LO 11-2
25) Two key concepts underlie management's design and implementation of internal controls are
absolute assurance and inherent limitations.
FALSE => Reasonable assurance
Terms: Management's responsibilities for internal control

Difficulty: Easy
Objective: LO 11-2
26) It is possible for management to design an ideal and effective system of internal controls for
example over the counting of the physical inventory.
FALSE
Terms: Inherent limitations of internal control
Difficulty: Easy
Objective: LO 11-2
27) Management's report on internal controls must identify the framework used to evaluate the
effectiveness of internal controls, and this framework may include other internal control
frameworks which exist around the world. (TRUE)
Terms: Management's Section 404 reporting responsibilities

Difficulty: Easy
Objective: LO 11-2
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28) It is possible, under certain circumstances, for financial statements to correctly reflect GAAP
or IFRS even if internal controls over financial reporting are inadequate.
FALSE
Terms: Auditor responsibilities for understanding internal controls
Objective: LO 11-2
29) The auditor is always concerned with their audit client's controls that affect the efficiency
and the effectiveness of company operations, as these controls will always influence the fair
presentation of the financial statements.
FALSE
Terms: Auditor responsibilities for understanding internal controls
Objective: LO 11-2
30) Once the auditor is satisfied with the transaction-related controls in the revenue and accounts
receivable area, it is not important for the auditor to gain an understanding of the controls that
exist over the ending account balances and the related disclosures made in the financial
statements. (FALSE)
Terms: Controls over classes of transactions

Difficulty: Easy
Objective: LO 11-2
31) As a result of the Dodd-Frank federal financial reform legislation passed by Congress in
2010, only larger public companies (accelerated filers) are now required to obtain an audit report
from their auditors on internal control over financial reporting. (TRUE)
Terms: Auditor responsibilities for reporting on internal controls

Objective: LO 11-2
1) Which of the following activities would be least likely to strengthen a company's internal
control?
A) separating accounting from other financial operations
B) maintaining insurance for fire and theft
C) fixing responsibility for the performance of employee duties
D) carefully selecting and training employees
Terms: Not strengthen internal control

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Difficulty: Easy
Objective: LO 11-3
2) Which of the following components 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 values
Terms: Control environment components; Responsibility and authority

Objective: LO 11-3
3) Which of the following factors may increase risks to an organization?

A)
Geographic dispersion of Presence of new information
company operations technologies
Yes Yes
B)
No No
C)
Yes No
D)
No Yes
Terms: Control activities; control risk

Objective: LO 11-3
4) Which of the following statements is most correct with respect to separation of duties?
A) A person who has temporary or permanent custody of an asset should account for that asset.
B) Employees who authorize transactions should not have custody of the related assets.
C) Employees who open cash receipts should record the amounts in the subsidiary ledgers.
D) Employees who authorize transactions should have recording responsibility for these
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transactions.
Terms: Separation of duties

Objective: LO 11-3
5) Authorizations can be either general or specific. Which of the following is not an example of
a general authorization?
A) automatic reorder points for raw materials inventory
B) a sales manager's authorization for a sales return
C) credit limits for various classes of customers
D) a sales price list for merchandise
Terms: General or specific authorizations

Objective: LO 11-3
6) Which of the following is correct with respect to the design and use of business documents?
A) The documents should be in paper format.
B) Documents should be designed for a single purpose to avoid confusion in their use.
C) Documents should be designed to be understandable only by those who use them.
D) Documents should be prenumbered consecutively to facilitate control over missing
documents.
Terms: Design and use of business documents

Objective: LO 11-3
7) 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 to address
risks to the achievement of the entity's objectives
D) activities that deal with the ongoing assessment of the quality of internal control by
management
Terms: Control activities

Objective: LO 11-3
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8) Which of the following deals with ongoing or periodic assessment of the quality of internal
control by management?
A) verifying activities
B) monitoring activities
C) oversight activities
D) management activities
Terms: Monitoring
Objective: LO 11-3
9) Which of the following best describes an entity's accounting information and communication
system?
A)
Monitor Record and Initiate transactions
transactions process
transactions
Yes Yes Yes
B)
transactions
No No No
C)
transactions
Yes No No
D)
transactions
No Yes Yes
Terms: Accounting information and communication system

Objective: LO 11-3
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10) Which of the following is a risk assessment principle?
A) accountability
B) use relevant, quality information to support the functioning of internal controls
C) consider the potential for fraud
D) develop general controls over technology
Terms: COSO components of internal control and risk assessment

Objective: LO 11-3
11) Which of the following is not an underlying principle related to risk assessment?
A) The organization should have clear objectives in order to be able to identify and assess the
risks relating to the objectives.
B) The auditors should determine how the company's risks should be managed.
C) The organization should consider the potential for fraudulent behavior.
D) The organization should monitor changes that could impact internal controls.
Terms: Risk assessment procedures

Difficulty: Easy
Objective: LO 11-3
12) Which of the following is not one of the subcomponents of the control environment?
A) management's philosophy and operating style
B) organizational structure
C) adequate separation of duties
D) commitment to competence
Terms: Subcomponents of control environment

Objective: LO 11-3
13) It is important for the CPA to consider the competence of the clients' personnel because their
competence has a direct impact upon the
A) cost/benefit relationship of the system 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.
Terms: Competence of client personnel

Objective: LO 11-3
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14) Proper segregation of functional responsibilities calls for separation of
A) authorization, execution, and payment.
B) authorization, recording, and custody.
C) custody, execution, and reporting.
D) authorization, payment, and recording.
Terms: Segregation of functional responsibilities

Objective: LO 11-3
15) Without an effective ________, the other components of the COSO framework are unlikely
to result in effective internal control, regardless of their quality.
A) risk assessment policy
B) monitoring policy
C) control environment
D) system of control activities

Objective: LO 11-3
16) Which of the following is an accurate statement regarding control activities?

A) As the level of complexity of IT systems increases, the separation of duties often becomes
blurred.
B) Segregation of duties would be violated if the same person authorizes the payment of a
vendor's invoice and also approves the disbursement of funds to pay the bill.
C) The most important type of protective measure for safeguarding assets and records is the use
of physical precautions.
D) All of the above.
Terms: COSO framework and control activities

Objective: LO 11-3
17) If a company has an effective internal audit department,

A) the internal auditors can express an opinion on the fairness of the financial statements.
B) their work cannot be used by the external auditors per PCAOB Standard 5.
C) it can reduce external audit costs by providing direct assistance to the external auditors.
D) the internal auditors must be CPAs in order for the external auditors to rely on their work.
Terms: Understanding of internal audit functions

Objective: LO 11-3
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18) To promote operational efficiency, the internal audit department would ideally report to
A) line management.
B) the PCAOB.
C) the Chief Accounting Officer.
D) the audit committee.
Terms: Monitoring
Objective: LO 11-3
19) Hanlon Corp. maintains a large internal audit staff that reports directly to the accounting
department. Audit reports prepared by the internal auditors indicate that the system is functioning
as it should and that the accounting records are reliable. An independent auditor will probably
A) eliminate tests of controls.
B) increase the depth of the study and evaluation of administrative controls.
C) avoid duplicating the work performed by the internal audit staff.
D) place limited reliance on the work performed by the internal audit staff.
Terms: Internal audit

Objective: LO 11-3
20) External financial statement auditors must obtain evidence regarding what attributes of an
internal audit (IA) department if the external auditors intend to rely on IA's work?
A) integrity
B) objectivity
C) competence
D) all of the above
Terms: External auditor reliance on internal auditors' work

Objective: LO 11-3
21) To obtain 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
A) management may establish appropriate policies and procedures but not act on them.
B) the board of directors may not be aware of management's attitude toward the control
environment.
C) the auditor may believe that the policies and procedures are inappropriate for that particular
entity.
D) the policies and procedures may be so weak that no reliance is contemplated by the auditor.
Terms: Substance of management's policies and procedures

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Objective: LO 11-3
22) The ________ is helpful in preventing classification errors if it accurately describes which
type of transaction should be in each account.
A) general ledger
B) general journal
C) trial balance
D) chart of accounts

Objective: LO 11-3
23) Control activities are a subcomponent of the information and communication component of
internal control.
FALSE => component
Terms: Internal control components
Difficulty: Easy
Objective: LO 11-3
24) Adequate documents and records are a subcomponent of the control environment.
FALSE => control activities
Terms: Control environment
Difficulty: Easy
Objective: LO 11-3
25) The chart of accounts is helpful in preventing classification errors if it accurately describes
which type of transaction should be in each account. (TRUE)
Terms: Internal control components

Difficulty: Easy
Objective: LO 11-3
26) Auditing standards prohibit reliance on the work of internal auditors due to the lack of
independence of the internal auditors.
FALSE
Terms: Auditing standards; Internal auditors
Objective: LO 11-3
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27) If an auditor wishes to rely on the work of internal auditors (IA), the auditor must obtain
satisfactory evidence related to the IA's competence, integrity, and objectivity.
TRUE
Terms: Internal auditors
Objective: LO 11-3
28) An example of a specific authorization is management setting a policy authorizing the

ordering of inventory when less than a one-week supply is on hand.
FALSE
Objective: LO 11-3
29) Personnel responsible for performing internal verification procedures must be independent of
those originally responsible for preparing the data. (TRUE)

Difficulty: Easy
Objective: LO 11-3
30) The COSO framework, updated in 2013, provides a rules-based approach that provides
additional guidance on designing and implementing an effective system of internal controls.
Terms: COSO framework

Objective: LO 11-3
31) Even without an effective control environment, it is likely that the other four components of
the COSO framework can result in effective internal controls. (TRUE)
Terms: COSO framework

Objective: LO 11-3
32) The audit committee of the board of directors must exercise oversight over the design and the
performance of internal controls over financial reporting, as well as not delegating the
responsibilities for these internal controls to management.
FALSE
Terms: Board of director participation in internal controls
Difficulty: Easy
Objective: LO 11-3
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33) The company forms a committee to identify specific risks inside of the company related to
information technology. As shown in the COSO cube, this action is related to organizational
structure.
FALSE
Terms: Risk assessment
Objective: LO 11-3
34) A small business has four employees, including the owner of the business, working for the
business on a daily basis processing cash receipts, making cash disbursements, processing
payroll, and invoicing customers. In this situation, separation of duties is impossible.
FALSE
Objective: LO 11-3
35) Control activities help assure that the necessary actions are taken to address risks to the
achievement of the company's objectives. List the five types of control activities.
Terms: Control activities
Objective: LO 11-3
36) Certain principles dictate the proper design and use of documents and records. Briefly
describe several of these principles.
Terms: Principles for design and use of documents and records
Objective: LO 11-3
37) Management's identification and analysis of risk is an ongoing process and is a critical
component of effective internal control. An important first step is for management to identify
factors that may increase risk. Identify at least five factors, observable by management, which
may lead to increased risk in a typical business organization.
Terms: Factors which may lead to increased risk
Objective: LO 11-3
38) Separation of duties is essential in preventing errors and intentional misstatements on the
financial statements. List below the four general guidelines.
Terms: General guidelines for separation of duties
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Objective: LO 11-3
39) The internal control framework developed by COSO includes five so-called "components" of
internal control. Discuss each of these five components.
Terms: Internal control framework; COSO
Objective: LO 11-3
40) Discuss what is meant by the term "control environment" and identify four control
environment subcomponents that the auditor should consider.
Terms: Control environment
Objective: LO 11-3
41) List the four underlying principles of risk assessment per the COSO framework.
Terms: COSO components of internal control and risk assessment
Objective: LO 11-3
42) Name five of the specific responsibilities specifically directed by the SEC under the
Sarbanes-Oxley Act requiring companies listed on the national stock exchanges to strengthen
their audit committee requirements.
Terms: Audit committee roles and requirements
Objective: LO 11-3
43) What are the four underlying principles related to risk assessment every organization should
consider?
Terms: Risk assessment
Objective: LO 11-3
1) Old and new systems operating simultaneously in all locations is a test approach known as
A) pilot testing.
B) horizontal testing.
C) integrative testing.
D) parallel testing.
Terms: Old and new systems operating simultaneously

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Difficulty: Easy
Objective: LO 11-4
2) Which of the following is a component of general controls?

A) processing controls
B) output controls
C) back-up and contingency planning
D) input controls
Terms: Component of general controls

Difficulty: Easy
Objective: LO 11-4
3) Which of the following statements related to application controls is correct?

A) Application controls relate to various aspects of the IT function including software
acquisition and the processing of transactions.
B) Application controls relate to various aspects of the IT function including physical security
and the processing of transactions in various cycles.
C) Application controls relate to all aspects of the IT function.
D) Application controls relate to the processing of individual transactions.
Terms: Application controls

Difficulty: Easy
Objective: LO 11-4
4) General controls include all of the following except

A) systems development.
B) online security.
C) processing controls.
D) hardware controls.
Terms: General controls

Difficulty: Easy
Objective: LO 11-4
5) Which of the following describes the process of implementing a new system in one part of the
organization, while other locations continue to use the current system?
A) parallel testing
B) online testing
C) pilot testing
D) control testing
Terms: Process implementing new system in one part of organization

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Difficulty: Easy
Objective: LO 11-4
6) A ________ is responsible for controlling the use of computer programs, transaction files and
other computer records and documentation and releases them to the operators only when
authorized.
A) software engineer
B) chief computer operator
C) librarian
D) data control operator

Difficulty: Easy
Objective: LO 11-4
7) Security controls should require that users enter a(n) ________ before being allowed access to
software and other related data files.
A) echo check
B) parity check
C) self-diagnosis test
D) authorized password
Terms: Required for access to IT programs or files from terminals

Difficulty: Easy
Objective: LO 11-4
8) Typical controls developed for manual systems which are still important in IT systems include
A) management's authorization of transactions.
B) competent personnel.
C) adequate preparation of input source documents.
D) all of the above.
Terms: Typical controls developed for manual systems still important in IT systems
Objective: LO 11-4
9) Which of the following controls prevent and detect errors while transaction data are
processed?
A) software
B) application
C) processing
D) transaction
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Terms: Controls that prevent and detect errors while transaction data are processed
Objective: LO 11-4
10) When purchasing software or developing in-house software,

A) cost should be the only factor.
B) extensive testing of the software is generally not required.
C) a team of both IT and non-IT personnel should be involved in the decision process.
D) the librarian and the IT manager should be the only ones involved in the decision process.

Objective: LO 11-4
11) Output controls need to be designed for which of the following data integrity objectives?
A) detecting errors after the processing is completed
B) preventing errors before the processing is completed
C) detecting errors in the general ledger adjustment process
D) preventing errors in separation of duties for IT personnel
Terms: Output controls need to be designed for

Objective: LO 11-4
12) A control that relates to all parts of the IT system is called a(n)
A) general control.
B) systems control.
C) universal control.
D) applications control.

Objective: LO 11-4
13) Controls that are designed for each software application and are intended to help a company
satisfy the transaction-related audit objectives are
A) user controls.
B) general controls.
C) audit controls.
D) application controls.
Terms: Controls which apply to a specific element of the system,

24
Objective: LO 11-4
14) Which of the following is not an example of an applications control?

A) Back-up of data is made to a remote site for data security.
B) There is a preprocessing authorization of the sales transactions.
C) There are reasonableness tests for the unit selling price of a sale.
D) After processing, all sales transactions are reviewed by the sales department.

Objective: LO 11-4
15) Which of the following is not a general control?

A) Computer performed validation tests of input accuracy.
B) Equipment failure causes error messages on monitor.
C) There is a separation of duties between programmer and operators.
D) There are adequate program run instructions for operating the computer.

Objective: LO 11-4
16) Controls which are built in by the manufacturer to detect equipment failure are called
A) input controls.
B) data integrity controls.
C) hardware controls.
D) manufacturer's controls.
Terms: Controls built in by manufacturer to detect equipment failure

Objective: LO 11-4
17) Controls which are designed to assure that the information entered into the computer is
authorized, complete, and accurate are called
A) input controls.
B) processing controls.
C) output controls.
D) general controls.
Terms: Controls designed to assure information processed by computer is authorized, complete,

and accurate
Objective: LO 11-4
25
18) When dealing with the administration of the IT function and the segregation of IT duties
A) in large organizations, management should assign technology issues to outside consultants.
B) programmers should investigate all security breaches.
C) the board of directors should not get involved in IT decisions since it is a routine function
handled by middle management.
D) in complex environments, management may establish IT steering committees.
Terms: Programmers should be allowed access

Objective: LO 11-4
19) Which of the following tests determines that every field in a record has been completed?
A) validation
B) sequence
C) completeness
D) programming
Terms: Tests to determine that every field in a record has been completed
Objective: LO 11-4
20) An example of a physical control is

A) a hash total.
B) a parallel test.
C) the matching of employee fingerprints to a database before access to the system is
allowed.
D) the use of backup generators to prevent data loss during power outages.
Terms: General and application controls

Objective: LO 11-4
21) Controls specific to IT include all of the following except for

A) adequately designed input screens.
B) pull-down menu lists.
C) validation tests of input accuracy.
D) separation of duties.
Terms: Controls specific to IT

Objective: LO 11-4
26
22) An internal control deficiency occurs when computer personnel
A) participate in computer software acquisition decisions.
B) design flowcharts and narratives for computerized systems.
C) originate changes in customer master files.
D) provide physical security over program files.
Terms: Internal control deficiency

Objective: LO 11-4
23) Which of the following best explains the relationship between general controls and
application controls?
A) Application controls are effective even if general controls are extremely weak.
B) Application controls are likely to be effective only when general controls are effective.
C) General controls have no impact on application controls.
D) None of the above.
Terms: General controls and application controls

Objective: LO 11-4
24) A(n) ________ total represents the summary total of codes from all records in a batch that
do not represent a meaningful total.
A) record
B) hash
C) output
D) financial
Terms: Batch input controls

Objective: LO 11-4
25) In an IT system, automated equipment controls or hardware controls are designed to

A) correct errors in the computer programs.
B) monitor and detect errors in source documents.
C) detect and control errors arising from the use of equipment.
D) arrange data in a logical sequential manner for processing purposes.
Terms: Equipment or hardware controls

Objective: LO 11-4
27
26) If a control total were to be computed on each of the following data items, which would best
be identified as a hash total for a payroll IT application?
A) gross wages earned
B) employee numbers
C) total hours worked
D) total debit amounts and total credit amounts
Terms: Hash total for payroll IT application

Objective: LO 11-4
27) Which of the following is not an application control?

A) reprocessing authorization of sales transactions
B) reasonableness test for unit selling price of sale
C) post-processing review of sales transactions by the sales department
D) logging in to the company's information systems via a password

Objective: LO 11-4
28) Which of the following is not a general control?

A) separation of IT duties
B) systems development
C) processing controls
D) hardware controls

Objective: LO 11-4
29) ________ is the information technology and internal control processes an organization has in
place to protect computers, networks, programs, and data from unauthorized access.
A) Encryption
B) A firewall
C) Cybersecurity
D) A processing control
Terms: Physical and online security

Difficulty: Easy
Objective: LO 11-4
28
30) The most important output control is
A) distribution control, which assures that only authorized personnel receive the reports
generated by the system.
B) review of data for reasonableness by someone who knows what the output should look
like.
C) control totals, which are used to verify that the computer's results are correct.
D) logic tests, which verify that no mistakes were made in processing.
Terms: Output controls

Objective: LO 11-4
31) Parallel testing is used when old and new systems are operated simultaneously in all
locations. (TRUE)
Terms: Parallel testing

Difficulty: Easy
Objective: LO 11-4
32) Programmers should only be allowed to work with test copies of programs and data.
TRUE
Terms: Programmer's responsibilities
Difficulty: Easy
Objective: LO 11-4
33) In IT systems, if general controls are effective, it increases the auditor's ability to rely on
application controls to reduce control risk. (TRUE)
Terms: Effective general controls and application controls

Objective: LO 11-4
34) Parallel testing can be used in combination with pilot testing to test new systems.
TRUE
Terms: Parallel testing
Objective: LO 11-4
29
35) The effectiveness of automated controls depends solely on the competence of the personnel
performing the controls.
FALSE
Terms: Effectiveness of automated controls
Objective: LO 11-4
36) Backup and contingency plans should also identify alternative hardware that can be used to
process company data. (TRUE)
Terms: Backup and contingency plans

Objective: LO 11-4
37) A large portion of errors in IT systems result from data entry errors. (TRUE)

Objective: LO 11-4
38) Output controls focus on preventing errors during processing.

FALSE => Detecting errors after processing is completed
Terms: Output controls
Objective: LO 11-4
39) Processing controls are a category of application controls. (TRUE)
Terms: Processing controls and application controls

Objective: LO 11-4
40) Controls that relate to a specific use of the IT system, such as the processing of sales or cash
receipts, are called application controls. (TRUE)

Objective: LO 11-4
30
41) IT controls are classified as either input controls or output controls.
FALSE
Terms: IT controls, input controls, and output controls
Objective: LO 11-4
42) Define control for general controls and application controls. Also list the categories of
controls included under general controls and application controls.
Terms: General controls and application controls
Difficulty: Easy
Objective: LO 11-4
43) Identify the three categories of application controls, and give one example of each.
pplication controls fall into three categories:
• Input controls — preformatted screens which prompt the data input personnel for the
information to be entered
• Processing controls — a reasonableness test for the unit selling price of a sale
• Output controls — postprocessing review of sales transactions by the sales department
Terms: Three categories of application controls
Objective: LO 11-4
44) One category of general controls is physical and online access controls. Describe the control
and give at two examples of implementation of the control.
Terms: General control of physical and online security
Objective: LO 11-4
45) Match six of the terms (a-j) with the definitions provided below (1-6).
a. Application controls
b. Error listing
c. General controls
d. Hardware controls
e. Input controls
f. Output controls
g. Parallel simulation
h. Parallel testing
i. Pilot testing
j. Processing controls
________ 1. The new and old systems operate simultaneously in all locations.
31
________ 2. Controls that relate to all aspects of the IT system.
________ 3. Controls such as review of data for reasonableness, designed to assure that data
generated by the computer is valid, accurate, complete, and distributed only to authorized people.
________ 4. Controls that apply to processing of transactions.
________ 5. A new system is implemented in one part of the organization while other locations
continue to rely on the old system.
________ 6. Controls such as proper authorization of documents, check digits, and adequate
documentation, designed to assure that the information to be entered into the computer is
authorized, complete, and accurate.
Terms: Application controls; General controls; parallel and pilot testing

Objective: LO 11-4
46) Processing controls include the following tests:

Validation
Sequence
Data Reasonableness
Completeness
Describe what each control is designed to do.

Terms: Tests of processing controls
Objective: LO 11-4
47) What are the two software testing strategies that companies typically use? Which strategy is
more expensive?
ompanies may use pilot testing and parallel testing to test new software. Pilot testing involves
operating the new software at a limited number of facilities, while continuing to operate the old
software at all other locations. Parallel testing involves operating the new and old software
simultaneously.
Terms: Software testing strategies
Objective: LO 11-4
48) Discuss the four areas of responsibility under the IT function that should be segregated in
large companies.
Terms: Areas of responsibility under IT function
Objective: LO 11-4
32
49) Identify the six categories of general controls and give one example of each.
Terms: Categories of general controls
Objective: LO 11-4
1) A database management system

A) allows clients to create databases that include information that can be shared across
multiple applications.
B) stores data on different files for different purposes, but always knows where they are and how
to retrieve them.
C) allows quick retrieval of data, but at a cost of inefficient use of file space.
D) allows quick retrieval of data, but it needs to update files continually.
Terms: Database management system

Objective: LO 11-5
2) When auditing a client who uses a database management system, the auditor is principally
aware of elevated risk due to the fact that
A) multiple users can access and update data files.
B) the accounting information is only in one place.
C) the database administrator may lack appropriate accounting knowledge.
D) multiple users could all access the data simultaneously causing a system shutdown.
Terms: Database management systems and elevated risk

Objective: LO 11-5
3) Firewalls are used to protect from

A) erroneous internal handling of data.
B) insufficient documentation of transactions.
C) illogical programming commands.
D) unauthorized external users.
Terms: Firewalls protect company data

Objective: LO 11-5
33
4) What tools do companies use to limit access to sensitive company data?
A)
Encryption Digital signatures Firewall
techniques
Yes Yes Yes
B)
techniques
Yes No No
C)
techniques
No Yes Yes
D)
techniques
Yes Yes No
Terms: Tools companies use to limit access to sensitive data

Objective: LO 11-5
5) Rather than maintain an internal IT center, many companies outsource their basic IT functions
such as payroll to an
A) external general service provider.
B) independent computer service center.
C) internal control service provider.
D) internal auditor.
Terms: Outsourced services

Objective: LO 11-5
6) When the auditor is obtaining an understanding of the independent computer service center's
internal controls, the auditor should
A) use the same criteria used to evaluate the client's internal controls.
B) use different criteria because the service center resides outside the company.
C) use the same criteria used to evaluate the client's internal controls but omit tests of
transactions.
D) use different criteria for the service center by including substantive tests of balances.
Terms: Service center's internal controls

34
Objective: LO 11-5
7) ________ protect(s) the security of electronic communication when information is transmitted

and when it is stored.
A) Firewalls
B) Digital signatures
C) Encryption
D) A database
Terms: Encryption
Objective: LO 11-5
8) A(n) ________ is a computer resource deployment and procurement model that enables an
organization to obtain IT resources and applications from any location via an Internet
connection.
A) application service provider
B) firewall
C) cloud computing environment
D) local area network
Terms: Cloud computing environment

Objective: LO 11-5
9) Firewalls can protect company data and software programs. (TRUE)
Terms: Firewalls protect company data

Difficulty: Easy
Objective: LO 11-5
10) LANs link equipment within a single or small cluster of buildings and are used within a
company. (TRUE)
Terms: LANs link equipment

Difficulty: Easy
Objective: LO 11-5
11) Companies using e-commerce systems to transact business electronically do not need to be
concerned about how their e-commerce partners manage IT systems risks.
FALSE => They are actually concerned
35
Terms: E-commerce and IT security risks
Objective: LO 11-5
12) Digital signatures are used by individuals and companies engaged in e-commerce to
guarantee the integrity and the authenticity of transactions or agreements executed between
parties. (TRUE)
Terms: Digital signatures

Objective: LO 11-5
13) Enterprise resource planning (ERP) systems integrate limited aspects of an organization's
business activities and transactions into one accounting information system.
FALSE => numerous aspects
Terms: Enterprise resource planning (ERP) systems
Objective: LO 11-5
14) Management is not as concerned about internal controls when they decide to outsource some
or all of their IT needs to cloud computing environments and suppliers.
FALSE => They are concerned
Terms: Controls in cloud computing environments
Objective: LO 11-5
15) Cost-benefit considerations should always be part of the consideration of most types of
outsourcing-related decisions made by management. (TRUE)
Terms: Cost-benefit considerations in outsourcing-related decisions

Difficulty: Easy
Objective: LO 11-5
16) From an internal control perspective, what challenges arise when a company outsources
computer functions?
Terms: Outsources IT requirements
Objective: LO 11-5
36

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Auditing and Assurance Services, 17e (Arens/Elder/Beasley)

Chapter 11 Internal Control and COSO Framework

11.1 Learning Objective 11-1

Terms: Internal control objectives

Terms: Management's assertions and internal control

Terms: Internal controls

4) Internal controls are not designed to provide reasonable assurance that

Terms: Internal controls; Reasonable assurance

Terms: Internal controls

Terms: Internal controls

Terms: Internal control objectives

Terms: Internal controls

11.2 Learning Objective 11-2

1) Who is responsible for establishing a private company's internal control?

Terms: Internal controls

Terms: Internal control design and implementation

Terms: PCAOB; internal control responsibility

4) Which of the following parties provides an assessment of the effectiveness of internal

Terms: Internal control effectiveness

Terms: Sarbanes-Oxley; Internal control report

7) When management is evaluating the design of internal control, management evaluates

Terms: Internal control design

Terms: Internal control weakness; Public company

Terms: Primary purpose to audit system of internal control

Terms: Internal control framework; COSO

Terms: Internal control over class of transactions

Terms: Internal control effectiveness

13) When considering internal controls,

Terms: Effectively designed internal controls; testing of controls

Terms: Internal controls

15) The Sarbanes-Oxley Act requires

Terms: Sarbanes-Oxley Act

Terms: Auditor responsibilities for understanding internal control

17) The primary emphasis by auditors is on controls over

Terms: Primary emphasis by auditors on controls

Terms: Key issues understanding client's internal controls

19) Reasonable assurance allows for

Terms: Reasonable assurance

Terms: Section 404 of the Sarbanes-Oxley Act

Terms: Auditor responsibilities for internal control

Terms: Auditor responsibilities for internal control

Terms: Management's responsibilities for internal control

Terms: Management's Section 404 reporting responsibilities

Terms: Controls over classes of transactions

Terms: Auditor responsibilities for reporting on internal controls

11.3 Learning Objective 11-3

Terms: Not strengthen internal control

Terms: Control environment components; Responsibility and authority

3) Which of the following factors may increase risks to an organization?

Terms: Control activities; control risk

Terms: Separation of duties

Terms: General or specific authorizations

Terms: Design and use of business documents

7) Which of the following best describes the purpose of control activities?

Terms: Control activities

Terms: Accounting information and communication system

Terms: COSO components of internal control and risk assessment

Terms: Risk assessment procedures

Terms: Subcomponents of control environment

Terms: Competence of client personnel