Chapter 1

Question 1

Both the SEC and the PCAOB require management to use the COSO framework for
assessing internal control adequacy.

Answer 1

False

Question 2

Corporate management (including the CEO) must certify monthly and annually their
organization’s internal controls over financial reporting.

Answer 2

False

Question 3

Both the SEC and the PCAOB require management to use the COBIT framework for
assessing internal control adequacy.

Answer 3

False

Question 5

.A qualified opinion on management’s assessment of internal controls over the financial
reporting system necessitates a qualified opinion on the financial statements?

Answer 5

False

Question 6

The same internal control objectives apply to manual and computer-based information
systems.

Answer 6

True

Question 7

The external auditor is responsible for establishing and maintaining the internal control system

Answer 7

False

Question 8

Segregaton of duties is and example of an internal control procedure

Answer 8

True

Question 9

Preventive controls are passive techniques designed to reduce fraud

Answer 9

True

Question 10

Sarbanes-Oxley Act requires only that a firm keep good records

Answer 10

False

Question 11

A key modifying assumption in internal control is that the internal control system is the
responsibility of management.

Answer 11

True

Question 12

While the Sarbanes-Oxley Act prohibits auditors from providing non-accounting services
to their audit clients, they are not prohibited from performing such services for non-audit
clients or privately held companies.

Answer 12

True

Question 13

The Sarbanes-Oxley Act requires the audit committee to hire and oversee the external
auditors.

Answer 13

True

Question 14

Section 404 requires that corporate management (including the CEO) certify their
organization’s internal controls on a quarterly and annual basis.

Answer 14

False

Question 15

Section 302 requires the management of public companies to assess and formally report
on the effectiveness of their organization’s internal controls.

Answer 15

False

Question 16

Application controls apply to a wide range of exposures that threaten the integrity of all
programs processed within the computer environment.

Answer 16

False

Question 17

IT auditing is a small part of most external and internal audits

Answer 17

False

Question 18

Advisory services is an emerging field that goes beyond the auditor’s traditional
attestation function.

Answer 18

True

Question 19

External auditing is an independent appraisal function established within an organization
to examine and evaluate its activities as a service to the organization.

Answer 19

False

Question 20

External auditors can cooperate with and use evidence gathered by internal audit
departments that are organizationally independent and that report to the Audit
Committee of the Board of Directors.

Answer 20

True

Question 21

Tests of controls determine whether the database contents fairly reflect the
organization’s transactions.

Answer 21

False

Question 22

Audit risk is the probability that the auditor will render an unqualified opinion on financial
statements that are materially misstated.

Question 23

A strong internal control system will reduce the amount of substantive testing that must
be performed.

Answer 23

True

Question 24

Substantive testing techniques provide information about the accuracy and
completeness of an application’s processes.

Answer 24

False

Question 25

The concept of reasonable assurance suggests that a. the cost of an internal control should be less than the benefit it provides b. a well-designed system of internal controls will detect all fraudulent activity c. the objectives achieved by an internal control system vary depending on the data processing method d. the effectiveness of internal controls is a function of the industry environment

Answer 25

A

Question 26

Which of the following is not a limitation of the internal control system? a. errors are made due to employee fatigue b. fraud occurs because of collusion between two employees c. the industry is inherently risky d. management instructs the bookkeeper to make fraudulent journal entries

Answer 26

C

Question 27

The most cost-effective type of internal control is a. preventive control b. accounting control c. detective control d. corrective control

Answer 27

A

Question 28

Which of the following is a preventive control? a. Credit check before approving a sale on account c. physical inventory count d. comparing the accounts receivable subsidiary ledger to the control account

Answer 28

A

Question 29

A well-designed purchase order is an example of a a. preventive control b. detective control c. corrective control d. none of the above

Answer 29

A

Question 30

A physical inventory count is an example of a a. preventive control b. detective control c. corrective control d. Feed-forward control

Answer 30

B

Question 31

The bank reconciliation uncovered a transposition error in the books. This is an example of a a. preventive control b. detective control c. corrective control d. none of the above

Answer 31

B

Question 32

Which of the following is not an element of the internal control environment? a.management philosophy and operating style b. organizational structure of the firm c. well-designed documents and records d. the functioning of the board of directors and the audit committee

Answer 32

C

Question 33

Which of the following suggests a weakness in the internal control environment? a. the firm has an up-to-date organizational chart b. monthly reports comparing actual performance to budget are distributed to managers c. performance evaluations are prepared every three years d. the audit committee meets quarterly with the external auditors

Answer 33

C

Question 34

Which of the following indicates a strong internal control environment? a. the internal audit group reports to the audit committee of the board of directors b. there is no segregation of duties between organization functions c. there are questions about the integrity of management d. adverse business conditions exist in the industry

Answer 34

A

Question 35

According to COSO, an effective accounting system performs all of the following except a. identifies and records all valid financial transactions b. records financial transactions in the appropriate accounting period c. separates the duties of data entry and report generation d. records all financial transactions promptly

Answer 35

C

Question 36

Which of the following is the best reason to separate duties in a manual system? a. to avoid collusion between the programmer and the computer operator b. to ensure that supervision is not required c. to prevent the record keeper from authorizing transactions d. to enable the firm to function more efficiently

Answer 36

C

Question 37

Which of the following is not an internal control procedure? a. authorization b. management's operating style c. independent verification d. accounting records

Answer 37

B

Question 38

The decision to extend credit beyond the normal credit limit is an example of a. independent verification b. authorization c. segregation of functions d. supervision

Answer 38

B

Question 39

When duties cannot be segregated, the most important internal control procedure is a. supervision b. independent verification c. access controls d. accounting records

Answer 39

A

Question 40

An accounting system that maintains an adequate audit trail is implementing which internal control procedure? a. access controls b. segregation of functions c. independent verification d. accounting records

Answer 40

D

Question 41

The importance to the accounting profession of the Sarbanes-Oxely Act is that a. bribery will be eliminated b. management will not override the company's internal controls c. management are required to certify their internal control system d. firms will not be exposed to lawsuits

Answer 41

C

Question 42

The board of directors consists entirely of personal friends of the chief executive officer. This indicates a weakness in a. the accounting system b. the control environment c. control procedures d. this is not a weakness

Answer 42

B

Question 43

The office manager forgot to record in the accounting records the daily bank deposit. Which control procedure would most likely prevent or detect this error? a. segregation of duties b. independent verification c. accounting records d. supervision

Answer 43

B

Question 44

Control activities under SAS 109/COSO include a. IT Controls, preventative controls, and Corrective controls b. physical controls, preventative controls, and corrective controls. c. general controls, application controls, and physical controls. d. transaction authorizations, segregation of duties, and risk assessment

Answer 44

C

Question 45

Internal control system have limitations. These include all of the following except a. possibility of honest error b. circumvention c. management override d. stability of systems

Answer 45

D

Question 46

Management can expect various benefits to follow from implementing a system of strong internal control. Which of the following benefits is least likely to occur? a. reduced cost of an external audit. b. prevents employee collusion to commit fraud. c. availability of reliable data for decision-making purposes. d. some assurance of compliance with the Foreign Corrupt Practices Act of 1977. e. some assurance that important documents and records are protected.

Answer 46

B

Question 47

Which of the following situations is not a segregation of duties violation? a. The treasurer has the authority to sign checks but gives the signature block to the assistant treasurer to run the check-signing machine. b. The warehouse clerk, who has the custodial responsibility over inventory in the warehouse, selects the vendor and authorizes purchases when inventories are low. c. The sales manager has the responsibility to approve credit and the authority to write off accounts. d. The department time clerk is given the undistributed payroll checks to mail to absent employees. e. The accounting clerk who shares the record keeping responsibility for the accounts receivable subsidiary ledger performs the monthly reconciliation of the subsidiary ledger and the control account.

Answer 47

B

Question 49

Which concept is not an integral part of an audit? a. evaluating internal controls b. preparing financial statements c. expressing an opinion d. analyzing financial data

Answer 49

B

Question 50

Which statement is not true? a. Auditors must maintain independence. b. IT auditors attest to the integrity of the computer system. C. IT auditing is independent of the general financial audit. d. IT auditing can be performed by both external and internal auditors.

Answer 50

C

Question 51

Typically, internal auditors perform all of the following tasks except a. IT audits b. evaluation of operational efficiency c. review of compliance with legal obligations d. internal auditors perform all of the above tasks

Answer 51

D

Question 52

The fundamental difference between internal and external auditing is that a. internal auditors represent the interests of the organization and external auditors represent outsiders b. internal auditors perform IT audits and external auditors perform financial statement audits c. internal auditors focus on financial statement audits and external auditors focus on operational audits and financial statement audits d. external auditors assist internal auditors but internal auditors cannot assist external auditors

Answer 52

A

Question 53

Internal auditors assist external auditors with financial audits to a. reduce audit fees b. ensure independence c. represent the interests of management the statement is not true; internal auditors are not permitted to assist external auditors with financial audits

Answer 53

A

Question 54

Which statement is not correct? a. Auditors gather evidence using tests of controls and substantive tests. b. The most important element in determining the level of materiality is the mathematical formula. c. Auditors express an opinion in their audit report. d. Auditors compare evidence to established criteria.

Answer 54

B

Question 55

All of the following are steps in an IT audit except a. substantive testing b. tests of controls c. post-audit testing d. audit planning

Answer 55

C

Question 56

When planning the audit, information is gathered by all of the following methods except a. completing questionnaires b. interviewing management c. observing activities d. confirming accounts receivable

Answer 56

D

Question 57

Substantive tests include a. examining the safety deposit box for stock certificates b. reviewing systems documentation c. completing questionnaires d. observation

Answer 57

A

Question 58

Tests of controls include a. confirming accounts receivable b. counting inventory c. completing questionnaires d. counting cash

Answer 58

C

Question 59

All of the following are components of audit risk except a. control risk b. legal risk c. detection risk d. inherent risk

Answer 59

B

Question 60

Control risk is a. the probability that the auditor will render an unqualified opinion on financial statements that are materially misstated b. associated with the unique characteristics of the business or industry of the client c. the likelihood that the control structure is flawed because controls are either absent or inadequate to prevent or detect errors in the accounts d. the risk that auditors are willing to take that errors not detected or prevented by the control structure will also not be detected by the auditor

Answer 60

C

Question 61

Which of the following is true? a. In the CBIS environment, auditors gather evidence relating only to the contents of databases, not the reliability of the computer system. b. Conducting an audit is a systematic and logical process that applies to all forms of information systems. c. Substantive tests establish whether internal controls are functioning properly. d. IT auditors prepare the audit report if the system is computerized.

Answer 61

B

Question 62

Inherent risk a. exists because all control structures are flawed in some ways. b. is the likelihood that material misstatements exist in the financial statements of the firm. c. is associated with the unique characteristics of the business or industry of the client. d. is the likelihood that the auditor will not find material misstatements.

Answer 62

C

Question 63

Attestation services require all of the following except a. written assertions and a practitioner's written report b. the engagement is designed to conduct risk assessment of the client's systems to verify their degree of SOX compliance c. the formal establishment of measurements criteria d. the engagement is limited to examination, review, and application of agreed-upon procedures

Answer 63

B

Question 64

The financial statements of an organization reflect a set of management assertions about the financial health of the business. All of the following describe types of assertions except a. that all of the assets and equities on the balance sheet exist b. that all employees are properly trained to carry out their assigned duties c. that all transactions on the income statement actually occurred d. that all allocated amounts such as depreciation are calculated on a systematic and rational basis

Answer 64

B

Question 65

Which of the following is NOT an implication of section 302 of the Sarbanes-Oxley Act? a. Auditors must determine, whether changes in internal control has, or is likely to, materially affect internal control over financial reporting. b. Auditors must interview management regarding significant changes in the design or operation of internal control that occurred since the last audit. c. Corporate management (including the CEO) must certify monthly and annually their organization's internal controls over financial reporting. d. Management must disclose any material changes in the company's internal controls that have occurred during the most recent fiscal quarter.

Answer 65

C