Chapter 6

Question 1

Auditors obtain an understanding of nonpublic entity’s internal control for the primary purpose of…

Answer 1

Determining the nature, extent, and timing of audit procedures to be performed

Question 2

Internal controls are designed to achieve company objectives in what areas?

Answer 2

1. Safeguarding of Assets
2. Reliability of Financial Reporting
3. Compliance with Laws and Regultions

Question 3

The five major components of internal control (COSO framework)

Answer 3

1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information & Communication
5. Monitoring

Question 4

What is a proper reason for NOT conducting tests of controls for nonpublic companies?

Answer 4

The procedures require more audit effort than the projected benefits to be obtained from lowering the control risk.

Question 5

For nonpublic companies with preliminary control risk assessments set at high, auditors are likely to…

Answer 5

Complete little or no tests of controls.

Question 6

What is the proper sequence of audit steps that come after an understanding and documenting the entity’s internal control

Answer 6

1. Assess Control Risk
2. Test of Controls
3. Reassess Control Risk
4. Determine Extent of Substantive Testing

Question 7

What form is document is required to document internal controls?

Answer 7

No one particular form of documentation is necessary, and the extent of documentation may vary.

Question 8

An report from a service auditor should include what?

Answer 8

An opinion

Question 9

The auditor should report what about internal controls to the audit committee or others charged with governance?

Answer 9

Significant deficiencies

Material Weaknesses

Question 10

List 3 general controls

Answer 10

1. Backup and disaster recovery controls
2. Password protection on the central server
3. Requiring change authorization forms on all program software

Question 11

A reliance strategy is chosen when the auditor…

Answer 11

1. Plans on conducting test of controls

2. Has set the control risk at a lower level

Question 12

Understanding each of the components of internal control provides knowledge about…

Answer 12

The design of Internal Controls

Factors that affect the risk of material misstatement

Question 13

The effectiveness of internal control is reduced by…

Answer 13

Human errors or mistakes

Question 14

In order to be able to set controls risk at a lower level, the auditor must do all of the following…

Answer 14

1. Identify specific controls that will be relied upon
2. Perform test of controls
3. Conclude on the achieved level of control risk

Question 15

The auditor may document the achieved level of control risk using the following…

Answer 15

1. Structured working papers
2. Internal Control Questionnaire
3. A Memorandum

Question 16

Four categories of Control Activities

Answer 16

1. Performance Reviews
2. Information Processing Controls
3. Physical Controls
4. Segregation of Duties

Question 17

What audit procedure does an auditor typically use to develop an understanding of control activities?

Answer 17

Walkthroughs

Question 18

What forms can an auditor use to document an understanding of internal controls?

Answer 18

1. Procedure Manuals/Organization Chart
2. Internal Control Questionnaires
3. Flowcharts
4. Narrative Description

Question 19

A memo to document internal controls is typically used for what size or organization?

Answer 19

Smaller

Question 20

How is a complex system of internal controls typically documented?

Answer 20

Internal Control Questionnaire

Question 21

What are the top 3 reasons cited causes of fraud?

Answer 21

1. Inadequate controls
2. Management Override
3. Inadequate oversight

Question 22

Name 3 limitations to internal controls

Answer 22

1. Management override
2. Human Errors or Mistakes
3. Collusion

Question 23

Type 1 Service auditor report states what?

Answer 23

An opinion on management’s description and assertions on the design of the system and related controls

Question 24

Type 2 Service auditor report states what?

Answer 24

Everything from a Type 1 report and opinion on the operating effectiveness of the controls.

Question 25

An auditor's primary consideration regarding an entity's internal controls is whether they...

Answer 25

Affect the financial statement assertions

Question 26

The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system (T/F).

Answer 26

True

Question 27

Internal control is a process designed to provide reasonable assurance regarding the achievement of what?

Answer 27

1. Effectiveness and Efficiency of Operations 2. Reliability of financial reporting 3. Compliance with applicable laws and regulations