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
Answer: D
2) 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
Answer: B
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.
Answer: B
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.
Answer: A
5) Describe each of the three broad objectives management typically has for internal control.
With which of these objectives is the auditor primarily concerned?
Answer: The three objectives are:
● Reliability of financial reporting. Management has both a legal and professional
responsibility to be sure that the information is fairly presented in according with reporting
requirements such as U.S. GAAP and IFRS.
● Efficiency and effectiveness of operations. Controls within an organization are meant to
encourage efficient and effective use of its resources to optimize the company's goals.
● Compliance with laws and regulations. Public, non-public, and not-for-profit
organizations are required to follow many laws and regulations. Some relate to
accounting only indirectly, such as environmental protection and civil rights laws. Others
are closely related to accounting, such as income tax regulations and anti-fraud legal
provisions.
6) Section 404 of the Sarbanes-Oxley Act requires that public companies issue an internal
control report.
A) True
B) False
Answer: A
7) 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.
A) True
B) False
Answer: A
1) Which of the following is responsible for establishing a private company's internal control?
A) Senior Management
B) Internal Auditors
C) FASB
D) Audit committee
Answer: A
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.
Answer: C
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.
Answer: C
4) Which of the following parties provides an assessment of the effectiveness of internal control
over financial reporting for public companies?
A) Management; Yes, Financial statement auditors; Yes
B) Management; No, Financial statement auditors; No
C) Management; Yes, Financial statement auditors; No
D) Management; No, Financial statement auditors; Yes
Answer: A
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.
Answer: A
TRUE OR FALSE
1. Internal control is concerned with the reliability of financial information. TRUE
2. The Foreign Corrupt Practices Act prohibits bribes to foreign corporate officials to obtain
business. FALSE
3. Incompatible duties exist when an employee is in a position to perpetrate and conceal
errors or fraud. TRUE
4. Internal auditors should preferably report to the chief accounting officer of the company.
FALSE
5. Well-designed internal control will prevent all fraud by top management.
6. CPA firms may use written narratives to describe internal control in their audit working
papers. TRUE
7. The auditor’s communication of internal control significant deficiencies should be
addressed only to senior management of the company. FALSE
8. If the auditor’s assessment of the design of internal control reveals that it cannot be relied
upon, the auditors are not required to prepare any documentation of internal control for
their working papers. FALSE
9. The relatively low number of types of transactions incurred by small firms make the
segregation of duties impossible. FALSE
10. In a financial statement audit, CPAs are required to assess the operating effectiveness of
most significant accounting oriented controls. FALSE
MCQ
1. Which of the following matters would an auditor most likely consider to be a significant
deficiency to be communicated to the audit committee?
A. Management's failure to renegotiate unfavorable long-term purchase commitments.
B. Recurring operating losses that may indicate going concern problems.
C. Evidence of a lack of objectivity by those responsible for accounting decisions.
D. Management's current plans to reduce its ownership equity in the entity
2. In assessing the objectivity of a client's internal auditors, the CPA would be most
likely to
consider internal auditor's:
A. Education levels.
B. Experience.
C. Organizational status within the company.
D. Training and supervisory skills.
3. In a financial statement audit performed following AICPA Professional Standards,
how frequently must an auditor test operating effectiveness of controls that appear to
function as they have in past years and on which the auditor wishes to rely upon in the
current year?
A. Monthly.
B. Each audit.
C. At least every second audit.
D. At least every third audit
14. After obtaining an understanding of internal control and arriving at a preliminary
assessed level of control risk, an auditor decided to perform tests of controls. The
auditor most likely decided that:
A. Additional evidence to support a reduction in the assessed level of control risk is not
available.
B. An increase in the assessed level of control risk is justified for certain financial
statement assertions.
C. It would be efficient to perform tests of controls that would result in a
reduction in planned substantive procedures.
D. There were many internal control deficiencies that would allow misstatements to
enter the accounting system
15. Which of the following is least likely to be evidence of operating effectiveness of
controls?
A. Canceled supporting documents.
B. Confirmations of accounts receivable.
C. Records documenting usage of computer programs.
D. Signatures on authorization forms