The authority to accept incoming goods in receiving should be based on
an approved purchase order
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a correspo
Control amounts posted to the accounts receivable ledger are compared with control totals of invoices
Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control?
The auditor need not search for significant deficiencies but should document and communicate any significant deficiencies that are discovered
Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?
An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities
Which of the following procedures represents a weakness in internal controls for payroll?
The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department
A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows:
Employee Responsibility
-------- -----------------------------------------------------
Clerk 1 Reviews vendor invoices for proper signature approval
Clerk 3 mails the checks and remittances after they have been signed
Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control procedure that provides for
investigation of variances within a formal budgeting system
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a correspo
Sales invoices are compared with shipping documents and approved customer orders before invoices are mailed
In the integrated audit of an issuer, which of the following would not be considered an entity-level control?
The outside auditor's assessment process of internal auditor competence and objectivity
Which of the following computer documentations would an auditor most likely utilize in obtaining an understanding of internal control?
Systems flowcharts
Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control?
Incompatible duties
Which of the following internal control procedures most likely would deter lapping of collections from customers?
Segregation of duties between receiving cash and posting the accounts receivable ledger
Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
Employees involved in the credit-granting function are separated from the sales function.
An auditor most likely would not rely on controls if the payroll department supervisor is responsible for
authorizing payroll rate changes for all employees
Which of the following is an inherent limitation of internal controls?
collusion
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 credits are recorded
A client that recently installed a new accounts payable system assigned employees a user identification code (UIC) and a separate password. Each UIC is a person's name, and the individual's password is the same as the UIC. Users are not required to change
Employees are not required to take regular vacations.
In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedure
affects management's financial statement assertions.
Which of the following is a factor in the control environment?
Management's philosophy and operating style
Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?
Allowing for greater management oversight of incompatible activities
Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls?
The degree to which information technology is used in the accounting function
Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?
Require employees to have their direct supervisors approve their timecards
An auditor is evaluating a client's internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect?
Two employees, who work in different departments, are circumventing an internal control.
Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?
Are direct borrowings on notes payable authorized by the board of directors?
An audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do in an audit of financial statements?
Document the auditor's understanding of internal controls
Throughout the course of an audit, an auditor may become aware of significant transactions that are outside the normal course of business. It is important that the auditor understand the business rationale for the transaction. In understanding the busines
the personnel that were involved in booking the transaction to the G/L.
The overall attitude and awareness of an entity's board of directors concerning the importance of internal control usually is reflected in its
control environment.
Management philosophy and operating style most likely would have a significant influence on an entity's control environment when
management is dominated by one individual.
In obtaining an understanding of an entity's internal controls in a financial statement audit, an auditor is not obligated to
search for significant deficiencies in the operation of the entity's internal controls.
When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the
trust company has no direct contact with the entity employees responsible for maintaining investment accounting records
Which of the following factors would most likely influence the form and extent of the auditor's documentation of an entity's internal control environment?
Complexity and size of the entity
Which of the following is an inherent limitation in internal control?
faulty human judgement
When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that
internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness.
Each of the following types of controls is considered to be an entity-level control, except those
regarding the company's annual stockholder meeting.
Which of the following represents an inherent limitation of internal controls?
The CEO can request a check with no purchase order.
Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively?
Establishing budgets and forecasts to identify variances from expectations
Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?
the check signer reviews and cancels the voucher packets.
Communication with which of the following will help to obtain sufficient knowledge of the communication component to understand how the entity communicates financial reporting roles, responsibilities, and significant matters pertaining to financial report
I, II, III, and IV
The auditor should obtain sufficient knowledge of the communication component to understand how the entity communicates financial reporting roles and responsibilities and significant matters relating to financial reporting. This compone
Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of control risk?
The suitability of the client's lines of reporting
AU-C 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, acknowledges all of the following limitations of internal control except
small size of the entity.
In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to
document the auditor's understanding of the entity's internal control.
field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a correspo
Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slips.
Which of the following internal control procedures is not usually performed in the treasurer's department?
Approving vendors' invoices for payment
Internal control is a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in all of the following categories, except
segregation of functional responsibilities in asset management.
The average check written by ABC Company for inventory purchases is over $5,000; therefore, the management of ABC Company has decided to require two signatures on their checks for inventory purchases only if the check is in excess of $10,000. This is an e
cost-benefit considerations in implementing controls.
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the
debit memo
An auditor obtains sufficient understanding by performing risk assessment procedures to evaluate the design of controls relevant to an audit to
all
Which of the following would an auditor most likely consider in evaluating the control environment of an audit client?
Management's operating style
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
Which of the following elements should the auditor not consider in evaluating the entity's control environment?
Measurements and review of the entity's financial performance
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a correspo
Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slips.
Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?
Financial statement accounts likely to contain a misstatement
Conditions that require extension of audit tests
both
the one component of internal control that sets the tone of an organization, influencing the control consciousness of its people and serving as the foundation for all other components of internal control is:
the control environment
Which of the following is considered a control environment factor?
Human resources policies and practices
Which of the following items is an example of an inherent limitation in an internal control system?
Human error in decision making
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a correspo
Daily sales summaries are compared with control totals of invoices.
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a correspo
Monthly statements are mailed to all customers with outstanding balances.
An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern?
Verifying that approved spending limits are not exceeded
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
Treasurer
Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?
Approving a summary of hours each employee worked during the pay period
Management override of controls can occur in unpredictable ways. Due to this fact, the auditor should perform procedures, in addition to the procedures already performed to address identified risks of material misstatements due to fraud, that include whic
all
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc., (MMI) for the year ended January 31, 20X1. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a correspo
Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slips.
Which of the following factors would most likely be considered an inherent limitation to an entity's internal control?
Human judgment in the decision-making process
Which of the following describes a weakness in accounts payable procedures?
The accounts payable manager issues purchase orders.
Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been
implemented.
Why should an auditor obtain an understanding of control activities relevant to an audit?
Information on control activities can be utilized to determine areas that need attention.
The audit program usually cannot be finalized until the:
consideration of the entity's internal control has been completed.
In planning an audit, the auditor's knowledge about the design of relevant control activities should be used to
identify the types of potential misstatements that could occur.
An auditor assesses control risk because it
affects the level of detection risk that the auditor may accept
In designing systems of internal control, which of the following types of controls are the best to include in the design in order to be fully effective?
Preventative, detective, and corrective controls
When testing journal entries, the auditor should focus on journal entries:
made during the end of a reporting period, as fraudulent entries are made during that time.
made throughout the reporting period, as material misstatements are made during that tim
both
Which of the following components of internal control would be considered the foundation for the other components?
control environment
In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the:
operating effectiveness of policies and procedures.
design of policies and procedures.
2
Sound internal control procedures dictate that defective merchandise returned by customers should be presented initially to the
receiving clerk.
Proper segregation of duties reduces the opportunities to allow persons to be in positions to
perpetrate and conceal errors and fraud.
Which of the following situations most likely could lead to an embezzlement scheme?
Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement.
Which of the following are considered control environment factors?
Personnel policies and practices
Which of the following is a component of internal control?
risk assessment
Sound internal control procedures dictate that immediately upon receiving checks from customers by mail, a responsible employee should
prepare a duplicate listing of checks received.
An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the
collection of receivables.
Internal control consists of five interrelated components, which include all of the following except
materiality
For effective internal control, the accounts payable department generally should
establish the agreement of the vendor's invoice with the receiving report and purchase order
Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both
record and conceal fraudulent transactions in the normal course of assigned tasks
If an auditor is obtaining an understanding of an issuer's information and communication component of internal control, which of the following factors should the auditor assess?
the classes of transactions in the issuer's operations that are significant to the issuer's financial statements
Which of the following statements correctly describes the "top-down approach" used during an audit of internal control over financial reporting?
Begin by understanding the overall risks to internal control over financial reporting at the financial statement level.
Preventative controls are
usually more cost beneficial than detective controls
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the
authorization of transactions from the custody of related assets.
Which of the following actions should the auditor first take in response to discovering a deviation from the prescribed control procedure?
Make inquiries to understand the potential consequence of the deviation
Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded?
custody of investment securities is assigned to an outside agent such as a brokerage house, and access to securities requires the signatures and presence of two designated officials.
The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with
knowledge necessary for audit planning.
The definition of internal control found in AU-C 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, is taken from the definition found in Internal Control�Integrated Framework (the COSO Framework). In the d
the public's perception of the risk associated with the entity.
Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonpublic entity?
Observing the safeguards over access to and use of assets and records
Mailing disbursement checks and remittance advices should be controlled by the employee who
signs the checks last.
Which of the following statements is correct regarding internal control?
An inherent limitation to internal control is the fact that controls can be circumvented by management override
The objectives of the internal control for a production cycle are to provide assurance that transactions are properly executed and recorded, and that:
custody of work-in-process and of finished goods is properly maintained.
When obtaining an understanding of an entity's internal control, an auditor should concentrate on the implementation of the procedures because
management may establish appropriate procedures but not enforce compliance with them.
Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?
Preparation of system flowcharts