AUDIT: Chapter 12 Test Bank

1) When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be A) tracing. B) vouching. C) performing a walkthrough. D) testing controls. - correct answer C. 2) For financial statement audits, auditors need to understand controls that are relevant to the audit in order to A) identify and assess the risks of material misstatements. B) perform preliminary analytical procedures. C) detect fraud. D) assess inherent risk. - correct answer A 3) Narratives, flowcharts, and internal control questionnaires are three common methods of A) testing the internal controls. B) documenting the auditor's understanding of internal controls. C) designing the audit manual and procedures. D) documenting the auditor's understanding of a client's organizational structure. - correct answer B 4) When dealing with the documentation of internal control, A) in a narrative, most questions simply require a "yes" or "no" response. B) questionnaires offer useful checklists to remind the auditor of the many different types of internal controls that should exist. C) questionnaires and flowcharts should not be used together. D) flowcharts fail to show the segregation of duties in the company. - correct answer B 5) Which type of evidence is not used by the auditor to obtain an understanding of the design and implementation of internal control? A) inquiry B) observation C) confirmation D) inspection - correct answer C 20) Name four types of evidence which the auditor uses to obtain an understanding of the design and implementation of controls. - correct answer Inspection; inquiries of client personnel; observation of employees performing control processes; and reperformance by tracing one or a few transactions through the accounting system from the start to the finish. 21) Name three types of documents which auditors commonly use to obtain and to document their understanding in the audit working paper of the design of internal controls. - correct answer Narratives; flowcharts; and internal control questionnaires 22) A proper narrative of an accounting system and the related controls should include which four characteristics? - correct answer The origin of every document and record in the system; the processing that takes place; the disposition of every document and record in the system; and an indication of the controls relevant to the control risk (including separation of duties; authorizations and approvals, and internal verification performed by the client. When making a preliminary assessment of control risk, the starting point for most auditors is A) IT assessment controls. B) assessment of entity level controls. C) transaction-related controls. D) fraud controls. - correct answer B 2) You are performing the audit of internal control for Clifton Company. Which of the following would represent a material weakness in internal control? A) The company's audit committee has experienced an unusual turnover of members. B) The company's CFO was indicted for embezzling from the company. C) Bank reconciliations are done monthly. D) The CEO retired after twenty years of service to the company. - correct answer B 3) The employee in charge of authorizing credit to the company's customers does not fully understand the concept of credit risk. This lack of knowledge would A) constitute a deficiency in operation of internal controls. B) constitute a deficiency in design of internal controls. C) constitute a deficiency of management. D) not constitute a deficiency. - correct answer A 4) When assessing whether the financial statements are auditable, the auditor must consider A) that the integrity of management and the adequacy of accounting records are the two primary factors determining auditability. B) that the integrity of management and the adequacy of risk management are the two primary factors determining auditability. C) that if all of the transaction information is available only in electronic form without a visible audit trail, the company cannot be audited. D) the control risk before determining if the entity is auditable. - correct answer A 5) Once auditors determine that entity level controls are designed and placed in the operation, they A) make a preliminary assessment for each transaction-related audit objective for each major type of transaction. B) make a preliminary assessment of control risk. C) obtain an understanding of the design and implementation of internal control. D) prepare audit documentation in order to express their opinion on the company's internal control system. - correct answer A 6) Which of the following is the correct definition of "control deficiency"? A) A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis. B) A control deficiency exists if one or more deficiencies exist that adversely affect a company's ability to prepare external financial statements reliably. C) A control deficiency exists if the design or operation of controls results in a more than remote likelihood that controls will not prevent or detect misstatements. D) A control deficiency exists if the design or operation of controls results in a more than probable likelihood that controls will prevent or detect misstatements. - correct answer A 7) Which deficiency exists if a necessary control is missing or not properly implemented? A) control B) significant C) design D) operating - correct answer C To determine if significant internal control deficiencies are material weaknesses, they must be evaluated on their - correct answer Likeleyhood : YES Significance: YES 9) The auditor should identify and include only ________ controls since they will be sufficient to achieve the transaction-related audit objectives and will also provide audit efficiency. A) key B) significant C) material D) compensating - correct answer A 10) Before making the final assessment of internal control at the end of an audit, the auditor must - correct answer Test Controls: YES Perform substantive tests: YES 11) When identifying audit objectives and existing controls, A) audit objectives are identified for classes of transactions, account balances, and presentation and disclosure. B) the auditor identifies controls to satisfy each objective. C) it is helpful for the auditor to use the five control activities as reminders of controls. D) all of the above. - correct answer D 12) A(n) ________ control is a control elsewhere in the system that offsets the absence of a key control. A) significant B) alternate C) design D) compensating - correct answer D 13) A ________ exists if one or more control deficiencies exist that are less severe than a material weakness, but are important enough to merit attention by those responsible for oversight of the company's financial reporting. A) potential misstatement B) significant weakness C) significant deficiency D) fraud symptom - correct answer C 14) A five-step approach can be used to identify deficiencies, significant deficiencies, and material weaknesses. The first step in this approach is A) identify the absence of key controls. B) consider the possibility of compensating controls. C) determine potential misstatements that could result. D) identify existing controls. - correct answer D 15) Whe