Ch. 1—Auditing and Internal Control
T/F
1. Corporate management (including the_ CEO) must certify monthly and annually the_ir organization’s
internal controls over financial reporting.
ANSWER: F PTS: 1
2. Both the_ SEC and the_ PCAOB require management to use the_ COBIT framework for assessing internal
control adequacy.
ANSWER: F PTS: 1
3. Both the_ SEC and the_ PCAOB require management to use the_ COSO framework for assessing internal
control adequacy.
ANSWER: F PTS: 1
4. A qualified opinion on management’s assessment of internal controls over the_ financial reporting system
necessitates a qualified opinion on the_ financial statements?
ANSWER: F PTS: 1
5. The_ same internal control objectives apply to manual and computer-based information systems.
ANSWER: T PTS: 1
6. The_ external auditor is responsible for establishing and maintaining the_ internal control system.
ANSWER: F PTS: 1
7. Segregation of duties is an example of an internal control procedure.
ANSWER: T PTS: 1
8. Preventive controls are passive techniques designed to reduce fraud.
ANSWER: T PTS: 1
9. A key modifying assumption in internal control is that the_ internal control system is the_ responsibility of
management.
ANSWER: T PTS: 1
10. While the_ Sarbanes-Oxley Act prohibits auditors from providing non-accounting services to the_ir audit
clients, the_y are not prohibited from performing such services for non-audit clients or privately held
companies.
ANSWER: T PTS: 1
,11. The_ Sarbanes-Oxley Act requires the_ audit committee to hire and oversee the_ external auditors.
ANSWER: T PTS: 1
12. Section 404 requires that corporate management (including the_ CEO) certify the_ir organization’s internal
controls on a quarterly and annual basis.
ANSWER: F PTS: 1
13. Section 302 requires the_ management of public companies to assess and formally report on the_
effectiveness of the_ir organization’s internal controls.
ANSWER: F PTS: 1
14. Application controls apply to a wide range of exposures that threaten the_ integrity of all programs processed
within the_ computer environment.
ANSWER: F PTS: 1
15. Advisory services is an emerging field that goes beyond the_ auditor’s traditional attestation function.
ANSWER: T PTS: 1
16. An IT auditor expresses an opinion on the_ fairness of the_ financial statements.
ANSWER: F PTS: 1
17. External auditing is an independent appraisal function established within an organization to examine and
evaluate its activities as a service to the_ organization.
ANSWER: F PTS: 1
18. External auditors can cooperate with and use evidence gathe_red by internal audit departments that are
organizationally independent and that report to the_ Audit Committee of the_ Board of Directors.
ANSWER: T PTS: 1
19. Tests of controls determine whethe_r the_ database contents fairly reflect the_ organization's transactions.
ANSWER: F PTS: 1
20. Audit risk is the_ probability that the_ auditor will render an unqualified opinion on financial statements that are
materially misstated.
ANSWER: T PTS: 1
21. A strong internal control system will reduce the_ amount of substantive testing that must be performed.
ANSWER: T PTS: 1
22. Substantive testing techniques provide information about the_ accuracy and completeness of an application's
processes.
, ANSWER: F PTS: 1
MULTIPLE CHOICE QUESTIONS
1. 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: A PTS: 1
2. 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: C PTS: 1
3. The_ most cost-effective type of internal control is
a. preventive control
b. accounting control
c. detective control
d. corrective control
ANSWER: A PTS: 1
4. Which of the_ following is a preventive control?
a. credit check before approving a sale on account
b. bank reconciliation
c. physical inventory count
d. comparing the_ accounts receivable subsidiary ledger to the_ control account
ANSWER: A PTS: 1
5. 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: A PTS: 1
6. A physical inventory count is an example of a
a. preventive control
b. detective control
c. corrective control
d. Feed-forward control
ANSWER: B PTS: 1
, 7. 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: B PTS: 1
8. 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: C PTS: 1
9. 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: C PTS: 1
10. 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. the_re is no segregation of duties between organization functions
c. the_re are questions about the_ integrity of management
d. adverse business conditions exist in the_ industry
ANSWER: A PTS: 1
11. 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: C PTS: 1
12. 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: C PTS: 1
13. Which of the_ following is not an internal control procedure?
a. authorization
b. management’s operating style
T/F
1. Corporate management (including the_ CEO) must certify monthly and annually the_ir organization’s
internal controls over financial reporting.
ANSWER: F PTS: 1
2. Both the_ SEC and the_ PCAOB require management to use the_ COBIT framework for assessing internal
control adequacy.
ANSWER: F PTS: 1
3. Both the_ SEC and the_ PCAOB require management to use the_ COSO framework for assessing internal
control adequacy.
ANSWER: F PTS: 1
4. A qualified opinion on management’s assessment of internal controls over the_ financial reporting system
necessitates a qualified opinion on the_ financial statements?
ANSWER: F PTS: 1
5. The_ same internal control objectives apply to manual and computer-based information systems.
ANSWER: T PTS: 1
6. The_ external auditor is responsible for establishing and maintaining the_ internal control system.
ANSWER: F PTS: 1
7. Segregation of duties is an example of an internal control procedure.
ANSWER: T PTS: 1
8. Preventive controls are passive techniques designed to reduce fraud.
ANSWER: T PTS: 1
9. A key modifying assumption in internal control is that the_ internal control system is the_ responsibility of
management.
ANSWER: T PTS: 1
10. While the_ Sarbanes-Oxley Act prohibits auditors from providing non-accounting services to the_ir audit
clients, the_y are not prohibited from performing such services for non-audit clients or privately held
companies.
ANSWER: T PTS: 1
,11. The_ Sarbanes-Oxley Act requires the_ audit committee to hire and oversee the_ external auditors.
ANSWER: T PTS: 1
12. Section 404 requires that corporate management (including the_ CEO) certify the_ir organization’s internal
controls on a quarterly and annual basis.
ANSWER: F PTS: 1
13. Section 302 requires the_ management of public companies to assess and formally report on the_
effectiveness of the_ir organization’s internal controls.
ANSWER: F PTS: 1
14. Application controls apply to a wide range of exposures that threaten the_ integrity of all programs processed
within the_ computer environment.
ANSWER: F PTS: 1
15. Advisory services is an emerging field that goes beyond the_ auditor’s traditional attestation function.
ANSWER: T PTS: 1
16. An IT auditor expresses an opinion on the_ fairness of the_ financial statements.
ANSWER: F PTS: 1
17. External auditing is an independent appraisal function established within an organization to examine and
evaluate its activities as a service to the_ organization.
ANSWER: F PTS: 1
18. External auditors can cooperate with and use evidence gathe_red by internal audit departments that are
organizationally independent and that report to the_ Audit Committee of the_ Board of Directors.
ANSWER: T PTS: 1
19. Tests of controls determine whethe_r the_ database contents fairly reflect the_ organization's transactions.
ANSWER: F PTS: 1
20. Audit risk is the_ probability that the_ auditor will render an unqualified opinion on financial statements that are
materially misstated.
ANSWER: T PTS: 1
21. A strong internal control system will reduce the_ amount of substantive testing that must be performed.
ANSWER: T PTS: 1
22. Substantive testing techniques provide information about the_ accuracy and completeness of an application's
processes.
, ANSWER: F PTS: 1
MULTIPLE CHOICE QUESTIONS
1. 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: A PTS: 1
2. 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: C PTS: 1
3. The_ most cost-effective type of internal control is
a. preventive control
b. accounting control
c. detective control
d. corrective control
ANSWER: A PTS: 1
4. Which of the_ following is a preventive control?
a. credit check before approving a sale on account
b. bank reconciliation
c. physical inventory count
d. comparing the_ accounts receivable subsidiary ledger to the_ control account
ANSWER: A PTS: 1
5. 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: A PTS: 1
6. A physical inventory count is an example of a
a. preventive control
b. detective control
c. corrective control
d. Feed-forward control
ANSWER: B PTS: 1
, 7. 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: B PTS: 1
8. 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: C PTS: 1
9. 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: C PTS: 1
10. 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. the_re is no segregation of duties between organization functions
c. the_re are questions about the_ integrity of management
d. adverse business conditions exist in the_ industry
ANSWER: A PTS: 1
11. 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: C PTS: 1
12. 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: C PTS: 1
13. Which of the_ following is not an internal control procedure?
a. authorization
b. management’s operating style
