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41.     Which of the following is the correct definition of “control deficiency?”
medium
     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.     None of the above is a correct definition.
     
42.     The purpose of an entity’s accounting information and communication system is to



medium     a.     initiate transactions.
     b.     record and process transactions.
     c.     monitor transactions.
     d.     a and b only.
     
43.
medium     A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation of functions and that leave no transaction trail is
     a.     inspection.
     b.     observation.
     c.     reperformance.
     d.     reconciliation.
     
44.     Internal controls normally include procedures designed to provide reasonable assurance that
medium     a.     employees act with integrity when performing their assigned tasks.
     b.     transactions are executed in accordance with management’s general or specific authorization.
     c.     decision processes leading to management’s authorization of transactions are sound.
     d.     collusive activities would be detected by segregation of employee duties.
     
45. (Public)     Which of the following is not a common step used to identify internal control deficiencies?
medium     a.     Decide whether there is a significant deficiency or material weakness.
     b.     Identify existing controls.
     c.     Identify the absence of key controls.
     d.     Each of the above is a common step used to identify internal control deficiencies.
     
46.     Which of the following is not a component of an entity’s internal control?
medium     a.     Control risk.
     b.     Control procedures.
     c.     The accounting system.
     d.     The control environment.
47. (Public)
medium     Before making the final assessment of internal control at the end of an integrated audit, the auditor must
     a.     test controls.
     b.     perform substantive tests of details.
     c.     a only.
     d.     a and b.
     
48. (Public)
medium     Significant deficiencies and material weaknesses in internal control of a public company must be reported to which of the following?
     a.     The Public Company Accounting Oversight Board.
     b.     Members of management who are responsible for the related area of the company.
     c.     Audit committee of the company’s board of director.
     d.     None of the above.
     
49.     Of the following statements about internal controls, which one is not valid?
medium
     a.     No one person should be responsible for the custodial responsibility and the recording responsibility for an asset.
     b.     Transactions must be properly authorized before such transactions are processed.
     c.     Because of the cost benefit relationship, a client may apply control procedures on a test basis.
     d.     Control procedures reasonably ensure that collusion among employees cannot occur.
     
50.
medium     Which of the following best describes the inherent limitations that should be recognized by an auditor when considering the potential effectiveness of internal control?
     a.     Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.
     b.     The competence and integrity of client personnel provides an environment conducive to accounting control and provides assurance that effective control will be achieved.
     c.     Procedures designed to assure the execution and recording of transactions in accordance with proper authorizations are effective against irregularities perpetrated by management.
     d.     The benefits expected to be derived from effective internal accounting control usually do not exceed the costs of such control.
     
51.     Which of the following is not one of the subcomponents of the control environment?
medium     a.     Management’s philosophy and operating style.
     b.     Organizational structure.
     c.     Adequate separation of duties.
     d.     Commitment to competence.
     
52.
medium     It is important for the CPA to consider the competence of the audit clients’ employees because their competence bears directly and importantly upon the
     a.     cost/benefit relationship of the system of internal control.
     b.     achievement of the objectives of internal control.
     c.     comparison of recorded accountability with assets.
     d.     timing of the tests to be performed.
     
53.
medium     Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by
     a.     employment of temporary personnel to aid in the separation of duties.
     b.     direct participation by the owner of the business in the record-keeping activities of the business.
     c.     engaging a CPA to perform monthly “write-up” work.
     d.     delegation of full, clear-cut responsibility to each employee for the functions assigned to each.
     

54.     Evidential matter concerning proper segregation of duties ordinarily is best obtained by
medium     a.     direct personal observation of the employee who applies control procedures.
     b.     making inquiries of co-workers about the employee who applies control procedures.
     c.     preparation of a flowchart of duties performed and available personnel.
     d.     inspection of third-party documents containing the initials of who applied control procedures.
     
55.     Proper segregation of functional responsibilities calls for separation of the functions of
medium     a.     authorization, execution, and payment.
     b.     authorization, recording, and custody.
     c.     custody, execution, and reporting.
     d.     authorization, payment, and recording.
     
56.     When considering the objectivity of internal auditors, an independent auditor should
medium     a.     evaluate the quality control program in effect for the internal auditors.
     b.     examine documentary evidence of the work performed by the internal auditors.
     c.     test a sample of the transactions and balances that the internal auditors examined.
     d.     determine the organizational level to which the internal auditors report.
     
57.     Internal controls are not designed to provide reasonable assurance that
medium     a.     all frauds will be eliminated.
     b.     transactions are executed in accordance with management’s authorization.
     c.     access to assets is permitted only in accordance with management’s authorization.
     d.     the recorded accountability for assets is compared with the existing assets at reasonable intervals.
     
58.
medium     Which of the following statements regarding auditor documentation of the client’s internal controls is correct?
     a.     Documentation must include flow charts.
     b.     Documentation must include procedural write-ups.
     c.     No documentation is necessary although it is desirable.
     d.     No one particular form of documentation is necessary.
     
59.
medium     Significant deficiencies are matters that come to an auditor’s attention, which should be communicated to an entity’s audit committee because they represent
     a.     material frauds perpetrated by high-level management.
     b.     internal control deficiencies that could adversely affect a company’s ability to initiate, record, process, or report external financial statements reliably.
     c.     flagrant violations of the entity’s documented conflict-of-interest policies.
     d.     intentional attempts by client personnel to limit the scope of the auditor’s field work.
     
60.
challenging
     Which of the following statements, if any, is correct?
a.     The NASDAQ market requires listed companies to have audit committees that have only independent directors.
b.     The NASDAQ market requires listed companies to have audit committees that have a minority of the positions held by independent directors.
c.     The NASDAQ market recommends, but does not require, listed companies to have audit committees.
d.     The NASDAQ market recommends, but does not require, listed companies to have audit committees that have a minority of the positions held by independent directors.


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