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challenging     Which of the following is not typically one of management’s concerns in designing effective internal controls?
     a.     Reliability of financial reporting.
     b.     Efficiency and effectiveness of operations.
     c.     Compliance with applicable laws and regulations.
     d.     Obtaining the best internal control possible.
62. (SOX)     The Sarbanes-Oxley Act requires
challenging     a.     all public companies to issue an internal control report.
     b.     all public companies to define adequate internal controls.
     c.     the auditor of public companies to design effective internal controls over financial reporting.
     d.     provides for all three of the above.
challenging     When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the
     a.     segregation of incompatible functions is necessary to ascertain that internal control is effective.
     b.     employment of competent personnel provides assurance that the objectives of internal control will be achieved.
     c.     establishment and maintenance of internal control is an important responsibility of the management and not of the auditor.
     d.     costs of internal control should not exceed the benefits expected to be derived from internal control.
     To comply with the second standard of fieldwork, the auditor need not be concerned with all five areas of internal control that apply to management. The auditor’s primary concerns are with the internal control’s ability to
     a.     ensure reliability of financial reporting for external purposes.
     b.     provide reliable data and promote efficiency.
     c.     promote efficiency and encourage adherence to policy.
     d.     provide reliable data, safeguard assets, and comply with the Sarbanes-Oxley Act of 2002.

challenging     The financial statements are not likely to correctly reflect generally accepted accounting principles if
     a.     the controls affecting the reliability of financial reporting are inadequate.
     b.     the company’s controls do not promote efficiency.
     c.     the company’s controls do not promote effectiveness.
     d.     all three of the above are true.
66.     The primary emphasis by auditors is on controls over
challenging     a.     classes of transactions.
     b.     account balances.
     c.     both a and b, because they are equally important.
     d.     both a and b, because they vary from client to client.
challenging     The most important difference in a nonpublic company in assessing control risk is the ability to assess control risk at

     a.     low
     b.     medium
     c.     high
     d.     none of the above

68.     Having an audit committee composed of outside directors is a requirement of
challenging     a.     all public and private companies.
     b.     all private companies.
     c.     all companies that are listed on the NYSE, AMEX, and NASDAQ.
     d.     all companies that are audited by members of the AICPA.
challenging     An auditor should consider two key issues when obtaining an understanding of a client’s internal controls. These issues are
     a.     the effectiveness and efficiency of the controls.
     b.     the frequency and effectiveness of the controls.
     c.     the design and utilization of the controls.
     d.     none of the above.
challenging     The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor’s study and evaluation of internal accounting control because
     a.     the audit programs, working papers, and reports of internal auditors can often be used as a substitute for the work of the independent auditor’s staff.
     b.     the procedures performed by the internal audit staff may eliminate the independent auditor’s need for an extensive study and evaluation of internal control.
     c.     the work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor’s procedures.
     d.     the understanding of the internal audit function is an important substantive test to be performed by the independent auditor.
     Taylor Sales Corp. maintains a large full-time internal audit staff that reports directly to the chief accountant. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. The independent auditor will probably
     a.     eliminate tests of controls.
     b.     increase the depth of the study and evaluation of administrative controls.
     c.     avoid duplicating the work performed by the internal audit staff.
     d.     place limited reliance on the work performed by the internal audit staff.
72.     When planning an audit, the auditor’s assessed level of control risk is
challenging     a.     determined by using actuarial tables.
     b.     calculated by using the audit risk model.
     c.     an economic issue, trading off the costs of testing controls against the cost of testing balances.
     d.     calculated by using the formulas provided in the AICPA’s auditing standards.
73.     When a compensating control exists, the absence of a key control
     a.     is no longer a concern because there is no longer a significant deficiency or material weakness.
     b.     is a slight concern to the auditor.
     c.     could cause a material loss, so it must be tested using substantive procedures.
     d.     is magnified and must be removed from the sampling process and examined in its entirety.
     An internal control narrative indicates that an approved voucher is required to support every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?
     a.     Select and examine canceled checks and ascertain that the related vouchers are dated no later than the checks.
     b.     Select and examine vouchers and ascertain that the related canceled checks are dated no earlier than the vouchers.
     c.     Select and examine canceled checks and ascertain that the related vouchers are dated no earlier than the checks.
     d.     Select and examine vouchers and ascertain that the related canceled checks are dated no later than the vouchers.
     When obtaining an understanding of an entity’s control environment, an auditor should concentrate on the substance of management’s policies and procedures rather than their form because
     a.     management may establish appropriate policies and procedures but not act on them.
     b.     the board of directors may not be aware of management’s attitude toward the control environment.
     c.     the auditor may believe that the policies and procedures are inappropriate for that particular entity.
     d.     the policies and procedures may be so weak that no reliance is contemplated by the auditor.

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