Exam 5: Risk Assessment: Internal Control Evaluation

A) Require all employees to record arrival and departure by using the time clock.
B) Have a payroll clerk recalculate all time cards.
C) Require all employees to sign their time cards.
D) Require employees to have their direct supervisors approve their time cards.

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D

A) processing control activities.
B) separation of various computer system functions.
C) appropriate documentation of the data processing system.
D) control over physical access to computer hardware.

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A) Disclosing lack of segregation of duties to the external auditors during the annual review
B) Replacing personnel every three or four years
C) Requiring accountants to pass a yearly background check
D) Allowing for greater management oversight of incompatible activities

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A) consider factors that affect the risk of material misstatement.
B) ascertain whether internal control policies and activities have been placed in operation.
C) identify the types of potential misstatements that can occur.
D) obtain knowledge about the operating effectiveness of the client's internal control activities.

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A) The relevant internal control components are not well documented.
B) The internal auditor already has tested the relevant controls and found them effective.
C) Testing the operating effectiveness of the relevant controls would not be efficient.
D) The cost of substantive procedures will exceed the cost of testing the relevant controls.

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A) Policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant.
B) Policies and procedures that provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant.
C) Policies and procedures that provide reasonable assurance regarding the compliance with applicable laws and regulations.
D) Policies and procedures that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements.

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Some of the elements of a control environment include: * Management's philosophy and operating style. * Company organization structure. * Functioning of the board of directors,particularly its audit committee. * Methods of assigning authority and responsibility. * Management's monitoring methods,including internal auditing. * Personnel policies and practices. * External influences.

A) a statement that management is responsible for establishing and maintaining adequate internal control over financial reporting.
B) a statement identifying the framework management uses to evaluate the effectiveness of the company's internal control.
C) a statement providing management's assessment of the effectiveness of the company's internal control.
D) a statement providing management's evaluation of the company's control environment.

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A) a valid character test.
B) missing data test.
C) reasonableness test.
D) check digit.

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A) performing more extensive substantive tests with larger sample sizes than originally planned.
B) reducing inherent risk for most of the assertions relevant to significant account balances.
C) changing the timing of substantive tests by omitting interim-date testing and performing the tests at year end.
D) identifying specific internal control activities that are relevant to specific financial statement assertions.

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A) document the auditor's understanding of the entity's internal control.
B) search for significant deficiencies in the operation of the internal controls.
C) perform tests of controls to evaluate the effectiveness of the entity's accounting system.
D) determine whether control activities are operating effectively to prevent or detect material misstatements.

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The difference between a signi...

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A) Processing of unusual or nonrecurring transactions
B) Enhanced timeliness of information
C) Potential loss of data
D) Recording of unauthorized transactions

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A) Reasonableness tests
B) Record counts
C) Financial totals
D) Hash totals

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A.The audit team has two primary reasons for conducting an evaluation of an entity's internal control.First,Sarbanes-Oxley requires an audit of the effectiveness of internal control that is an integrated part of the financial statement audit for publicly traded companies.The second reason for evaluating an entity's internal control is to comply with the performance principle of GAAS: To assess the risk of material misstatement to give the auditors a basis for planning the audit and determining the nature,timing,and extent of audit procedures for the substantive audit plan.The audit team assesses control risk. B.If auditors assess control risk as "maximum" or 100 percent (i.e.,poor control),they will tend to perform a great deal of substantive procedures with large sample sizes (extent),at or near the entity's fiscal year end (timing),using procedures designed to obtain high-quality external evidence (nature).On the other hand,if auditors assess control risk as "low," usually around 10 to 20 percent (i.e.,effective control),they can perform fewer substantive procedures with smaller sample sizes (extent),at an interim date before the entity's fiscal year end (timing),using a mixture of procedures designed to obtain high-quality external evidence and lower-quality internal evidence (nature).Of course,auditors may assess control risk between "low" and "maximum" (e.g.,"moderate," "high," or "slightly below maximum")and adjust the substantive procedures accordingly. C.No.here may be occasions when the audit team chooses to test everything substantively rather than relying on internal controls to reduce substantive testing.For example,for fixed assets,there are usually a small number of very material transactions.Testing controls would not be efficient if the audit team is going to examine every transaction anyway.

A) additional evidence to support a further reduction in control risk was not cost beneficial.
B) assessed level of inherent risk exceeded the assessed level of control risk.
C) internal control structure was properly designed and justifiably may be relied on.
D) evidence obtainable through tests of controls would not support an increased level of control risk.

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A) Distributing paychecks directly to department store employees
B) Setting the pay rate for departmental employees
C) Hiring employees and authorizing them to be added to payroll
D) Approving a summary of hours each employee worked during the pay period

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