Test bank principles of auditing and other assurance principles chapter 7 internal control

Chapter 07 - Internal Control

Chapter 07
Internal Control
True / False Questions

1. Internal control is concerned with the reliability of financial information.
True False

2. The Foreign Corrupt Practices Act prohibits bribes to foreign corporate officials to obtain
business.
True False

3. Incompatible duties exist when an employee is in a position to perpetrate and conceal errors
or fraud.
True False

4. Internal auditors should preferably report to the chief accounting officer of the company.
True False

5. Well-designed internal control will prevent all fraud by top management.
True False

6. CPA firms may use written narratives to describe internal control in their audit working
papers.
True False

7. The auditors' communication of internal control significant deficiencies should be
addressed only to senior management of the company.
True False

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Chapter 07 - Internal Control

8. If the auditors' assessment of the design of internal control reveals that it cannot be relied
upon, the auditors are not required to prepare any documentation of internal control for their
working papers.
True False

9. The relatively low number of types of transactions incurred by small firms makes the
segregation of duties impossible.
True False

10. In a financial statement audit, CPAs are required to assess the operating effectiveness of
most significant accounting oriented controls.
True False

Multiple Choice Questions

11. Which of the following matters would an auditor most likely consider to be a significant
deficiency to be communicated to the audit committee?
A. Management's failure to renegotiate unfavorable long-term purchase commitments.
B. Recurring operating losses that may indicate going concern problems.
C. Evidence of a lack of objectivity by those responsible for accounting decisions.
D. Management's current plans to reduce its ownership equity in the entity.

12. In assessing the objectivity of a client's internal auditors, the CPA would be most likely to
consider internal auditor:
A. Education levels.

B. Experience.
C. Organizational status within the company.
D. Training and supervisory skills.

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13. In a financial statement audit performed following AICPA Professional Standards, how
frequently must an auditor test operating effectiveness of controls that appear to function as
they have in past years and on which the auditor wishes to rely upon in the current year?
A. Monthly.
B. Each audit.
C. At least every second audit.
D. At least every third audit.

14. After obtaining an understanding of internal control and arriving at a preliminary assessed
level of control risk, an auditor decided to perform tests of controls. The auditor most likely
decided that:
A. Additional evidence to support a reduction in the assessed level of control risk is not
available.
B. An increase in the assessed level of control risk is justified for certain financial statement
assertions.
C. It would be efficient to perform tests of controls that would result in a reduction in planned
substantive procedures.
D. There were many internal control deficiencies that would allow misstatements to enter the
accounting system.

15. Which of the following is least likely to be evidence of operating effectiveness of

controls?
A. Cancelled supporting documents.
B. Confirmations of accounts receivable.
C. Records documenting usage of computer programs.
D. Signatures on authorization forms.

16. Which of the following is not ordinarily a procedure for documenting an auditor's
understanding of internal control for planning purposes?
A. Checklist.
B. Flowchart.
C. Questionnaire.
D. Confirmation.

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17. Tests of controls do not ordinarily address:
A. By whom a control was applied.
B. How a control was applied.
C. The consistency with which a control was applied.
D. The cost effectiveness of the way a control was applied.

18. Which is most likely when the assessed level of control risk increases?
A. Change from performing substantive procedures at year-end to an interim date.
B. Perform substantive procedures directed inside the entity rather than tests directed toward
parties outside the entity.
C. Use the maximum number of dual purpose tests.
D. Use larger sample sizes for substantive procedures.

19. Which of the following must the auditor communicate to the audit committee?
A. Significant deficiencies and material weaknesses.
B. Only significant deficiencies.
C. Only material weaknesses.
D. Neither significant deficiencies nor material weaknesses.

20. A client's internal control appears strong, but the CPA has elected not to perform any tests
of controls. The planned assessed level of control risk is at what level?
A. Zero.
B. Low.
C. Moderate.
D. Maximum.

21. Which of the following would be least likely to be regarded as a test of a control?
A. Tests of the additions to property by physical inspection.
B. Comparisons of the signatures on cancelled checks to the authorized check signer list.
C. Tests of signatures on purchase orders.
D. Recalculation of payroll deductions.

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Chapter 07 - Internal Control

22. Which of the following is not considered one of the five major components of internal
control?
A. Risk assessment.
B. Segregation of duties.
C. Control activities.

D. Monitoring.

23. Which of the following statements is correct concerning the understanding of internal
control needed by auditors?
A. The auditors must understand the information system, not the accounting system.
B. The auditors must understand monitoring and all preliminary accounting controls.
C. The auditors must have a sufficient understanding to assess the risks of material
misstatement.
D. The auditors must understand the control environment, risk assessment, and all control
activities.

24. The effectiveness of controls is not generally tested by:
A. Inspection of documents and reports.
B. Performance of analytical procedures.
C. Observation of the application of accounting policies and procedures.
D. Inquiries of appropriate client personnel.

25. On financial statement audits, it is required that the auditors obtain an understanding of
internal control, including:
A. Its operating effectiveness.
B. Whether it has been implemented (placed in operation).
C. Performing tests of controls for all material controls.
D. Its ability to provide reasonable assurance.

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Chapter 07 - Internal Control

26. A significant deficiency:

A. Differs from a material weakness in that it involves internal control over operations rather
than internal control over financial reporting.
B. Involves an amount of discovered misstatements greater than the amount used as the
planning measure of materiality.
C. Is identical to a material weakness except that it need not be communicated to those
responsible for oversight of the company's financial reporting.
D. Is less severe than a material weakness.

27. This organization developed a set of criteria that provide management with a basis to
evaluate controls not only over financial reporting, but also over the effectiveness and
efficiency of operations and compliance with laws and regulations:
A. Foreign Corrupt Practices Corporation.
B. Committee of Sponsoring Organizations.
C. Cohen Commission.
D. Financial Accounting Standards Board.

28. Which of the following is most likely to be considered a risk assessment procedure
relating to internal control?
A. Confirm accounts receivable.
B. Perform a test of a control relating to payroll.
C. Take test counts of the year-end inventory.
D. Trace a transaction through the information system relevant to financial reporting.

29. Which statement is correct concerning the definition of internal control developed by the
Committee of Sponsoring Organizations (COSO)?
A. Its applicability is largely limited to internal auditing applications.
B. It is recognized in the Statements on Auditing Standards.
C. It emphasizes the effectiveness and efficiency of operations over the reliability of financial
reporting.
D. It suggests that it is important to view internal control as an end product as contrasted to a

process or means to obtain an end.

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Chapter 07 - Internal Control

30. The definition of internal control developed by the Committee of Sponsoring
Organizations (COSO) includes controls related to the reliability of financial reporting, the
effectiveness and efficiency of operations, and:
A. Compliance with applicable laws and regulations.
B. Effectiveness of prevention of fraudulent occurrences.
C. Safeguarding of entity equity.
D. Incorporation of ethical business practice standards.

31. Which statement is correct concerning the relevance of various types of controls to a
financial statement audit?
A. An auditor may ordinarily ignore the consideration of controls when a substantive audit
approach is used.
B. Controls over the reliability of financial reporting are ordinarily most directly relevant to
an audit, but other controls may also be relevant.
C. Controls over safeguarding assets and liabilities are of primary importance, while controls
over the reliability of financial reporting may also be relevant.
D. All controls are ordinarily relevant to an audit.

32. Which of the following is not a component of the control environment?
A. Integrity and ethical values.
B. Risk assessment.
C. Commitment to competence.
D. Organizational structure.

33. Which of the following is not ordinarily considered a factor indicative of increased
financial reporting risk when an auditor is considering a client's risk assessment policies?
A. Salaried sales personnel.
B. Implementation of a new information system.
C. Rapid growth of the organization.
D. Corporate restructuring.

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34. The Sarbanes-Oxley Act of 2002 requires that the audit committee:
A. Annually reassess control risk using information from the CPA firm.
B. Be directly responsible for the appointment, compensation and oversight of the work of the
CPA firm.
C. Require that the company's CPA firm rotate the partner in charge of the audit.
D. Review the level of management compensation.

35. When tests of controls reveal that controls are operating as anticipated, it is most likely
that the assessed level of control risk will:
A. Be less than the preliminary assessed level of control risk.
B. Equal the preliminary assessed level of control risk.
C. Equal the actual control risk.
D. Be less than the actual control risk.

36. Under which circumstance is it likely that the extent of substantive procedures will be
expanded beyond that anticipated in the audit plan?
A. The auditors have determined that controls have been implemented (placed in operation)

but, in accordance with the audit plan, have performed no tests of controls.
B. Certain controls do not leave a trail of documentary evidence.
C. Deviation rates were greater than zero and approached anticipated levels.
D. The operating effectiveness of certain controls was found to be less than expected,
although no material misstatements were identified.

37. The provisions of the Foreign Corrupt Practices Act apply to:
A. All U.S. corporations.
B. All U.S. corporations that engage in foreign operations.
C. All corporations that must file under the Securities Exchange Act of 1934.
D. All U.S. partnerships and corporations.

38. If the auditors do notperform tests of controls for certain assertions:
A. They have performed a substandard audit.
B. They are not required to communicate significant deficiencies relating to those accounts to
management and the board of directors.
C. They must issue a qualified opinion.
D. They must assess control risk at the maximum level for those assertions.

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39. During financial statement audits, the auditors' consideration of their clients' internal
control is integral to both assess the risk of material misstatement and to:
A. Assess inherent risk.
B. Design further audit procedures.
C. Assess compliance with the Foreign Corrupt Practices Act.
D. Provide a reasonable basis for an opinion on compliance with applicable laws.

40. Which of the following comes closest to outlining the auditors' responsibility for
considering internal control in all financial statement audits?
A. An understanding of the control environment, information and communication, risk
assessment and monitoring is necessary; an understanding of control activities is only
necessary for areas in which the auditor is performing tests of controls.
B. The auditor must obtain an understanding of each of the five internal control components
sufficient to assess the risks of material misstatement for the audit.
C. When tests of controls have been performed, control risk must be assessed at a level less
than the maximum.
D. An understanding of the control environment is necessary, but no understanding of the
other components is necessary unless control risk is to be assessed at a level less than the
maximum.

41. Which of the following is not a primary procedure auditors use to obtain sufficient
knowledge about the design of the relevant controls and to determine whether they have been
implemented (placed in operation)?
A. Previous experience with the entity.
B. Inquiries of appropriate management personnel.
C. Performance of substantive procedures.
D. Inspection of document and records.

42. A control deficiency that is less severe than a material weakness, but important enough to
merit attention by those responsible for oversight of the company's financial reporting is
referred to as a(n):
A. Control deficiency.
B. Inherent limitation.
C. Reportable deficiency.
D. Significant deficiency.

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Chapter 07 - Internal Control

43. For effective internal control, which of the following functions should not be assigned to
the company's accounting department?
A. Reconciling accounting records with existing assets.
B. Recording financial transactions.
C. Signing payroll checks.
D. Preparing financial reports.

44. Which of the following is not a responsibility that should be assigned to a company's
internal audit department?
A. Evaluating internal control.
B. Approving disbursements.
C. Reporting on the effectiveness of operating segments.
D. Investigating potential merger candidates.

45. Which of the following is true about the auditors' consideration of internal control in a
financial statement audit?
A. The auditors must assess control risk at a level lower than the maximum.
B. The auditors must prepare a flowchart description of internal control for their working
papers.
C. The auditors must obtain an understanding of the steps in processing major types of
transactions.
D. The auditors must perform tests of controls.

46. Which of the following is an advantage of describing internal control through the use of a
standardized questionnaire?

A. Questionnaires highlight weaknesses in the system.
B. Questionnaires are more flexible than other methods of describing internal control.
C. Questionnaires usually identify situations in which internal control weaknesses are
compensated for by other strengths in the system.
D. Questionnaires provide a clearer and more specific portrayal of a client's system than other
methods of describing internal control.

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Chapter 07 - Internal Control

47. Which of the following is least likely to be considered a risk assessment procedure
relating to internal control?
A. Counting marketable securities at year-end.
B. Inquiries of client personnel.
C. Inspecting documents and reports.
D. Observing the application of specific controls.

48. Which of the following is least likely to be considered a risk assessment procedure?
A. Analytical procedures.
B. Inspection of documents.
C. Observation of the counting of inventory.
D. Observation of the performance of certain accounting procedures.

49. Which of the following is not a factor that is considered a part of the client's overall
control environment?
A. The organizational structure.
B. The information system.
C. Management philosophy and operating style.

D. Board of directors.

50. Which of the following would be least likely to be considered a benefit of effective
internal control?
A. Eliminating all employee fraud.
B. Restricting access to assets.
C. Detecting ineffectiveness.
D. Ensuring authorization of transactions.

51. After documenting the client's prescribed internal control, the auditors will often perform
a walk-through of each transaction cycle. An objective of a walk-through is to:
A. Verify that the controls have been implemented (placed in operation).
B. Replace tests of controls.
C. Evaluate the major strengths and weaknesses in the client's internal control.
D. Identify weaknesses to be communicated to management in the management letter.

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Chapter 07 - Internal Control

52. The major components of internal control include all of the following, except:
A. Risk assessment.
B. The control environment.
C. Internal auditing.
D. Control activities.

53. Which of the following is correct with respect to control deficiencies discovered during an
audit?
A. Auditors must communicate and recommend corrections relating to all material

weaknesses in internal control to management.
B. All material weaknesses in internal control should be reported to the audit committee.
C. All such matters must be communicated to the audit committee and regulatory agencies.
D. All control deficiencies are also significant deficiencies.

54. After considering the client's internal control the auditors have concluded that it is well
designed and is functioning as anticipated. Under these circumstances the auditors would
most likely:
A. Cease to perform further substantive procedures.
B. Reduce substantive procedures in areas where the internal control was found to be
effective.
C. Increase the extent of anticipated analytical procedures.
D. Perform all tests of controls to the extent outlined in the preplanned audit program.

55. The use of fidelity bonds protects a company from embezzlement loses and also:
A. Minimizes the possibility of employing persons with dubious records in positions of trust.
B. Reduces the company's need to obtain expensive business interruption insurance.
C. Allows the company to substitute the fidelity bonds for various parts of internal control.
D. Protects employees who made unintentional errors from possible monetary damages
resulting from such errors.

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56. The independent auditors might consider the procedures performed by the internal
auditors because:
A. They are employees whose work must be reviewed during substantive testing.
B. They are employees whose work might affect the independent auditors' work.

C. Their work impacts upon the cost/benefit tradeoff in evaluating inherent limitations.
D. Their degree of independence may be inferred by the nature of their work.

57. In the consideration of internal control, the operating effectiveness of controls is tested
by:
A. Flowcharts verification.
B. Tests of controls.
C. Substantive procedures.
D. Decision tables.

58. The auditors who become aware of an internal control significant deficiency are required
to communicate this to the:
A. Client's legal counsel.
B. Compensation committee.
C. Audit committee.
D. Internal auditors.

59. A material weakness involves an amount that could result in a misstatement that is
A. Smaller than inconsequential.
B. Larger than inconsequential.
C. Tolerable.
D. Material.

60. At least what level of probability of a material misstatement is required for a control
deficiency to be considered a material weakness?
A. More than remote.
B. Probable.
C. Reasonable possibility.
D. Sufficient.

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61. A situation in which the design or operation of a control does not allow management or
employees, in the normal course of performing their assigned functions, to prevent or detect
material misstatements on a timely basis is referred to as a:
A. Control deficiency.
B. Material weakness.
C. Reportable condition.
D. Significant deficiency.

62. To provide for the greatest degree of independence in performing internal auditing
functions, an internal auditor most likely should report to the:
A. Financial vice-president.
B. Corporate controller.
C. Audit committee.
D. Corporate stockholders.

63. Well-designed internal control that is functioning effectively is most likely to detect an
fraud arising from:
A. The fraudulent action of several employees.
B. The fraudulent action of an individual employee.
C. Informal deviations from the official organization chart.
D. Management fraud.

64. The program flowcharting symbol representing a decision is a:
A. Triangle.
B. Circle.

C. Rectangle.
D. Diamond.

65. Controls are not designed to provide assurance that:
A. Transactions are executed in accordance with management's authorization.
B. Fraud will be eliminated.
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.

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66. The scope of substantive procedures as compared to the scope of tests of controls
generally vary:
A. In a parallel manner.
B. Inversely.
C. Directly.
D. Equally.

67. Which of the following is least likely to be a factor that might indicate to an auditor that
an identified risk of misstatement requires special audit consideration?
A. Complex calculations are involved.
B. The rate of technological change is moderate in the industry.
C. The potential for fraud seems high.
D. Various subjective methods of application of a key accounting policy exist.

68. Which of the following audit tests would be regarded as a test of a control?

A. Tests of the specific items making up the balance in a given general ledger account.
B. Tests confirming receivables.
C. Tests of the signatures on canceled checks to board of director's authorizations.
D. Tests of the additions to property, plant, and equipment by physical inspection.

69. If the independent auditors decide that the work performed by the internal auditors may
have a bearing on their own procedures, they should consider the internal auditors':
A. Competence and objectivity.
B. Efficiency and experience.
C. Independence and review skills.
D. Training and supervisory skills.

70. In the consideration of internal control, the auditor is basically concerned that it provides
reasonable assurance that:
A. Management can not override the system.
B. Operational efficiency has been achieved in accordance with management plans.
C. Misstatements have been prevented or detected.
D. Controls have not been circumvented by collusion.

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Chapter 07 - Internal Control

71. Which of the following is least likely to be considered an appropriate response relating to
risks the auditors identify at the financial statement level?
A. Assign more experienced staff.
B. Incorporate additional elements of unpredictability in the selection of audit procedures.
C. Increase the scope of auditor procedures.
D. Emphasize the need to remain neutral, rather than to exercise professional skepticism.

72. In assessing the competence of a client's internal auditor, an independent auditor most
likely would consider the
A. Internal auditor's compliance with professional internal auditing standards.
B. Client's policies that limit the internal auditor's access to management salary data.
C. Evidence supporting a further reduction in the assessed level of control risk.
D. Results of ratio analysis that may identify unusual transactions and events.

73. Which of the following factors would most likely be considered an inherent limitation to
an entity's internal control?
A. The complexity of the information processing system.
B. Human judgment in the decision making process.
C. The ineffectiveness of the board of directors.
D. The lack of management incentives to improve the control environment.

74. Proper segregation of duties reduces the opportunities to allow any employee to be in a
position to both
A. Journalize cash receipts and disbursements and prepare the financial statements.
B. Monitor internal controls and evaluate whether the controls are operating as intended.
C. Adopt new accounting pronouncements and authorize the recording of transactions.
D. Record and conceal fraudulent transactions in the normal course of assigned tasks.

75. Which of the following is intended to detect deviations from prescribed controls?
A. Substantive procedures specified by a standardized audit program.
B. Tests of controls designed specifically for the client.
C. Analytical procedures as set forth in an industry audit guide.
D. Computerized analytical procedures tailored for the configuration of the computer
equipment in use.

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Chapter 07 - Internal Control

76. An auditor's purpose for performing tests of controls is to provide reasonable assurance
that:
A. Controls are operating effectively.
B. The risk that the auditor may unknowingly fail to modify the opinion on the financial
statements is minimized.
C. Transactions are executed in accordance with management's authorization and access to
assets is limited by a segregation of functions.
D. Transactions are recorded as necessary to permit the preparation of the financial statements
in conformity with generally accepted accounting principles.

77. Of the following statements about internal control, which one is not valid?
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 activities reasonably insure that collusion among employees can not occur.

78. Tests of controls are most likely to be performed when:
A. Controls seem weak and must be properly documented.
B. Inadequate substantive procedures exist to restrict audit risk to an acceptable level.
C. The auditor wishes to assess control risk at the maximum.
D. The client's control environment appears weak.

79. Which of the following would be least likely to be included in an auditor's tests of
controls?

A. Inspection.
B. Observation.
C. Inquiry.
D. Analytical procedures.

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Chapter 07 - Internal Control

80. The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which
companies in the United States:
A. All companies.
B. SEC registrants.
C. Only those companies included in the Fortune 500.
D. All nonpublic companies.

81. An integrated audit performed under Section 404b of the Sarbanes-Oxley Act addresses
financial statements and:
A. Compliance with laws.
B. Internal control over asset safeguarding.
C. Internal control over financial reporting.
D. Suitable criteria.

82. A report on internal control performed in accordance with PCAOB Standard No. 2
includes an opinion on internal control for:
A. The entire year.
B. The prior quarter.
C. The "as of date."
D. The end of each quarter.

83. When performing an audit of internal control under PCAOB requirements, auditors

evaluate control:
A. Option A
B. Option B
C. Option C
D. Option D

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84. When performing an internal control audit under PCAOB requirements, one or more
material weaknesses in internal control that exist at year-end may result in what type of
report(s):

A. Option A
B. Option B
C. Option C
D. Option D

85. When performing an internal control audit under PCAOB standards, one or more material
weaknesses in internal control that exist at year-end may result in what type of report(s):

A. Option A
B. Option B
C. Option C
D. Option D

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Chapter 07 - Internal Control
Essay Questions

86. Independent auditors should consider the work of internal auditors in their assessment of
control risk.
a. Are internal auditors independent of management? Explain.
b. What is the difference between the primary objective of the independent auditors and that
of internal auditors? Explain.
c. Discuss the factors that should be considered by the independent auditors in deciding how
much, if any, reliance should be placed on the work of the internal auditors.

87. Auditors are required to consider a client's internal control.
a. Describe the two purposes of the auditors' consideration of a client's internal control.
b. Even the best internal control has certain limitations. List three of those limitations.

88. When considering a client's internal control, the auditors focus on its various
characteristics. For each of the following characteristics indicate the auditors' responsibility
under generally accepted auditing standards and the procedures used to meet that
responsibility.
a. The design of internal control.
b. Controls have been implemented (placed in operation).
c. The operating effectiveness of controls.

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Chapter 07 - Internal Control

89. Assume that you have assessed inherent risk for an audit area at a very high level. While
obtaining an understanding of internal control, you have determined that it appears to be very
strong. Nonetheless, due to the large number of transactions involved, you have chosen not to
test controls in the area.
a. At what level will the planned assessed level of control risk be established?
b. Describe the scope of tests of controls that will be performed.
c. At what level will the assessed level of control risk be established?
d. What must be documented in the working papers relating to internal control?
e. At what level will detection risk be established?
f. Describe the required scope of substantive procedures, if any. Make certain to discuss
details of likely nature, timing and extent.

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Chapter 07 - Internal Control

Chapter 07 Internal Control Answer Key

True / False Questions

1. Internal control is concerned with the reliability of financial information.
TRUE

Difficulty: Easy

2. The Foreign Corrupt Practices Act prohibits bribes to foreign corporate officials to obtain
business.

FALSE

Difficulty: Hard

3. Incompatible duties exist when an employee is in a position to perpetrate and conceal errors
or fraud.
TRUE

Difficulty: Easy

4. Internal auditors should preferably report to the chief accounting officer of the company.
FALSE

Difficulty: Medium

5. Well-designed internal control will prevent all fraud by top management.
FALSE

Difficulty: Easy

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Chapter 07 - Internal Control

6. CPA firms may use written narratives to describe internal control in their audit working
papers.
TRUE

Difficulty: Easy

7. The auditors' communication of internal control significant deficiencies should be
addressed only to senior management of the company.
FALSE

Difficulty: Easy

8. If the auditors' assessment of the design of internal control reveals that it cannot be relied
upon, the auditors are not required to prepare any documentation of internal control for their
working papers.
FALSE

Difficulty: Medium

9. The relatively low number of types of transactions incurred by small firms makes the
segregation of duties impossible.
FALSE

Difficulty: Easy

10. In a financial statement audit, CPAs are required to assess the operating effectiveness of
most significant accounting oriented controls.
FALSE

Difficulty: Medium

Multiple Choice Questions

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Chapter 07 - Internal Control

11. Which of the following matters would an auditor most likely consider to be a significant
deficiency to be communicated to the audit committee?
A. Management's failure to renegotiate unfavorable long-term purchase commitments.
B. Recurring operating losses that may indicate going concern problems.
C. Evidence of a lack of objectivity by those responsible for accounting decisions.
D. Management's current plans to reduce its ownership equity in the entity.

Difficulty: Medium
Source: AICPA

12. In assessing the objectivity of a client's internal auditors, the CPA would be most likely to
consider internal auditor:
A. Education levels.
B. Experience.
C. Organizational status within the company.
D. Training and supervisory skills.

Difficulty: Medium

13. In a financial statement audit performed following AICPA Professional Standards, how
frequently must an auditor test operating effectiveness of controls that appear to function as
they have in past years and on which the auditor wishes to rely upon in the current year?
A. Monthly.
B. Each audit.
C. At least every second audit.
D. At least every third audit.

Difficulty: Medium

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Chapter 07 - Internal Control

14. After obtaining an understanding of internal control and arriving at a preliminary assessed
level of control risk, an auditor decided to perform tests of controls. The auditor most likely
decided that:
A. Additional evidence to support a reduction in the assessed level of control risk is not
available.
B. An increase in the assessed level of control risk is justified for certain financial statement
assertions.
C. It would be efficient to perform tests of controls that would result in a reduction in planned
substantive procedures.
D. There were many internal control deficiencies that would allow misstatements to enter the
accounting system.

Difficulty: Hard
Source: AICPA

15. Which of the following is least likely to be evidence of operating effectiveness of
controls?
A. Cancelled supporting documents.
B. Confirmations of accounts receivable.
C. Records documenting usage of computer programs.
D. Signatures on authorization forms.

Difficulty: Hard

16. Which of the following is not ordinarily a procedure for documenting an auditor's
understanding of internal control for planning purposes?
A. Checklist.
B. Flowchart.
C. Questionnaire.
D. Confirmation.

Difficulty: Easy

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