Test 2 - Ch.6

Question 1

A substantive strategy is used when control risk has been set at maximum (T/F)

Answer 1

True

Question 2

Once a level of control risk has been established, it cannot be changed (T/F)

Answer 2

False

Question 3

Potential benefits of an entity’s control in an IT environment include what?

Answer 3

1. Reduction in the risk that controls will be circumvented
2. Consistent application of predefined business rules
3. More timely information

Question 4

Proper segregation of functional responsibilities in an effective system of internal control call for separation of what functions?

Answer 4

Authorization
Recording
Custody

Question 5

A well-prepared flowchart should make it easier for the auditor to do what?

Answer 5

Perform Walkthroughs

Question 6

To obtain evidential matter about control risk, an auditor selects tests from a variety of techniques including what?

Answer 6

Inquiry
Inspection
Observation
Reperformance

Question 7

Where computer processing is used in significant accounting applications, internal control activities may be defined by classifying controls activities into what two types?

Answer 7

General & Application

Question 8

The concept of reasonable assurance in the context of an entity’s internal controls recognizes what?

Answer 8

The costs of some controls may be too high to implement in relation to potential benefits.

Question 9

An effective control environment does what?

Answer 9

Creates a commitment to competence.

Question 10

A substantive strategy differs from a reliance strategy in what way?

Answer 10

Substantive strategy includes increased implementation of detailed test of transactions and balances

Question 11

A high detection risk strategy includes what?

Answer 11

1. Interim Testing
2. Reduced testing of transactions
3. Heavy reliance on analytically procedures as substantive test

Question 12

An auditor’s primary consideration regarding an entity’s internal controls is whether they…

Answer 12

Affect the financial statement assertion

Question 13

A properly maintained internal control system reasonably ensures that collusion among employees cannot occur (T/F)

Answer 13

False

Question 14

The establishment and maintenance of internal control is an important responsibility of the internal auditor (T/F)

Answer 14

False

Question 15

An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on significant account balances (T/F)

Answer 15

False

Question 16

The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system (T/F)

Answer 16

True

Question 17

Internal control is a process designed to provide reasonably assurance regarding the achievement of what 3 objectives?

Answer 17

1. Effectiveness and Efficiency of operations
2. Reliability of Financial Reporting
3. Compliance with applicable laws and regulations

Question 18

The independent auditor can serve as part of the entity’s control environment and continuous monitoring (T/F)

Answer 18

False

Question 19

After obtaining an understanding of an entity’s internal control system, an auditor may set control risk at the maximum level for some assertions because he or she…

Answer 19

Believes the internal controls are unlikely to be effective

Question 20

Regardless of the assessed level of control risk , an auditor would perform what?

Answer 20

Substantive procedures to restrict detection risk for significant transaction classes.

Question 21

Assessing control risk below maximum involves what?

Answer 21

1. Identifying specific controls to rely on
2. Performing tests of controls
3. Analyzing the achieved level of control risk after performing tests of controls.

Question 22

What audit technique would most likely provide an auditor with the most assurance about the effectiveness of the operation of a control?

Answer 22

Reperformance of the control by the auditor

Question 23

The highest quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by…

Answer 23

Observation by the auditor of the employees performing control activities

Question 24

Reports by the service organization’s auditor typically…

Answer 24

Assess whether the service organization’s controls are suitably designed and operate effectively

Question 25

Significant deficiencies are matters that come to an auditor’s attention that should be communicated to an entity’s audit committee because they represent…

Answer 25

Significant deficiencies in the design or operation of the internal control.

Question 26

An auditor’s flowchart of a client’s accounting system is a diagrammatic representation that depicts the auditor’s…

Answer 26

Understanding of the system

Question 27

An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on what type of controls would the auditor initially focus?

Answer 27

General Controls