Chapter 5 - Internal Control

Question 1

ICs are designed to provide reasonable assurance in the following categories

Answer 1

1. reliability of financial reporting
2. effectiveness and efficiency of operations
3. compliance with laws and regulations

Question 2

ICFR objective is to see the…

Answer 2

reliability of financial reporting

Question 3

limitations of IC include…

Answer 3

human error, collusion, management override (limitation of control, and cost/benefit analysis

Question 4

there is often a trade off between the cost and ____ of ICs

Answer 4

effectiveness

Question 5

the concept of reasonable assurance recognizes…

Answer 5

that the cost of ICs should not exceed the benefits

Question 6

two types of controls

Answer 6

detective, preventive

Question 7

why do we always asses iC even if we dont test it?

Answer 7

helps guide decisions

Question 8

for each fruad risk, auditors must evaluate whether…

Answer 8

controls are in place to mitigate the fraud risk

Question 9

must assess control risk to…

Answer 9

determine the nature, timing, and extent of substantial procedures to be performed

Question 10

less reliance on control risk mean ____ CR, ____ RMM, ____ detected risk

Answer 10

higher, higher, lower

Question 11

more reliance on control risk means ____ CR, ____ RMM, and ____ detection risk

Answer 11

lower, lower, higher

Question 12

with more reliance on control risk, how do we adjust the nature?

Answer 12

more effective test

Question 13

with more reliance on control risk, how do we adjust timing?

Answer 13

testing performed at year end

Question 14

with more reliance on control risk, how do we adjust extent?

Answer 14

higher sample size

Question 15

COSO is used by…

Answer 15

auditors and management

Question 16

control environment sets the…

Answer 16

“tone at the top”

Question 17

control environment is the…

Answer 17

foundation for all other components

Question 18

audit committee is a…

Answer 18

subcommittee of the board that is generally composed of 3-6 “outside members”

Question 19

audit committee provides a…

Answer 19

buffer between the audit team and operating management

Question 20

all members of the audit committee must be…

Answer 20

financially literate

Question 21

one member of the audit committee must be…

Answer 21

a financial expert

Question 22

risk assessment is from the ___ perspective

Answer 22

managements

Question 23

risk assessment is the…

Answer 23

management’s identification, analysis, and management of relevent risks to achievement of its objectives

Question 24

one way to do risk assessment is through…

Answer 24

COSO’s ERM framework

Question 25

we want a control to assess a _____ risk

Answer 25

specific

Question 26

occurance always goes with

Answer 26

vouching

Question 27

completeness always goes with

Answer 27

tracing

Question 28

who used accounts recieveable aging reports?

Answer 28

CEO

Question 29

who used new hire reports?

Answer 29

payroll clerk

Question 30

four types of functional responsibilities that should be segregated

Answer 30

1. authorization 2. recording transactions 3. custody of assets involved 4. periodic reconciliation

Question 31

the auditor cannot ever rely on info produced by the company's info system without...

Answer 31

investigation

Question 32

"audit trail"

Answer 32

trail of activities information systems provide

Question 33

a well functioning monitoring system includes...

Answer 33

ongoing and separate evaluations and reporting deficiencies

Question 34

phase 1 of internal control evaluation is

Answer 34

undertand and document

Question 35

phase2 of evaluation is

Answer 35

asses the control risk (preliminary)

Question 36

phase 3 of evaluation is

Answer 36

Identify controls to test and perform test of controls

Question 37

entirety level controls are...

Answer 37

pervasive to the internal control system and the reliability of financial statements taken as a whole

Question 38

entity level controls are not...

Answer 38

transaction specific

Question 39

a narrative is..

Answer 39

in writing from start to finish including control

Question 40

in phase 2 assessing cost risk, we consider..

Answer 40

cost effectiveness of reliance and testing

Question 41

two reasons auditor may choose to not test controls

Answer 41

1. Ic systems is TOO EFFECTIVE in preventing or detecting misstatements to rely upon to justify reductions in substantive testing 2. it may take more time to test controls than to just perform more substance testing

Question 42

for non public, how do we know ICS are not effective

Answer 42

1. walkthrough discrepancy 2. already tested internally

Question 43

when we assess risk, we do not...

Answer 43

test every control

Question 44

for efficiency, if we test audit controls it is ____ audit more

Answer 44

less

Question 45

we want to test the _____ level controls we can

Answer 45

highest

Question 46

exception testing is...

Answer 46

testing all items in a population

Question 47

audit sampling is...

Answer 47

taking a sample from a population

Question 48

lowest level of support for a control is...

Answer 48

inquiry

Question 49

for testing of controls, direction...

Answer 49

does not matter

Question 50

if an IC is design deficient..

Answer 50

do nto proceed

Question 51

if IC is not design deficient...

Answer 51

test operating deficient

Question 52

what serious IC deficiencies do we report to audit committee?

Answer 52

material weakness and significant dificeni