ASSIGNMENT
The following questions deal with deficiencies in internal control. Choose the best response.
a. An internal control deficiency may be defined as a condition in which material mis- statements would ordinarily not be timely detected by
(1) auditors in assisting control risk.
(2) the controller reconciling the general ledger.
(3) employees in normal course of assigned functions.
(4) the chief financial officer reviewing interim financial statements.
b. Which of the following is an example of an operation deficiency in internal control?
(1) The company does not have a code of conduct for employees to consider.
(2) The cashier has online ability to post write-offs to accounts receivable accounts.
(3) Clerks who conduct monthly reconciliation of intercompany accounts do not
understand the nature of misstatements that could occur in those accounts.
(4) Management does not have a process to identify and assess risks on a recurring
basis.
c. A material weakness in internal control represents a control deficiency that
(1) more than remotely adversely affects a company’s ability to initiate, authorize, record, process, or report external financial statements reliably.
(2) results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements.
(3) exists because a necessary control is missing or not properly designed.
(4) reduces the efficiency and effectiveness of the entity’s operations.
The following questions deal with assessing control risk in a financial statement audit. Choose the best response.
a. On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level (AcAR) that is substantially the same as the planned audit risk level (AAR), the auditor will
(1) increase inherent risk.
(2) increase materiality levels.
(3) decrease substantive testing.
(4) decrease planned detection risk.
b. An auditor uses assessed control risk to
(1) evaluate the effectiveness of the entity’s internal controls.
(2) identify transactions and account balances where inherent risk is at the maximum.
(3) indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.
(4) determine the acceptable level of detection risk for financial statement assertions.
c. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the
(1) factors that raise doubts about the auditability of the financial statements.
(2) operating effectiveness of internal control policies and procedures.
(3) risk that material misstatements exist in the financial statements.
(4) possibility that the nature and extent of substantive tests may be reduced.
The following questions concern auditing IT systems. Choose the best response.
a. As general IT controls weaken, the auditor is most likely to
(1) reduce testing of automated application controls done by the computer.
(2) increase testing of general IT controls to conclude whether they are operating effectively.
(3) expand testing of automated application controls used to reduce control risk to cover greater portions of the fiscal year under audit.
(4) ignore obtaining knowledge about the design of general IT controls and whether they have been implemented.
b. Before processing, the system validates the sequence of items to identify any breaks in sequence of input documents. This automated control is primarily designed to ensure the
(1) accuracy of input.
(2) authorization of data entry.
(3) completeness of input.
(4) restriction of duplicate entries.
c. An auditor will use the test data approach to obtain certain assurances with respect to the
(1) input data.
(2) machine capacity.
(3) procedures contained within the program.
(4) degree of data entry accuracy.
