Auditing and Assurance Services An Integrated Approach 13th Edition by Arens-Test Bank

$25.00

Category:

Description

INSTANT DOWNLOAD WITH ANSWERS
Auditing and Assurance Services An Integrated Approach 13th Edition by Arens-Test Bank

Chapter 2

 

Multiple-Choice Questions

 

 

1. Which one of the following is not one of the three General Standards?
easy a.      Proper planning and supervision.
a b.      Independence of mental attitude.
  c.       Adequate training and proficiency.
  d.      Due professional care.
   
2. Which one of the following is not a Field Work Standard?
easy a.      Adequate planning and supervision.
b b.      Due professional care.
  c.       Understand the entity and its environment including internal control.
  d.      Sufficient appropriate audit evidence.
   
3. The General Standards stress the importance of:
easy a.      evidence accumulation.
b b.      personal qualities the auditor should possess.
  c.       communicating the auditor’s findings to the reader.
  d.      general supervision of the audit.
   
4.

easy

The generally accepted auditing standard that requires “Adequate technical training and proficiency” is normally interpreted as requiring the auditor to have:
a a.      formal education in auditing and accounting.
  b.      worked for an entity similar to the entity being audited.
  c.       independence in mental attitude
  d.      a graduate degree in a business field.
   
5. (SOX)

 

Members of the Public Company Accounting Oversight Board are appointed and overseen by:
easy a.      the U.S. Congress.
d b.      the American Institute of Certified Public Accountants.
  c.       the Auditing Standards Board.
  d.      the Securities and Exchange Commission.
   
6.

easy

Statements on Auditing Standards provide auditors of privately held companies with ______ guidance regarding the conduct of financial statement audits.
b a.      fairly extensive
  b.      some limited
  c.       practically no
  d.      specific and detailed
   

 

 

7.

easy

Which of the following statements most accurately captures the intent of the standards of field work?
c a.      Field work standards are primarily concerned with personal attributes necessary during the conduct of the audit.
  b.      Field work standards provide extensive guidance regarding the conduct of an audit.
  c.       Field work standards are primarily directed at the auditor’s planning, understanding of internal control, and evidence accumulation.
  d.      Field work standards are primarily concerned with the conduct of substantive testing as opposed to testing of internal controls.
   
8. (SOX)

easy

Prior to the passage of the Sarbanes-Oxley Act, which of the following was responsible for establishing auditing standards?
c a.      Securities and Exchange Commission
  b.      Public Company Accounting Oversight Board
  c.       Auditing Standards Board
  d.      National Association of Accounting
   
9. (SOX)

medium

Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit:
b a.      both private and public companies.
  b.      public companies only.
  c.       private companies, public companies, and nonprofit entities.
  d.      private companies only.
   
10. Which of the following is the least likely form of business for a CPA firm?
medium a.      General partnership
b b.      General corporation
  c.       Limited liability company
  d.      Limited liability partnership
   
11. The Statements on Auditing Standards issued by the Auditing Standards Board:
medium a.      are interpretations of generally accepted auditing standards.
a b.      are the equivalent of laws for audit practitioners.
  c.       must be followed in all situations.
  d.      are optional guidelines which an auditor may choose to follow or not follow when   conducting an audit.
   
12. An auditor need not abide by a particular auditing standard if the auditor believes that:
medium a.      the issue in question is immaterial in amount.
a b.      more expertise is needed to fulfill the requirement.
  c.       the requirement of the standard has not been addressed by the PCAOB.
  d.      any of the above three are correct.
   
13. (SOX) The Public Company Accounting Oversight Board does not:
medium a.      perform inspections of the quality controls at audit firms that audit public companies.
b b.      establish auditing standards that must be followed by CPAs on all audits.
  c.       oversee auditors of public companies.
  d.      perform any of the above functions.
   
14.

medium

The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the:
b a.      Form S-1.
  b.      Form 8-K.
  c.       Form 10-K.
  d.      Form 10-Q.
   
15.

medium

The form that must be filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the:
a a.      Form S-1.
  b.      Form 8-K.
  c.       Form 10-K.
  d.      Form 10-Q.
   
16.

medium

The third general standard states that due care is to be exercised in the performance of an audit. This standard is generally interpreted to require:
c a.      objective review of the adequacy of the technical training of firm personnel.
  b.      thorough review of the existing internal control structure.
  c.       critical review of work done at every level of supervision.
  d.      periodic review of a CPA firm’s quality control procedures.
   
17. (SOX)

medium

Assume the Public Company Accounting Oversight Board (PCAOB) identifies a violation during its inspection of a registered accounting firm.
d a.      The PCAOB may not enforce some disciplinary action against the accounting firm.
  b.      The PCAOB may not report the matter to the Securities and Exchange Commission.
  c.       The PCAOB may not report the matter to the appropriate state accountancy board
  d.      The PCAOB may not suspend the license to practice of the CPA guilty of the violation.
   
18.

medium

Which of the following statements best describes the primary purpose of Statements on Auditing Standards?
d a.    They are guides intended to set forth auditing procedures that are applicable to a variety of situations.
  b.    They are procedural outlines that are intended to narrow the areas of inconsistency and divergence of auditor opinion.
  c.     They are authoritative statements, enforced through the Code of Professional Conduct, and are intended to limit the degree of auditor judgment.
  d.    They are interpretations that are intended to clarify the meaning of “generally accepted auditing standards.”
   
19. Statements on Standards for Accounting and Review Services are issued by the:
medium a.      Accounting and Review Services Committee.
a b.      Professional Ethics Executive Committee.
  c.       Securities and Exchange Commission.
  d.      Financial Accounting Standards Board.
   
20. Consulting Standards are issued by the:
medium a.      Accounting and Review Services Committee.
c b.      Securities and Exchange Commission.
  c.       Management Consulting Services Executive Committee.
  d.      Financial Accounting Standards Board.
   
21.

medium

The auditor’s judgment concerning the overall fairness of presentation of financial position, results of operations, and changes in cash flow is applied within the framework of:
d a.      quality control.
  b.      generally accepted auditing standards which include the concept of materiality.
  c.       the auditor’s evaluation of the audited company’s internal control.
  d.      generally accepted accounting principles.
   
22.

medium

A basic objective of a CPA firm is to provide professional services to conform to professional standards. Reasonable assurance of achieving this basic objective is provided through:
c a.      continuing professional education.
  b.      compliance with generally accepted reporting standards.
  c.       a system of quality control.
  d.      a system of peer review.
   
23.

medium

Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide its personnel with:
c a.      technical training that assures proficiency as a valuation expert.
  b.      professional education that is required in order to perform with due professional care.
  c.       knowledge required to fulfill assigned responsibilities.
  d.      knowledge required to perform a peer review.
   
24.

medium

Williams & Co., a member of the Private Companies Practice Section, is to have a “peer review.” The peer review can be performed by:
d a.      a CPA firm selected by Williams & Co.
  b.      a review team selected by the state society.
  c.       internal auditors.
  d.      either a or b.
   
25.

medium

a

Hansen Corporation’s stock is listed on a national stock exchange and registered with the Securities and Exchange Commission. Hansen’s management hires a CPA to perform an independent audit of Hansen’s financial statements. The primary objective of this audit is to provide assurance to the:
  a.      investors in Hansen Corporation’s stock.
  b.      stock exchange.
  c.       Securities and Exchange Commission.
  d.      management of Hansen Corporation.
   
26. Which of the following is not an essential component of quality control?
medium

a

a.      Policies and procedures to ensure that firm personnel are actively engaged in marketing   strategies.
  b.      Policies and procedures to ensure that the work performed by firm personnel meet   applicable professional standards.
  c.       Policies to ensure that personnel maintain their independence in fact and in appearance.
  d.      Policies that ensure that monitoring activities are effectively applied.
   
27. Which of the following is true regarding the AICPA-approved practice monitoring programs?
challenging a.      The Center for Public Company Audit Firms does not offer a peer review program.
c b.      Firms registered with the PCAOB must not enroll in an AICPA-approved practice           monitoring program.
  c.       Public accounting firms must be enrolled in an AICPA-approved practice monitoring           program for members in the firm to be eligible for membership in the AICPA.
  d.      The AICPA peer review program is administered through the SEC.
   
28.

challenging

c

Which of the following statements is true as it relates to limited liability partnerships?

a.      Only senior partners are liable for the partnership’s debts.

b.      Partners have no liability in a limited liability partnership arrangement.

c.       Partners are personally liable for the acts of those under their supervision.

d.      All partners must be AICPA members.

 

29. (SOX)

challenging

If an auditor of a public company cannot find guidance issued by the PCAOB on a particular audit matter, the auditor should generally seek guidance from which of the following sources?
a a.      Statements on Auditing Standards.
  b.      Statements on Standards for Accounting and Review Services.
  c.       Regulations issued by the Securities and Exchange Commission.
  d.      The AICPA Code of Professional Conduct.
   
30. The SEC requirements of greatest interest to CPAs are set forth in the SEC’s:
challenging a.      Regulation S-X and Accounting Series Releases.
a b.      S-1 through S-16 forms.
  c.       Director’s newsletter.
  d.      Forms 8-K, 10-K, and 10-Q.
   
31.

challenging

The AICPA has authority to establish standards and rules in all but which of the following areas?
d a.      Auditing standards applicable to financial statements of private companies.
  b.      Compilation and review standards.
  c.       Professional conduct.
  d.      Auditing standards applicable to financial statements of private and public companies.
   
32.

challenging

Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS) should be looked upon by practitioners as:
c a.      ideals to work towards, but which are not achievable.
  b.      maximum standards that denote excellent work.
  c.       minimum standards of performance that must be achieved on each audit engagement.
  d.      benchmarks to be used on all audits, reviews, and compilations.
   
33.

challenging

Which one of the following is not a requirement for belonging to the Private Companies Practice Section of the American Institute of Certified Public Accountants?
c a.      Adherence to quality control standards.
  b.      Mandatory peer review.
  c.       Partner rotation after a period of ten consecutive years.
  d.      Continuing education.
   
34. Statements on Auditing Standards issued by the AICPA’s Auditing Standards Board are:
challenging

b

a.      part of the generally accepted auditing standards under the AICPA Code of Professional Conduct.
  b.      interpretations of generally accepted auditing standards and departures from such statements must be justified.
  c.       interpretations of generally accepted auditing standards and such standards must be followed in every engagement.
  d.      generally accepted auditing procedures that are not covered by the AICPA Code of Professional Conduct.
   

 

Essay Questions

 

35.

easy

Distinguish between generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP). What professional organization establishes GAAS? What professional organization establishes GAAP?

 

  Answer:

Generally accepted auditing standards are general guidelines to help auditors meet their professional responsibilities in the audit of historical financial statements. They are considered to be the minimum standards of performance for auditors to follow and are established by the Auditing Standards Board of the American Institute of Certified Public Accountants for private companies and by the Public Company Accounting Oversight Board for public companies. Generally accepted accounting principles are the guidelines which an entity’s management normally follows when preparing historical financial statements. GAAP is established by the Financial Accounting Standards Board.

 

 

36.

easy

Discuss the relationship between quality control and generally accepted auditing standards.

 

  Answer:

For a CPA firm, quality control encompasses the methods used to make sure that the firm meets its professional responsibilities to clients. Quality control is closely related to, but distinct from, GAAS. A CPA firm must make sure that GAAS are followed on every audit. Quality controls are the procedures used by the CPA firm that help it meet requirements demanded by GAAS on every engagement in a consistent manner.

 

 

37.

easy

Describe the various staff levels and responsibilities of a typical public accounting firm.

 

  Answer:

·         Staff assistant – Staff assistants, or staff accountants, perform most of the detailed audit work.

·         Senior or In-charge auditor – Seniors coordinate and are responsible for the audit field work, including the supervision and review of staff assistants’ work.

·         Manager – Managers assist the senior plan and manage the audit, review the senior’s work, and manages relations with the client. A manager may be responsible for multiple engagements at the same time.

·         Partner – Partners review the overall audit work and they are involved in all significant audit decisions. As owners of the firm, partners are ultimately responsible for conducting the audit and serving the client.

 

38.

medium

Discuss the five elements of quality control. Who establishes the standards for quality control?

 

  Answer:

·         Independence, integrity and objectivity – Personnel on engagement should maintain independence in fact and in appearance, perform all professional responsibilities with integrity and maintain objectivity in performing their professional responsibilities.

·         Personnel management – Policies and procedures should be established to provide the firm with reasonable assurance that all new personnel are qualified to perform their work, work is assigned to personnel who have adequate training, and personnel should participate in continuing professional education.

·         Acceptance and continuation of clients and engagements – Policies and procedures should be established for deciding whether to accept or continue a client relationship. These policies should minimize the risk of associating with a client whose management lacks integrity.

·         Engagement performance – Policies and procedures should exist to ensure that engagement personnel perform work that meets applicable professional standards and the firm’s standards of quality.

·         Monitoring – Policies and procedures should exist to ensure that the other four quality control elements are being effectively applied.

 

Quality control standards are established by the Auditing Standards Board for auditors of private companies and by the Public Company Accounting Oversight Board for auditors of public companies.

 

39.

medium

Describe the six organizational structures available to CPA firms.

 

  Answer:

CPA firms can take one of six organizational forms:

·         Proprietorship. This form is limited to firms with only one owner.

·         General partnership. This form is similar to a proprietorship, except that it applies to multiple owners.

·         General corporation. Unlike a general partnership, shareholders in a general corporation are liable only to the extent of their investment in the corporation.

·         Professional corporation. Professional corporations can have one or more shareholders. Personal liability protection for shareholders in professional corporations varies widely from state to state.

·         Limited liability company. This form combines the most favorable attributes of a general corporation and a general partnership. LLCs are taxed like a general partnership, but its owners have limited personal liability like shareholders of a general corporation.

·         Limited liability partnership. An LLP is structured and taxed like a general partnership. However, the personal liability protection of an LLP is less than that of a general corporation or an LLC, but it is greater than a general partnership. Many accounting firms now operate as LLPs.

 

 

40.

medium

There are ten generally accepted auditing standards, divided into three categories. List, by category, each of these ten standards.

 

  Answer:

General Standards

·         Adequate technical training and proficiency.

·         Independence in mental attitude.

·         Due professional care.

 

Standards of Fieldwork

·         Adequate planning and supervision.

·         Understand the entity and its environment including internal control.

·         Sufficient appropriate audit evidence.

 

Standards of Reporting

·         Whether statements were prepared in accordance with GAAP.

·         Circumstances when GAAP was not consistently followed.

·         Adequacy of informative disclosures.

·         Expression of opinion on financial statements as a whole.

 

 

41.

medium

In the context of auditing, explain what is meant by an independent mental attitude. Discuss how internal auditors can have an independent mental attitude when they are employed by the company they audit.

 

  Answer:

Independent mental attitude refers to a state of mind in which the CPA is totally unbiased with respect to the client and the financial information under audit.

Although internal auditors are employees of the organization for which their audits are performed, internal auditors should be independent of the function being examined and should report their findings to a level high enough in the organization to allow the auditor to be free from influence by the party, or parties, being examined.

 

 

42. (SOX)

medium

The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB). What are the PCAOB’s primary functions? Who performed these functions prior to the PCAOB?

 

  Answer:

The PCAOB has responsibility for providing oversight auditors of public companies, establishing auditing and quality control standards for public company audits and performing inspections of the quality controls at audit firms performing those audits. These functions were formerly the responsibility of the American Institute of Certified Public Accountants.

 

 

 

 

43.

challenging

What are four of the major functions of the AICPA?

 

  Answer:

Major functions of the AICPA include:

·         Establishing standards and rules that practicing CPAs must follow. These standards consist of auditing standards for auditors of private companies, compilation and review standards, other attestation standards, and the Code of Professional Conduct.

·         Research and publication. AICPA publications include the Journal of Accountancy, industry audit guides, periodic updates of the Codification of Statements on Auditing Standards, and the Code of Professional Conduct.

·         Promoting the accounting profession.

·         Developing specialist certifications.

·         Writing and grading the uniform CPA examination.

·         Providing continuing education seminars for its members.

 

 

44.

challenging

Discuss the purpose of the Securities and Exchange Commission and its influence on setting generally accepted accounting principles.

 

  Answer:

The overall purpose of the SEC is to assist in providing investors with reliable information upon which to make investment decisions. As a result of its authority for specifying financial reporting requirements, the SEC has considerable influence in setting generally accepted accounting principles. Although the SEC has taken the position that accounting principles should be set by the profession (FASB), the SEC’s opinion is generally considered in any major change in GAAP proposed by the FASB.

 

 

45.

challenging

The purpose of the AICPA’s CPA Vision Project is to help CPAs make sense of our changing and complex world. The Project has identified core values that CPAs must be aware of in the future. What are the top five core values?

 

  Answer:

·         Continuing education and lifelong learning

·         Competence

·         Integrity

·         Attuned to broad business issues

·         Objectivity

 

 

Other Objective Answer Format Questions

 

46.

easy

b

Membership in the AICPA is restricted to CPAs who are currently practicing as independent auditors.

a.      True

b.      False

 

47.

easy

b

Membership in the AICPA is mandatory for all licensed practicing CPAs.

a.      True

b.      False

 

48.

easy

a

Any public accounting firm can be a member of the AICPA if the firm meets the membership requirements.

a.      True

b.      False

 

49.

easy

b

Statements on Auditing Standards (SASs) are issued by the Public Company Accounting Oversight Board.

a.      True

b.      False

 

50. (SOX)

easy

b

Auditors of public companies should, in the absence of guidance issued by the PCAOB, follow auditing standards issued by the SEC.

a.      True

b.      False

 

51. (SOX)

medium

b

The U.S. Congress has oversight responsibility for the PCAOB.

a.      True

b.      False

 

52.

medium

b

Form 10-K must be filed with the SEC whenever a public company experiences a significant event.

a.      True

b.      False

 

53.

medium

b

In a limited liability partnership, partners are personally liable for liabilities arising from negligent acts of other partners, but not for liabilities arising from acts of other employees.

a.      True

b.      False

 

54.

medium

a

Limited liability companies are structured and taxed like a general partnership, but their owners have limited personal liability similar to that of a general corporation.

a.      True

b.      False

 

55. (SOX)

medium

b

All CPA firms registered with the PCAOB are required to undergo a peer review at least once every two years.

a.      True

b.      False

 

56.

medium

a

Statements on Auditing Standards (SASs) are considered to be interpretations of the ten generally accepted auditing standards.

a.      True

b.      False

 

57. (SOX)

medium

a

Any CPA firm that audits more than 100 public companies is required to have an annual inspection by the PCAOB.

a.      True

b.      False

 

58.

medium

a

The overall purpose of the Securities and Exchange Commission is to assist in providing investors with reliable information upon which to make investment decisions.

a.      True

b.      False

 

59.

medium

a

International Standards on Auditing are issued by the International Auditing Practices Committee.

a.      True

b.      False

 

Chapter 10

 

Multiple-Choice Questions

 

1. Which of the following is responsible for establishing a private company’s internal control?
easy a.      Management.
a b.      Auditors.
  c.       Management and auditors.
  d.      Committee of Sponsoring Organizations.
   
2. Which of the following is not one of the three primary objectives of effective internal control?
easy a.      Reliability of financial reporting
d b.      Efficiency and effectiveness of operations
  c.       Compliance with laws and regulations
  d.      Assurance of elimination of business risk.
   
3. (Public) The Public Company Accounting Oversight Board states that reasonable assurance allows a:
easy a.      small likelihood of ineffective internal controls.
b b.      remote likelihood that material misstatements will not be prevented or detected by           internal control.
  c.       likelihood that material misstatements will not be prevented or detected by           internal         control.
  d.      high likelihood that material misstatements will not be prevented or detected by           internal control.
   
4.

easy

Two key concepts that underlie management’s design and implementation of internal control are:
c a.      costs and materiality.
  b.      absolute assurance and costs.
  c.       inherent limitations and reasonable assurance.
  d.      collusion and materiality.
   
5. Internal controls can never be considered as absolutely effective because:
easy a.      their effectiveness is limited by the competency and dependability of employees.
a b.      not all organizations have internal audit departments.
  c.       controls are designed to prevent and detect only material misstatements.
  d.      internal controls prevent separation of duties.
   
6. A major control available in a small company, which might not be feasible in a big company, is:
easy a.      a wider segregation of duties.
d b.      a voucher system.
  c.       fewer transactions to process.
  d.      the owner-manager’s personal interest and close relationship with personnel.
   
7. (Public) Which of the following is responsible for establishing internal controls for a public company?
easy a.      Management.
a b.      The PCAOB.
  c.       Management and auditors.
  d.      Committee of Sponsoring Organizations.
   
8.

medium

Which of the following parties provides an assessment of the effectiveness of internal control over financial reporting for public companies?
a  
     

Management

   

Financial statement auditors

 
  a. Yes   Yes  
  b. No   No  
  c. Yes   Yes  
  d. No   No  
   
9. An act of two or more employees to steal assets or misstate records is frequently referred to as:
easy a.      collusion.
a b.      a material weakness.
  c.       a control deficiency.
  d.      a significant deficiency.
   
10.

easy

When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be:
c a.      tracing.
  b.      vouching.
  c.       performing a walk-through.
  d.      testing controls.
   
11. (SOX)

easy

Which section of the Sarbanes-Oxley Act requires management to issue an internal control report?
c a.      202
  b.      203
  c.       404
  d.      408
   
12. (SOX)

easy

Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements?
a a.      A statement that management is responsible for establishing and maintaining an adequate               internal control structure and procedures for financial reporting.
  b.      A statement that management and the board of directors are jointly responsible for           establishing and maintaining an adequate internal control structure and procedures for           financial reporting.
  c.       A statement that management, the board of directors, and the external auditors are jointly    responsible for establishing and maintaining an adequate internal control structure and           procedures for financial reporting.
  d.      A statement that the external auditors are solely responsible.
   
13. (SOX)

easy

When management is evaluating the design of internal control, management evaluates whether the control can do which of the following?
c  
  Detect material misstatements   Correct material misstatements
  a.

b.

c.

d.

Yes

No

Yes

No

Yes

No

No

Yes

     
14. (SOX)

easy

b

Internal control reports issued by public companies must identify the framework used to evaluate the effectiveness of internal control. Which of the following is the most common framework in the U.S.?  
  a.      Effective Internal Control Framework – AICPA  
  b.      Internal Control – Integrated Framework – COSO  
  c.       Enterprise Internal Control – COSO  
  d.      Enterprise Internal Control – AICPA  
     
15. (Public)

easy

When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is:  
c a.      insufficient.  
  b.      inadequate.  
  c.       ineffective.  
  d.      inefficient.  
     
16. (Public)

easy

The auditor’s tests to understand the client’s internal controls might include which of the following types of procedures?  
a    
    Observation of employees   Inquiries of personnel  
  a. Yes   Yes  
  b. No   No  
  c. Yes   No  
  d. No   Yes  
     
17.

easy

Which of management’s concerns with respect to implementing internal controls is the auditor primarily concerned?  
b a.      Efficiency of operations.  
  b.      Reliability of financial reporting.  
  c.       Effectiveness of operations.  
  d.      Compliance with applicable laws and regulations.  
     
18.

easy

Which of the following activities would be least likely to strengthen a company’s internal control?  
b a.      Separating accounting from other financial operations.  
  b.      Maintaining insurance for fire and theft.  
  c.       Fixing responsibility for the performance of employee duties.  
  d.      Carefully selecting and training employees.  
     
19. (Public) Management must disclose material weaknesses in internal control:  
medium a.      whenever the weakness is deemed significant to a single class of transactions.  
c b.      whenever the weakness is significant to overall financial reporting objectives.  
  c.       if the weakness exists at the end of the year.  
  d.      only if the auditor identifies the weakness as significant.  
     
20.

easy

When auditing a private company, the auditor should obtain an understanding of internal control sufficient to:  
b a.      provide reasonable protection against client fraud and defalcations by client employees.  
  b.      assess control risk.  
  c.       provide a basis for suggestions to the client for improving the accounting system.  
  d.      provide a method for safeguarding assets, checking the accuracy and reliability of           accounting data, promoting operational efficiency, and encouraging adherence to           prescribed managerial policies.  
     
21. (Public) The initial presumption in the audit of a public company is that control risk is:  
medium a.      low.  
a b.      moderate.  
  c.       high.  
  d.      low or moderate, but not high.  
     
22. In the audit of a private company, the auditor will test controls when control risk is initially assessed at:  
medium    
c   Low   Moderate   High  
  a. Yes   No   Yes  
  b. No   No   Yes  
  c. Yes   Yes   No  
  d. No   Yes   No  
     
23. (Public) The auditor’s study of a public company’s internal control is:  
medium a.      required by GAAS.  
c b.      required by the AICPA.  
  c.       required by the Sarbanes-Oxley Act.  
  d.      recommended by the AICPA.  
     
24. The auditor’s consideration of a private company’s internal control is:  
medium a.      required by GAAP.  
b b.      required by GAAS.  
  c.       required by the IRS.  
  d.      recommended by the SEC.  
     
25.

medium

Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the:  
d a.      adequacy of the computer system.  
  b.      proper implementation by management.  
  c.       ability of the internal audit staff to maintain it.  
  d.      competency and dependability of the people using it.  
     
26.

medium

Even with the most effectively designed internal control, the auditor must obtain audit evidence, beyond testing the controls, for every:  
c a.      transaction.  
  b.      financial statement account.  
  c.       material financial statement account.  
  d.      financial statement account that will be relied upon by third parties.  
     
27. The essence of an effectively controlled organization lies in the:  
medium a.      effectiveness of its independent auditor.  
d b.      effectiveness of its internal auditor.  
  c.       attitude of its employees.  
  d.      attitude of its management.  
     
28. (Public)

medium

To issue a report on internal control over financial reporting for a public company, an auditor must:  
c a.      evaluate management’s assessment process.  
  b.      independently assess the design and operating effectiveness of internal control.  
  c.       evaluate management’s assessment process and independently assess the design and           operating effectiveness of internal control.  
  d.      test controls over significant account balances.  
     
29. (Public)

medium

Which of the stock exchanges require listed companies to have an audit committee composed entirely of independent directors?  
a          
    NYSE   NASDAQ  
  a. Yes   Yes  
  b. No   No  
  c. Yes   No  
  d. No   Yes  
     
     
30. Which of the following factors may increase risks to an organization?  
Medium        
a   Geographic dispersion of company operations    

Presence of new information technologies

  a. Yes   Yes  
  b. No   No  
  c. Yes   No  
  d. No   Yes  
     
31. Which of the following statements is correct with respect to separation of duties?  
medium a.        Employees should not have temporary and permanent custody of assets.  
b b.        Employees who authorize transactions should not have custody of related assets.  
  c.         It is permissible to allow an employee to open cash receipts and record those receipts.  
  d.        Employees who authorize transactions should have recording responsibility for these transactions.  
     
32.

medium

Authorizations can be either general or specific. Which of the following is not an example of a general authorization?  
b a.      Automatic reorder points for raw materials inventory.  
  b.      A sales manager’s authorization for a sales return.  
  c.       Credit limits for various classes of customers.  
  d.      A sales price list for merchandise.  
     
33. The most important type of protective measure for safeguarding assets is:  
medium a.      adequate separation of duties among personnel.  
c b.      proper authorization of transactions.  
  c.       the use of physical precautions.  
  d.      adequate documentation.  
     
34. Which of the following is correct with respect to the design and use of business documents?  
medium a.      Not all documents used for internal purposes need to be prenumbered.  
a b.      Documents should be designed for single purposes only to avoid confusion in their use.  
  c.       Documents should be designed to be understandable only by those who use them.  
  d.      Documents designed for external use must be prenumbered.  
     
35. (Public)

medium

PCAOB Standard 2 requires auditors to evaluate the effectiveness of the audit committee’s oversight of the company’s:  
a    
    External financial reporting   Efficiency of operations   Internal control over financial reporting  
  a. Yes   No   Yes  
  b. No   No   Yes  
  c. Yes   Yes   No  
  d. No   Yes   No  
     
36. Which of the following is correct?  
medium a.      Approval is a policy decision implemented by employees.  
c b.      Approval occurs as a matter of general policy and includes significant transactions only.  
  c.       Authorization is a policy decision for either a general class of transactions or specific           transactions.  
  d.      Approval should be given by the employee responsible for recording the transaction.  
     
37.

medium

Which of the following principles is not necessary for the proper design and use of documents and records?  
a a.      Designed for a single use to increase efficiency of operations.  
  b.      Constructed in a manner that encourages correct preparation.  
  c.       Prepared at the time a transaction takes place.  
  d.      Designed for multiple uses to increase efficiency of operations.  
     
38. Narratives, flowcharts, and internal control questionnaires are three common methods of:  
medium a.      testing the internal controls.  
b b.      documenting the auditor’s understanding of internal controls.  
  c.       designing the audit manual and procedures.  
  d.      documenting the auditor’s understanding of a client’s organizational structure.  
     
39.

medium

_____ deal with ongoing or periodic assessment of the quality of internal control by management.  
b a.      Quality monitoring activities  
  b.      Monitoring activities  
  c.       Oversight activities  
  d.      Management activities  
     
40. (Public)

medium

Smaller public companies face challenges implementing effective internal control due to ______.  
c a.      a lack of expertise  
  b.      reduced importance  
  c.       limited resources  
  d.      limited available guidance  
     
41. Which of the following is not one of the levels of an absence of internal controls?  
medium a.      Major deficiency.  
a b.      Material weakness.  
  c.       Significant deficiency.  
  d.      Control deficiency.  
     
42. Which of the following is the correct definition of “control deficiency?”  
medium

a

a.      A control deficiency exists if the design or operation of controls does not permit company           personnel to prevent or detect misstatements on a timely basis.  
  b.      A control deficiency exists if one or more deficiencies exist that adversely affect a           company’s ability to prepare external financial statements reliably.  
  c.       A control deficiency exists if the design or operation of controls results in a more than           remote likelihood that controls will not prevent or detect misstatements.  
  d.      A control deficiency exists if the design or operation of controls results in a more than           probable likelihood that controls will prevent or detect misstatements.  
     
43. A(n) _______ deficiency exists if a necessary control is missing or not properly formulated.  
medium a.      control  
c b.      significant  
  c.       design  
  d.      operating  
     
44.

medium

To determine if  significant internal control deficiencies are material weaknesses, they must be evaluated on their:  
a    
    Likelihood   Significance
  a. Yes   Yes  
  b. No   No  
  c. Yes   No  
  d. No   Yes  
     
45. The purpose of an entity’s accounting information and communication system is to ______.  
medium    
d    

Monitor transactions

  Record and process transactions    

 

Initiate transactions

 
  a. Yes   Yes   Yes
  b. No   No   No
  c. Yes   No   No
  d. No   Yes   Yes
   
46.

medium

A procedure that would most likely be used by an auditor in performing tests of control procedures that involve segregation of functions and that leave no transaction trail is:
b a.      inspection.
  b.      observation.
  c.       reperformance.
  d.      reconciliation.
   
47.

medium

If the results of tests of controls support the design and operations of controls as expected, the auditor uses ____ control risk as the preliminary assessment.
b a.      a lower
  b.      the same
  c.       a higher
  d.      either a lower or higher
   
48. Internal controls normally include procedures designed to provide reasonable assurance that:
medium a.      employees act with integrity when performing their assigned tasks.
b b.      transactions are executed in accordance with management’s authorization.
  c.       decision processes leading to management’s authorization of transactions are sound.
  d.      collusive activities would be detected by segregation of employee duties.
   
49. Which of the following is correct?
medium a.      A significant deficiency is always a material weakness.
d b.      A control deficiency is always a material weakness.
  c.       A material weakness is less significant that a control deficiency.
  d.      A material weakness is always a significant deficiency.
   
50.

medium

Which of the following is not a likely procedure to support the operating effectiveness of internal controls?
d a.      Inquiry of client personnel.
  b.      Observation of control-related activities.
  c.       Reperformance of client procedures.
  d.      Completing an internal control questionnaire.
   
51. (Public)

medium

Before making the final assessment of internal control at the end of an integrated audit, the auditor must:
a  
    Test controls   Perform substantive tests of details
  a. Yes   Yes  
  b. No   No  
  c. Yes   No  
  d. No   Yes  
     
52. (Public)

medium

Significant deficiencies and material weaknesses in internal control of a public company must be reported to which of the following?  
c a.      The Public Company Accounting Oversight Board.  
  b.      Members of management who are responsible for the related area of the company.  
  c.       Audit committee of the company’s board of directors.  
  d.      The AICPA.  
     
53. Of the following statements about internal controls, which one is not valid?  
medium

d

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 controls on a test basis.  
  d.      Control procedures reasonably ensure that collusion among employees cannot occur.  
     
54.

medium

Which of the following best describes the inherent limitations that should be recognized by an auditor when considering the potential effectiveness of internal control?  
a a.      Procedures that depend on segregation of duties can be circumvented by collusion.  
  b.      Competent and honest client personnel provide an environment conducive to accounting           control and provide absolute assurance that effective control will be achieved.  
  c.       Procedures designed to assure the execution and recording of transactions in accordance           with proper authorizations are effective against irregularities perpetrated by management.  
  d.      The benefits expected to be derived from effective internal accounting control usually do           not exceed the costs of such control.  
     
55. Which of the following is not one of the subcomponents of the control environment?  
medium a.      Management’s philosophy and operating style.  
c b.      Organizational structure.  
  c.       Adequate separation of duties.  
  d.      Commitment to competence.  
     
56.

medium

It is important for the CPA to consider the competence of the clients’ personnel because their competence bears directly and importantly upon the:  
b a.      cost/benefit relationship of the system of internal control.  
  b.      achievement of the objectives of internal control.  
  c.       comparison of recorded accountability with assets.  
  d.      timing of the tests to be performed.  
     
57. Audit evidence concerning proper segregation of duties normally is best obtained by:  
medium a.      direct personal observation of the employee who applies control procedures.  
a b.      making inquiries of co-workers about the employee who applies control procedures.  
  c.       preparation of a flowchart of duties performed and available personnel.  
  d.      inspection of third-party documents containing the initials of who applied control           procedures.  
     
58. Proper segregation of functional responsibilities calls for separation of:  
medium a.      authorization, execution, and payment.  
b b.      authorization, recording, and custody.  
  c.       custody, execution, and reporting.  
  d.      authorization, payment, and recording.  
     
59. Internal controls are not designed to provide reasonable assurance that:  
medium a.      all frauds will be eliminated.  
a b.      transactions are executed in accordance with management’s authorization.  
  c.       access to assets is permitted only in accordance with management’s authorization.  
  d.      company personnel comply with applicable rules and regulations.  
     
60.

medium

Which of the following statements about auditor documentation of the client’s internal controls is correct?  
d a.      Documentation must include flow charts.  
  b.      Documentation must include procedural write-ups.  
  c.       No documentation is necessary although it is desirable.  
  d.      No one particular form of documentation is necessary.  
     
61.

medium

Significant deficiencies are matters that come to an auditor’s attention and should be communicated to an entity’s audit committee because they represent:  
b a.      material frauds perpetrated by high-level management.  
  b.      internal control deficiencies that could adversely affect a company’s ability to initiate,           record, process, or report external financial statements reliably.  
  c.       flagrant violations of the entity’s documented conflict-of-interest policies.  
  d.      intentional attempts by client personnel to limit the scope of the auditor’s field work.  
     
62.

medium

How must significant deficiencies and material weaknesses be communicated to those charged with governance?  
c a.      Either oral or written communication is acceptable.  
  b.      Oral communication is required.  
  c.       Written communication is required.  
  d.      Written communication is required for material weaknesses, but oral communication is           allowed for significant deficiencies.  
     
63.

challenging

a

Which of the following statements, if any, is correct?

a.          The NASDAQ market requires listed companies to have audit committees that have only independent directors.

b.          The NASDAQ market requires listed companies to have audit committees that have a minority of the positions held by independent directors.

c.          The NASDAQ market recommends, but does not require, listed companies to have audit committees.

d.          The NASDAQ market recommends, but does not require, listed companies to have audit committees that have a minority of the positions held by independent directors.

 
     
64. (SOX) The Sarbanes-Oxley Act requires:  
challenging a.      all public companies to issue reports on internal controls.  
a b.      all public companies to define adequate internal controls.  
  c.       the auditor of public companies to design effective ICFR.  
  d.      the auditor of public companies to provide recommendations to correct material           weaknesses.  
     
65.

challenging

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that the:  
d a.      segregation of incompatible functions is necessary to ascertain that internal control is           effective.  
  b.      employment of competent personnel provides assurance that the objectives of internal           control will be achieved.  
  c.       establishment and maintenance of internal control is an important responsibility of the           management and not of the auditor.  
  d.      costs of internal control should not exceed the benefits expected to be derived from           internal control.  
     
66. The financial statements are not likely to correctly reflect GAAP if the:  
challenging a.      controls affecting the reliability of financial reporting are inadequate.  
a b.      company’s controls do not promote efficiency.  
  c.       company’s controls do not promote effectiveness.  
  d.      company’s control do not promote compliance with applicable rules and regulations.  
     
67. The primary emphasis by auditors is on controls over:  
challenging a.      classes of transactions.  
a b.      account balances.  
  c.       both a and b, because they are equally important.  
  d.      both a and b, because they vary from client to client.  
     
68.

challenging

Compared to a public company, the most important difference in a nonpublic company in assessing control risk is the ability to assess control risk at _______ for any or all control-related objectives.  
d a.      low  
  b.      moderately low  
  c.       medium  
  d.      high  
     
69.

challenging

An auditor should consider two key issues when obtaining an understanding of a client’s internal controls. These issues are:  
c a.      the effectiveness and efficiency of the controls.  
  b.      the frequency and effectiveness of the controls.  
  c.       the design and utilization of the controls.  
  d.      The implementation and efficiency of the controls.  
     
70.

challenging

The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor’s study and evaluation of internal control because the:  
c a.      audit programs, working papers, and reports of internal auditors can often be used as a           substitute for the work of the independent auditor’s staff.  
  b.      procedures performed by the internal audit staff may eliminate the independent auditor’s           need for an extensive study and evaluation of internal control.  
  c.       work performed by internal auditors may be a factor in determining the nature, timing, and   extent of the independent auditor’s procedures.  
  d.      understanding of the internal audit function is an important substantive test to be           performed by the independent auditor.  
     
71. To be effective, an internal audit department must be independent of:  
challenging a.      operating departments.  
c b.      the accounting department.  
  c.       both a and b.  
  d.      either a or b, but not both.  
     
72.

challenging

d

Hanlon Corp. maintains a large internal audit staff that reports directly to the chief financial officer. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably:  
  a.      eliminate tests of controls.  
  b.      increase the depth of the study and evaluation of administrative controls.  
  c.       avoid duplicating the work performed by the internal audit staff.  
  d.      place limited reliance on the work performed by the internal audit staff.  
     
73.

challenging

External financial statement auditors must obtain evidence regarding what attributes of an internal audit (IA) department if the external auditors intend to rely on IA’s work?  
d a.      Integrity  
  b.      Objectivity  
  c.       Competence  
  d.      All of the above  
     
74. When planning an audit, the auditor’s assessed level of control risk is:  
challenging a.      determined by using actuarial tables.  
c b.      calculated by using the audit risk model.  
  c.       an economic issue, trading off the costs of testing controls against the cost of testing           balances.  
  d.      calculated by using the formulas provided in the AICPA’s auditing standards.  
     
75. When a compensating control exists, the absence of a key control:  
challenging

a

a.      is no longer a concern because there is no longer a significant deficiency or material           weakness.  
  b.      is still a major concern to the auditor.  
  c.       could cause a material loss, so it must be tested using substantive procedures.  
  d.      is magnified and must be removed from the sampling process and examined in its entirety.  
     
76.

challenging

After considering a client’s internal controls, an auditor has concluded that it is well designed and is functioning as intended. Under these circumstances the auditor would most likely:  
c a.      perform tests of controls to the extent outlined in the audit program.  
  b.      determine the control procedures that should prevent or detect errors and irregularities.  
  c.       not increase the extent of predetermined substantive tests.  
  d.      determine whether transactions are recorded to permit preparation of financial statements           in conformity with generally accepted accounting principles.  
     
77.

challenging

a

To obtain an understanding of an entity’s control environment, an auditor should concentrate on the substance of management’s policies and procedures rather than their form because:  
  a.      management may establish appropriate policies and procedures but not act on them.  
  b.      the board of directors may not be aware of management’s attitude toward the control           environment.  
  c.       the auditor may believe that the policies and procedures are inappropriate for that           particular entity.  
  d.      the policies and procedures may be so weak that no reliance is contemplated by the           auditor.  
     

 

Essay Questions

 

78.

medium

Describe each of the three broad objectives management typically has for internal control. With which of these objectives is the auditor primarily concerned?

 

  Answer:

The three objectives are:

·         Reliability of financial reporting. Management has both a legal and professional responsibility to be sure that the information is fairly presented in according with reporting requirements such as GAAP.

·         Efficiency and effectiveness of operations. Controls within an organization are meant to encourage efficient and effective use of its resources to optimize the company’s goals.

·         Compliance with laws and regulations. Public and non-public organizations are required to follow many laws and regulations. Some relate to accounting only indirectly, such as environmental protection and civil rights laws. Others are closely related to accounting, such as income tax regulations and fraud.

 

The auditor is primarily concerned with the objective of reliable financial reporting.

 

 

79.

medium

Briefly describe the responsibilities of management and external auditors for internal controls.

 

  Answer:

 

Management is responsible for establishing and maintaining the entity’s internal controls. For public companies, management is also required by Section 404 to publicly report on the operating effectiveness of those controls. In contrast, the auditor’s responsibilities include understanding and testing internal control over financial reporting. For public company clients, the auditor is also required by Section 404 to issue an audit report on management’s assessment of its internal controls, including the auditor’s opinion on the operating effectiveness of those controls.

 

 

80. (Public)

medium

There are four steps in the auditor’s process of understanding internal control and assessing control risk for a public company. Step one is obtain and document an understanding of internal control: design and operation. What are the remaining three steps?

 

 

  Answer:

The remaining three steps are:

·         Assess control risk.

·         Design, perform, and evaluate tests of controls.

·         Decide planned detection risk and substantive tests.

 

81.

medium

Certain principles dictate the proper design and use of documents and records. Briefly describe several of these principles.

 

  Answer:

·         Documents should be prenumbered consecutively to facilitate control over missing documents and as an aid in locating documents when they are needed at a later date.

·         Documents and records should be prepared at the time a transaction takes place, or as soon as possible thereafter, to minimize timing errors.

·         Documents and records should be designed for multiple uses, when possible, to minimize the number of different forms. For example, a properly designed and used shipping document can be the basis for releasing goods from storage to the shipping department, informing billing of the quantity of goods to bill to the customer and the appropriate billing date, and updating the perpetual inventory records.

·         Documents and records constructed in a manner that encourages correct preparation. This can be done by providing internal checks within the form or record. For example, a document might include instructions for proper routing, blank spaces for authorizations and approvals, and designated column spaces for numerical data.

 

 

82.

medium

Management’s identification and analysis of risk is an ongoing process and is a critical component of effective internal control. An important first step is for management to identify factors that may increase risk. Identify at least five factors, observable by management, which may lead to increased risk in a typical business organization.

 

  Answer:

There are many factors that may lead to increased risk in an organization. Some examples include:

·         failure to meet prior objectives,

·         decreasing quality of personnel,

·         increasing geographic dispersion of company operations,

·         increasing significance and complexity of core business processes,

·         introduction of new information technologies, and

·         entrance of new competitors.

 

 

83.

medium

During a financial statement audit of a private company, three steps must be completed by the auditor before concluding that control risk is low. What are these steps?

 

  Answer:

The three steps that must be completed by the auditor before concluding that control risk is low are:

1.       obtaining an understanding of the control environment, risk assessment procedures, accounting information and communication system, and monitoring methods at a fairly detailed level;

2.       identify specific controls that will reduce control risk and make an assessment of control risk; and

3.       test the effectiveness of controls.

 

 

84.

medium

What are the two primary factors that auditors consider in determining if an entity is auditable?

 

  Answer:

The two primary factors are the integrity of management and the adequacy of accounting            records.

 

 

85.

medium

Define the following terms: control deficiency, significant deficiency, and material weakness.

 

  Answer:

·         A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis.

·         A significant deficiency exists if one or more control deficiencies exist that results in more than a remote likelihood that a misstatement that is more than inconsequential will not be prevented or detected.

·         A material weakness exists if a significant deficiency, by itself, or in combination with other significant deficiencies, results in a more than remote likelihood that internal control will not prevent or detect material financial statement misstatements.

 

 

86.

medium

Describe three inherent limitations of internal control.

 

  Answer:

The effectiveness of internal controls depends on the competency and dependability of the people using it. Inherent limitations of internal control include:

·         employee carelessness,

·         lack of understanding,

·         management override, and

·         collusion.

 

 

87.

medium

The internal control framework developed by COSO includes five so-called “components” of internal control. Discuss each of these five components.

 

  Answer:

Five components of internal control are:

·         The control environment. The control environment consists of the actions, policies, and procedures that reflect the overall attitudes of top management about control and its importance to the company.

·         Risk assessment. This is management’s identification and analysis of risks relevant to the preparation of financial statements in accordance with GAAP.

·         Information and communication. This is the set of manual and/or computerized procedures that identifies, assembles, classifies, analyzes, records, and reports a company’s transactions and maintains accountability for the related assets.

·         Control activities. These are the policies and procedures that help ensure necessary actions are taken to address risks in the achievement of the company’s objectives.

·         Monitoring. This is management’s ongoing and periodic assessment of the quality of internal control performance to determine that controls are operating as intended and modified when needed.

 

 

 

 

88.

medium

Discuss what is meant by the term “control environment” and identify four control environment subcomponents that the auditor should consider.
  Answer:

The control environment consists of the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about control and its importance to the entity. Subcomponents include integrity and ethical values, commitment to competence, board of directors or audit committee participation, management’s philosophy and operating style, organizational structure, assignment of authority and responsibility and human resource policies and practices.

 

89.

challenging

Describe the auditor’s responsibilities related to communications regarding internal control matters.

 

  Answer:

The auditor must communicate significant deficiencies and material weaknesses in writing to those charged with governance as soon as they become aware of their existence. The communication is usually addressed to the audit committee and to management. Timely communications may provide management an opportunity to address control deficiencies before management’s report on internal control must be issued. In some instances, deficiencies can be corrected sufficiently early such that both management and the auditor can conclude that controls are operating effectively as of the balance sheet date.

 

 

90.

challenging

The text suggested a five-step approach to identify deficiencies, significant deficiencies, and material weaknesses. Describe this approach.

 

  Answer:

1. Identify existing controls. Because deficiencies and material weaknesses are the absence of adequate controls, the auditor must first know which controls exist.

2. Identify the absence of key controls. Internal control questionnaires, flowcharts, and walkthroughs are useful tools to identify where controls are lacking and the likelihood of misstatement is therefore increased.

3. Consider the possibility of compensating controls. A compensating control is one elsewhere in the system that offsets the absence of a key control. When a compensating control exists, there is no longer a significant deficiency or material weakness.

4. Decide whether there is a significant deficiency or material weakness. The likelihood of misstatements and their materiality are used to evaluate if there are significant deficiencies or material weaknesses.

5. Determine potential misstatements that could result. This step is intended to identify specific misstatements that are likely to result because of the significant deficiency or material weakness. The importance of a significant deficiency or material weakness is directly related to the likelihood and materiality of potential misstatements.

 

 

 

 

 

91.

challenging

Auditing standards related to the audits of private companies specify the extent to which auditors can rely on evidence about internal controls obtained in prior years. Briefly describe this guidance.

 

  Answer:

When auditors plan to use evidence about the operating effectiveness of internal control obtained in prior audits, SAS 110 requires them to test their effectiveness at least every third year. If auditors determine that a key control has been changed since it was last tested, they should test it in the current year. When there are a number of controls tested in prior audits that have not been changed, SAS 110 requires auditors to test some of those controls each year to ensure there is a rotation of controls testing throughout the three-year period.

 

 

92.

challenging

Adequate separation of duties is an important control activity. Discuss the four general guidelines for separation of duties to prevent both intentional and unintentional misstatements that are of significance to auditors.

 

  Answer:

The general guidelines are:

·         Custody of assets should be separated from accounting,

·         Authorizing transactions should be separated from custody of related assets,

·         Operational responsibility should be separated from record-keeping, and

·         Duties within IT should be separated.

 

Other Objective Answer Format Questions

 

93. Match seven of the terms (a-i) with the definitions provided below (1-7):
medium a.      Control environment
  b.      Control activities
  c.       Independent checks on performance
  d.      Internal control
  e.       Monitoring
  f.       Separation of duties
  g.       General authorization
  h.      Specific authorization
  i.        Risk assessment
   
e                   1.           Management’s ongoing and periodic assessment of the quality of internal control performance to determine that controls are operating as intended and modified when needed.

 

g                   2.           Company-wide policies for the approval of all transactions within stated limits.

 

a                   3.           The actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about control and its importance to the entity.

 

f                   4.           Segregation of the following activities in an organization: custody of assets, accounting, authorization, and operational responsibility.

 

 

 

i                   5.           Management’s identification and analysis of risks relevant to the preparation of financial statements in accordance with generally accepted accounting principles.

 

b                   6.           Policies and procedures that help ensure necessary actions are taken to address risks in the achievement of the entity’s objectives.

 

d                   7.           A process designed to provide reasonable assurance regarding the achievement of management’s objectives in the following categories: (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations.
   
94.

easy

a

If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably set a high assessment of control risk.

a.          True

b.          False

95.

easy

a

If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably determine the client were unauditable.

a.      True

b.      False

 

96.

easy

b

When internal controls are effective, then substantive audit tests are more reliable; thus, the extent of substantive tests should be reduced.

a.      True

b.      False

 

97.

easy

b

Auditors of private companies may rely on prior periods’ tests of controls for a period not to exceed four years.

a.      True

b.      False

 

98.

easy

a

In an audit of a non-public company, the less control risk there is, the smaller the amount of planned substantive evidence that is required.

a.      True

b.      False

 

99.

easy

b

As a client’s information system becomes more complex, it is likely that an auditor will decrease reliance on controls and increase substantive tests to support a control risk assessment.

a.      True

b.      False

 

100.

easy

b

When a company designs and implements internal controls, cost of the controls is not a valid consideration.

a.      True

b.      False

 

101. (Public)

easy

a

PCAOB Standard 2 requires auditors to perform walkthroughs to assist in understanding internal control.

a.      True

b.      False

 

102.

easy

b

Adequate documents and records is a subcomponent of the control environment.

a.      True

b.      False

 

103.

easy

a

For proper internal control, there should be adequate separation of duties. However, the extent of separation of duties considered “adequate” depends heavily on the size of the organization.

a.      True

b.      False

 

104.

medium

a

In an audit of a non-public company, the auditor’s assessment of control risk and the extent of tests of controls are inversely related.

a.      True

b.      False

 

105.

medium

b

Smaller companies usually have more extensive internal controls than larger companies which result in fewer frauds being committed at small companies.

a.          True

b.          False

 

106. (Public)

medium

a

 

To issue an unqualified opinion on internal control over financial reporting, there must be no identified material weaknesses and no restrictions on the scope of the audit.

a.      True

b.      False

 

107. (SOX)

medium

a

The Sarbanes-Oxley Act of 2002 requires that public companies issue an internal control report.

a.      True

b.      False

 

108.

medium

b

The most important component of internal control is risk assessment.

a.      True

b.      False

 

109.

medium

a

The primary emphasis by auditors when evaluating and testing internal control is on controls over classes of transactions rather than controls over account balances.

a.      True

b.      False

 

110.

medium

b

When internal controls over a given financial statement account are assessed as highly effective, the auditor need not obtain audit evidence for that account beyond testing the controls.

a.      True

b.      False

 

111.

medium

a

The chart of accounts is a control and is closely related to the controls related to adequate documents and records.

a.      True

b.      False

 

112.

medium

b

Auditing standards prohibit reliance on the work of internal auditors due to the lack of independence of the internal auditors.

a.      True

b.      False

 

113.

medium

a

 

If an auditor wishes to rely on the work of internal auditors (IA), the auditor must obtain satisfactory evidence related to the IA’s competence, integrity, and objectivity.

a.      True

b.      False

 

 

 

114.

medium

a

Procedures used to obtain an understanding of internal control are normally performed on fewer transactions than procedures used to test controls.

a.      True

b.      False

 

115.

medium

a

For most uses, flowcharts are superior to narratives as a method of communicating the characteristics of internal control.

a.      True

b.      False

 

116.

medium

b

When documenting their understanding of a client’s internal controls, auditors are required to use narratives.

a.      True

b.      False

 

 

Chapter 20

 

Multiple-Choice Questions

 

1. The payroll cycle consists of how many classes of transactions?
easy a.      one
a b.      two
  c.       three
  d.      four
   
2. Which of the following statements is false?
easy a.      The payroll cycle consists of one class of transactions.
b b.      Balance sheet accounts related to payroll are generally more significant than related           transactions.
  c.       Internal controls over payroll are effective for most companies.
  d.      Small companies usually have effective controls over payroll.
   
3. Which of the following is not correct regarding controls over the processing of payroll?
easy

b

a.      The person authorized to sign paychecks should not be otherwise involved in the           preparation of the payroll.
  b.      A check-signing machine should not be used to replace a manual signature.
  c.       Distribution of pay checks should be performed by someone who is not involved in the           other payroll functions.
  d.      Unclaimed paychecks should be immediately returned for redeposit.
   
4. Which of the following statements about the payroll and personnel cycle is correct?
Easy  
c   There are three classes of transactions within the payroll cycle – salaried employees, hourly employees, and commissioned employees.    

Transactions are less significant than related balance sheet accounts.

   

Internal controls over payroll are effective for almost all companies, even small ones.

  a. No   No   Yes
  b. Yes   No   Yes
  c. Yes   Yes   No
  d. No   Yes   No
   
   
5.

easy

Which of the following types of audit procedures is ordinarily emphasized the least when auditing payroll?
d a.      Tests of controls
  b.      Tests of transactions
  c.       Analytical procedures
  d.      Tests of details of balances
   
6.

easy

A form issued for each employee summarizing the earnings and income tax deductions for the calendar year is the:
d a.      rate authorization form.
  b.      summary payroll report.
  c.       payroll master file.
  d.      W-2 form.
   
7. The payroll and personnel cycle begins with which of the following events?
easy a.      Interviewing job candidates.
b b.      Hiring a new employee.
  c.       Existing employees submitting requests for payment for work performed.
  d.      Issuance of paychecks.
   
8. Most systems of internal control for payroll are:
easy a.      loosely structured but well controlled.
c b.      loosely structured and loosely controlled.
  c.       highly structured and well controlled.
  d.      highly structured but loosely controlled.
   
9. The payroll and personnel cycle ends with which of the following events?
easy a.      Interviewing job candidates.
d b.      Hiring a new employee.
  c.       Existing employees submitting requests for payment for work performed.
  d.      Issuance of paychecks.
   
10.

easy

The retirement savings deductions, number of exemptions for withholding allowances, union dues deductions, and other deductions are found on what form?
b a.      Time cards
  b.      Deduction authorization form
  c.       Rate authorization form
  d.      Job time ticket
   
11.

easy

A ____________ includes all payroll transactions processed by the accounting system for a given period of time.
b a.      payroll journal
  b.      payroll transaction file
  c.       time report
  d.      payroll summary
   
12. An imprest payroll account ordinarily carries a balance that is:
easy a.      larger than the other company bank accounts.
c b.      larger than the amount of the periodic payroll disbursement.
  c.       small.
  d.      below zero.
   
13. Records that include data such as employment date, performance ratings and pay rates are the:
easy a.      personnel records.
a b.      employee screening forms.
  c.       summary payroll reports.
  d.      employee folders.
   

 

14.

easy

In audits of companies in which payroll is a significant portion of inventory, the improper account classification of payroll can:
a  
    Increase asset valuations.   Decrease asset valuations.  
  a. Yes   Yes
  b. No   No
  c. Yes   No
  d. No   Yes
   
15. To minimize the opportunity for fraud, unclaimed salary checks should be:
easy a.      deposited in a special bank account.
a b.      kept in the payroll department.
  c.       left with the employee’s supervisor.
  d.      held for the employee in the personnel department.
   
16. Which of the following type of employee typically does not complete time cards?
medium a.      Hourly employees.
b b.      Salaried employees.
  c.       All employees must complete time cards.
  d.      Time cards are typically completed by salaried employees, but may also be completed by hourly employees.
   
17. When examining payroll transactions, an auditor is primarily concerned with the possibility of:
medium a.      incorrect summaries of employee time records.
b b.      overpayments and unauthorized payments.
  c.       under withholding of amounts required to be withheld.
  d.      posting of gross payroll amounts to incorrect salary expense accounts.
   
18.

medium

a

For which of the following functions is the use of prenumbered documents least important?

a.          Use of prenumbered time cards in the payroll function.

b.          Use of prenumbered sales invoices in the sales function.

c.          Use of prenumbered receiving reports in the acquisitions function.

d.          Use of prenumbered deposit slips in the cash receipts function.

 

19. Which of the following statements about payroll checks is correct?
medium

b

a.      After a payroll check is cashed and returned to the employee it is referred to as a depository check.
  b.      As soon as a payroll check is signed by an authorized employee, it becomes an asset.
  c.       Payroll checks are written for the amount of gross pay due employees.
  d.      It is rare that payroll checks are direct-deposited into employees’ bank accounts.
   
20. Which of the following is not an advantage of using an imprest payroll account?
medium a.      It limits the company’s exposure to payroll fraud.
c b.      It allows the delegation of payroll check-signing duties.
  c.       Companies have fewer banking transactions.
  d.      It facilitates cash management.
   
21.

medium

No individual with access to time cards, payroll records, or checks should also be permitted access to:
c a.      the computer.
  b.      job time tickets.
  c.       personnel records.
  d.      the canceled check file.
   
22.

medium

The file for recording each payroll transaction for each employee and maintaining total employee wages paid for the year to date is the:
a a.      payroll master file.
  b.      summary payroll report.
  c.       payroll journal.
  d.      job time ticket.
   
23.

medium

Many companies use outside payroll services to process payroll. Auditors _____ rely on the internal controls of these outside payroll services.
d a.      must
  b.      cannot
  c.       rarely
  d.      can often
   
24. The total of the individual employee earnings in the payroll master file equals the total:
medium a.      balance of gross payroll in general ledger accounts.
a b.      of the checks drawn to employees for payroll.
  c.       gross payroll plus the total contributed by the employer for payroll taxes.
  d.      gross pay for the current week’s payroll.
   
25.

medium

If auditors rely on the internal controls of an outside payroll service provider, they will receive a(n) _____ report.
b a.      reliance
  b.      SAS 70
  c.       outsourcer’s
  d.      quality assurance
   
26.

medium

Most companies use an imprest account to pay the payroll. Which of the following is not an advantage of such an account?
d a.      It facilitates cash management.
  b.      It limits the company’s exposure to payroll fraud.
  c.       It allows the delegation of payroll check-signing duties.
  d.      It eliminates the requirement of keeping a minimum balance in a checking account.
   
27.

medium

The careful and timely preparation of all payroll tax returns is necessary to avoid penalties and criminal charges. The most important control in the timely preparation of these returns is:
b a.      computerized preparation of tax returns.
  b.      a well-defined set of policies that indicate when each form must be filed.
  c.       independent verification of computer output by a competent individual.
  d.      a Gaant chart.
   
28.

medium

Which of the following types of audit tests is usually emphasized due to a lack of independent third-party evidence related to payroll transactions?
c a.      Analytical procedures
  b.      Tests of details of balances
  c.       Tests of controls
  d.      Each of the above is emphasized.
   
29. The most important means of verifying account balances in the payroll and personnel cycle are:
medium a.      tests of controls and tests of transactions.
a b.      analytical procedures and tests of controls.
  c.       analytical procedures and tests of transactions.
  d.      test of controls and tests of details of balances.
   
30. Tests of payroll are usually not extensive because:
Medium  
a   employees will likely complain if underpaid.   payroll transactions are uniform and uncomplicated.   payroll transactions are subject to audit by federal and state governments.
  a. Yes   Yes   Yes
  b. No   Yes   No
  c. No   No   Yes
  d. Yes   No   No
   
31.

medium

If an auditor wishes to test the completeness transaction-related audit objective in the payroll and personnel cycle, which of the following would be a reasonable test of control?
a a.      Account for a sequence of payroll checks.
  b.      Examine procedures manual and observe the recording of transactions.
  c.       Examine payroll records for indication of pay rate approval.
  d.      Reconcile the payroll bank account.
   
32. Which of the following is a substantive test of transactions?
medium a.      Review personnel policies.
c b.      Account for a sequence of payroll checks.
  c.       Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement.
  d.      Examine printouts of transactions rejected by the computer as having invalid employee IDs.
   
33.

medium

As a part of the auditor’s responsibility for ____________, the auditor should review the preparation of at least one of each type of payroll tax form the client is responsible for filing.
d a.      doing tests of controls.
  b.      doing tests of balances.
  c.       doing tests of transactions.
  d.      understanding the client’s internal controls.
   
34.

medium

Which of the following is not an assertion related to the classes of transactions underlying the payroll cycle?
c a.      Classification
  b.      Accuracy
  c.       Existence
  d.      Occurrence
   
35.

medium

Which of the following circumstances would not cause an auditor to extend payroll procedures considerably?
d a.      Payroll significantly affects inventory valuation.
  b.      There is a possibility of material fraudulent payroll transactions.
  c.       There is a weak internal control structure.
  d.      There is a lack of independent third-party evidence, such as confirmations.
   
36.

medium

When labor is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning:
c a.      fictitious employees.
  b.      authorization of wage rates.
  c.       proper valuation and allocation of balances.
  d.      completeness of recorded transactions.
   
37.

medium

Which of the following is not a procedure that can be performed on canceled checks in an effort to detect defalcations?
d a.      Compare the endorsements on checks with authorized signatures.
  b.      Scan endorsements for unusual or recurring second endorsements.
  c.       Examine voided checks to be sure they haven’t been used.
  d.      Examine the payroll records in subsequent periods to determine that terminated employees are no longer being paid.
   

 

38.

medium

What potential problems may arise when an auditor considers the relationship between payroll and inventory valuation?
d  
    Improper account classification.   Improper allocation to jobs or processes.   Non-manufacturing payroll expenses charged to inventory.
  a. Yes   Yes   Yes
  b. No   Yes   No
  c. No   No   Yes
  d. Yes   No   No
   
   
39. The primary concern in testing payroll-related liabilities is to make sure that:
medium a.      accruals are properly valued.
c b.      transactions are recorded in the proper period.
  c.       there are no understated or omitted accruals.
  d.      the accruals are not overstated.
   
40.

medium

Which department should be authorized to add and delete employees from the payroll or change pay rates and deductions?
c a.      The supervising department.
  b.      The accounting department.
  c.       The human resources department.
  d.      The treasurer’s department.
   
41. Paychecks should be distributed by someone:
Medium  
c   independent of the timekeeping function.   who reports to the company controller.  
  a. Yes   Yes
  b. No   No
  c. Yes   No
  d. No   Yes
   
42.

medium

Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be accomplished by comparing the recorded accrual to the amount:
c a.      in the expense account.
  b.      used in the prior period.
  c.       authorized in the minutes of the board.
  d.      paid in the subsequent period.
   
43.

medium

Which of the following errors gives the auditor the least concern in auditing payroll transactions?
d a.      An error that indicates possible fraud.
  b.      Computational errors in formulas when a computerized system is used.
  c.       Classification errors in charging labor to inventory and job cost accounts.
  d.      Each of the above gives the auditor significant concern.
   
44. (Public)

medium

The usual audit test for a public company’s officer compensation is to obtain the authorized salary of each officer from the minutes of the board of directors and compare it with:
a          
    the SEC’s 10-K report.   the company’s federal income tax return.  
  a. Yes   Yes
  b. No   No
  c. Yes   No
  d. No   Yes
   
45. Auditors may extend their tests of payroll in which of the following circumstances?
Medium  
a   Payroll materially affects the valuation of inventory.   The auditor is concerned there may be nonexistent employees on the payroll.  
  a. Yes   Yes
  b. No   No
  c. Yes   No
  d. No   Yes
   
46. To check the accuracy of hours worked, an auditor would ordinarily compare clock cards with:
medium a.      personnel records.
b b.      job time tickets.
  c.       labor variance reports.
  d.      time recorded in the payroll register.
   
47.

medium

A surprise payroll payoff in which employees must pick-up and sign for their pay check is one means of:
c a.      identifying employees who do not have proper work credentials.
  b.      establishing a tightly controlled, fraud-free work environment .
  c.       testing for nonexistent employees.
  d.      identifying employees who have not submitted proper W-2 forms..
   
48.

medium

Which of the following is the best way for an auditor to determine that every name on a company’s payroll is that of a bona fide employee presently on the job?
c a.      Examine personnel records for accuracy and completeness.
  b.      Examine employees’ names listed on payroll tax returns for agreement with payroll accounting records.
  c.       Make a surprise observation of the company’s regular distribution of paychecks.
  d.      Visit the working areas and confirm with employees their badge or identification numbers.
   
49. Inherent risk is typically _____ for balance-related audit objectives as they relate to payroll.
medium a.      not considered
b b.      low
  c.       moderate
  d.      high
   
50.

medium

It would be appropriate for the payroll department to be responsible for which of the following functions?
d a.      Approval of employee time records.
  b.      Maintain records of employment, firings, and raises.
  c.       Temporary retention of unclaimed employee paychecks.
  d.      Preparation of governmental reports as to employees’ earnings and withholding taxes.
   
51. What are the two major balance-related audit objectives in testing payroll liabilities?
medium a.      Accuracy and detail tie-in
d b.      Completeness and valuation
  c.       Completeness and rights and obligations
  d.      Accuracy and cutoff
   

 

52. Which of the following best describes proper internal control over payroll?
medium a.      The preparation of the payroll must be under the control of the personnel department.
c b.      The confidentiality of employee payroll data should be carefully protected to prevent fraud.
  c.       The duties of hiring, payroll computation, and payment to employees should be segregated.
  d.      The payment of cash to employees should be replaced with payment by checks.
   
53.

medium

The periodic payment from the general cash account to the payroll account for net payroll should be tested for at least one payroll period. The primary audit procedure is a(n):
d a.      analytical review procedure that net pay is reasonable.
  b.      test of controls that an imprest account is being used for payroll.
  c.       substantive test that the correct amount was transferred for this test period.
  d.      test of transactions that the check is prepared for the proper amount and deposited before payroll checks are handed out.
   
54.

challenging

Once the auditor determines that the company’s policy for accruing wages is consistent with prior years, the appropriate audit procedure to test for accuracy and cutoff is:
a a.      recalculating the client’s accrual.
  b.      performing extensive tests of controls.
  c.       performing extensive tests of details.
  d.      none of the above.
   
55.

challenging

In auditing payroll, which of the following procedures will ordinarily require the least amount of auditor time under normal circumstances?
d a.      Tests of controls.
  b.      Substantive tests of transactions.
  c.       Analytical procedures.
  d.      Tests of details of balances.
   
56.

challenging

a

A weak internal control system allows a department supervisor to “clock in” for a fictitious employee and then approve the employee’s time card at the end of the pay period. This fraud would be detected if other controls were in place, such as having an independent party:
  a.      distribute paychecks.
  b.      recompute hours worked from time cards.
  c.       foot the payroll journal and trace postings to the general ledger and the payroll master file.
  d.      compare the date of the recorded check in the payroll journal with the date on the canceled checks and time cards.
   
57.

challenging

The most important consideration in evaluating the fairness of the amounts accrued for vacation pay, sick pay, and other benefits is the:
a a.      consistent accrual of these liabilities relative to those of preceding periods.
  b.      actual expense incurred for the prior period.
  c.       amount expended to date in the current period.
  d.      profitability of the client which will enable these liabilities to be met.
   
58.

challenging

Effective internal accounting control over unclaimed payroll checks that are kept by the company would include accounting department procedures that require:
d a.      effective cancellation and stop payment orders for checks representing unclaimed wages.
  b.      preparation of a list of unclaimed wages on a periodic basis.
  c.       accounting for all unclaimed wages in a current liability account.
  d.      periodic accounting for the actual checks representing unclaimed wages.
   

 

59.

challenging

Which of the following internal controls in the payroll and personnel cycle is generally least important to an auditor?
b a.      Formal methods of informing payroll personnel of new employees.
  b.      Reconciliation of total payroll expense in the general ledger with the payroll tax returns and the W-2 forms.
  c.       Authorization of changes in pay rates.
  d.      Notice of the termination date of employees no longer working for the company.
   
60. Which of the following statements is correct?
challenging

d

a.      The overhead charged to inventory at the balance sheet date can be understated if the salaries of administrative personnel are inadvertently or intentionally charged to indirect manufacturing overhead.
  b.      When jobs are billed on a cost-plus basis, revenue and total expenses are both affected by charging labor to incorrect jobs.
  c.       Payroll is a significant portion of inventory for retail and service industry companies.
  d.      The valuation of inventory is affected if the direct labor cost of individual employees is improperly charged to the wrong job or process.
   
61.

challenging

Which of the following is an effective internal accounting control used to prove that production department employees are properly validating payroll time cards at a time-recording station?
d a.      Internal auditors should make observations of distribution of paychecks on a surprise basis.
  b.      Time cards should be carefully inspected by those persons who distribute pay envelopes to the employees.
  c.       One person should be responsible for maintaining records of employee time for which salary payment is not to be made.
  d.      Daily reports showing time charged to jobs should be approved by the supervisor and compared to the total hours worked on the employee time cards.
   
62.

challenging

a

Once the auditor has determined the company’s policy for accruing wages and knows it is consistent with that of previous years, the appropriate audit procedure to test for cutoff and accuracy is to:
  a.      recalculate the client’s accruals.
  b.      compare the ledger balance with the journal and the tax form.
  c.       confirm the amount with employees.
  d.      compare the recorded accrued wages with the amount approved in the minutes of the Board.
   

 

Essay Questions

 

63.

easy

What are two possible reasons that internal controls over payroll are effective for most companies?

 

  Answer:

Harsh federal and state penalties encourage effective controls for withholding and paying           payroll taxes. Also, employee morale problems can occur if employees are not paid or are           underpaid.

 

 

 

64.

easy

What events initiate and terminate the payroll and personnel cycle?

 

  Answer:

The hiring of an employee initiates the cycle and the payments to employees, governments, and other organizations terminate the cycle.

 

 

65.

easy

What types of audit procedures are typically emphasized during the audit of the payroll cycle?
  Answer:

Auditors typically emphasize tests of controls, tests of transactions and analytical           procedures.

 

66.

easy

Discuss the procedures involved in, and the purpose of, a surprise payroll payoff.

 

  Answer:

A surprise payroll payoff is a procedure in which each employee must pick up and sign for his or her check in the presence of a supervisor and the auditor. Any checks that are not claimed are subject to an extensive investigation to determine whether an unclaimed check is fraudulent. The purpose is to test for nonexistent employees; that is, the issuance of payroll checks to individuals who do not work for the company.

 

 

67.

medium

Discuss three important differences between the payroll and personnel cycle and other cycles in a typical audit.

 

  Answer:

Three important differences between the payroll and personnel cycle and other cycles in a typical audit are:

·         There is only one class of transactions for payroll, whereas most cycles include at least two classes of transactions.

·         In the payroll cycle, transactions are far more significant than related balance sheet accounts.

·         Internal controls over payroll are effective for almost all companies, even small ones. This is primarily due to severe federal and state penalties for errors in withholding and paying payroll taxes and employee morale problems if employees are not paid or are underpaid.

 

 

68.

medium

What key separation of duties should the auditor expect to find within the payroll and personnel cycle?

 

  Answer:

The human resources department should be independent of the payroll function and should be responsible for hiring and terminating employees, as well as changes in pay rates and deductions. In additional payroll processing should be separate from the custody of signed payroll checks.

 

 

 

69.

medium

Discuss each of the following primary documents and records used in the personnel and employment function in the payroll and personnel cycle: personnel records, deduction authorization form, and the rate authorization form.

 

  Answer:

·         Personnel records. These records include employees’ date of employment, personnel investigations, rates of pay, authorized deductions, performance evaluations, and termination of employment.

·         Deduction authorization form. This form authorizes payroll deductions, including the number of exemptions for withholding of income taxes, U.S. savings bonds, and union dues.

·         Rate authorization form. This form authorizes employees’ rate of pay.

 

70.

medium

Discuss each of the following documents and records used in the timekeeping and payroll preparation function in the payroll and personnel cycle: time card, job time ticket, summary payroll report, payroll journal and payroll master file.

 

  Answer:

The primary documents and records used in the timekeeping and payroll preparation function are:

·         Time card. The time card is used to indicate the time the employee started and stopped working each day and the number of hours the employee worked.

·         Job time ticket. This document indicates jobs on which a factory employee worked during a given time period. This form is used only when an employee works on different jobs or in different departments.

·         Summary payroll report. This report summarizes payroll for a period.

·         Payroll journal. This journal is used to record payroll checks.

·         Payroll master file. This file contains each payroll transaction for each employee, along with total employee wages paid for the year to date.

 

 

71.

medium

Discuss each of the following primary documents and records used in the (1) payment of payroll function, and (2) preparation of payroll tax returns and payment of taxes function in the payroll and personnel cycle: payroll check, W-2 form, and payroll tax returns.

 

  Answer:

The primary documents and records used in the payment of payroll function and the preparation of payroll tax returns and payment of taxes function are:

·         Payroll check. This is a check written to the employee for services performed.

·         W-2 form. This form is issued for each employee summarizing the earnings record for the calendar year.

·         Payroll tax returns. These are tax forms submitted to local, state, and federal units of government for the payment of withheld taxes and the employer’s tax.

 

 

72.

medium

There are several key internal controls over the payment of payroll function that should be present. For example, the payroll should be distributed by someone who is not involved in the other payroll functions. Discuss other key internal controls over the payment of payroll function.

 

 

  Answer:

Controls over payroll checks should include limiting the authorization for signing the checks to a responsible employee who does not have access to timekeeping or the preparation of the payroll, and the immediate return of unclaimed checks for redeposit. If a check-signing machine is used to replace a manual signature, the machine must be carefully controlled. An imprest payroll account can be used to prevent the payment of unauthorized payroll transactions.

 

 

73.

medium

Discuss the advantages of using an imprest payroll account.

 

  Answer:

The advantages of an imprest account are that it limits the client’s exposure to payroll fraud, allows the delegation of payroll check-signing duties, separates routine payroll expenditures from irregular expenditures, and facilitates cash management. It also simplifies the reconciliation of the payroll bank account.

 

74.

medium

Discuss the two circumstances under which auditors would extend their procedures considerably in the audit of payroll.

 

  Answer:

Auditors often extend their procedures considerably in the audit of payroll under the following circumstances: (1) when payroll significantly affects the valuation of inventory and (2) when the auditor is concerned about the possibility of material fraudulent payroll transactions.

 

 

75.

medium

How do auditors commonly verify sales commission expense?
  Answer:

If all employees receive the same commission rate, then verifying the expense is done by multiplying the commission rate by the amount of the sales. If there are different commission rates, then the auditor will likely select a sample of employees to examine separately on a monthly or annual basis.

 

 

76.

medium

What is one audit procedure that may be used to test for proper handling of terminated employees?
 

 

 

Answer:

A procedure that tests for proper handling of terminated employees is to select several files from the personnel records for employees who were terminated in the current year to determine whether each received termination pay consistent with company policy. Continuing payments to terminated employees can be tested by examining payroll records in the subsequent period to verify that the employee is no longer being paid. Naturally, this procedure is not effective if the personnel department is not informed of terminations.

 

 

 

 

77.

challenging

There are several internal controls in the personnel and employment function that are important from an audit perspective. For example, there should be an adequate investigation of the competence and trustworthiness of new employees. Discuss other internal controls in the personnel and employment function that are important from an audit perspective.

 

  Answer:

From an audit perspective, the most important internal controls in personnel involve formal methods of informing the timekeeping and payroll preparation personnel of new employees, the authorization of initial and periodic changes in pay rates, and the termination date of employees no longer working for the company. As part of these controls, segregation of duties is extremely important. No individual with access to time cards, payroll records, or checks should also be permitted access to personnel records.

 

 

78.

challenging

There are several key internal controls over the timekeeping and payroll preparation function that should be present. For example, adequate control over the time on employees’ time cards includes the use of a time clock or other method of making certain that employees are paid for the number of hours they worked. Discuss other key internal controls over the timekeeping and payroll preparation function.

 

  Answer:

Internal controls over the timekeeping and payroll preparation function should include controls to prevent anyone from checking in for several employees or submitting a fraudulent time card. The summarization and calculation of the payroll can be controlled by well-defined policies for the payroll department, separation of duties to provide automatic cross-checks, reconciliation of payroll hours with independent production records, and independent internal verification of all important data. Controls over the preparation of payroll checks include preventing those responsible for preparing the checks from having access to time cards, signing or distributing checks, or independently verifying payroll output. In addition, the checks should be prenumbered and verified through independent bank reconciliation procedures.

 

 

 


Other Objective Answer Format Questions

 

79.

medium

Match seven of the terms for documents and records (a-k) used in the payroll and personnel cycle with the descriptions provided below (1-7):

 

  a.      Personnel records
  b.      Deduction authorization form
  c.       Rate authorization form
  d.      Time card
  e.       Job time ticket
  f.       Summary payroll report
  g.       Payroll check
  h.      W-2 form
  i.        Payroll tax returns
  j.       Payroll journal
  k.      Payroll master file
   
k                   1.       A file used for recording payroll transactions for each employee and maintaining total employee wages paid for the year to date.

 

d                   2.       A document indicating the time the hourly employee stated and stopped working.

 

g                   3.       A document written in exchange for services received from an employee.

 

i                   4.       Forms submitted to local, state, and federal units of government for the payment of withheld taxes and the employer’s tax.

 

b                   5.       A form authorizing payroll deductions, including the number of exemptions for withholding of income taxes, U.S. savings bonds, and union dues.

 

c                   6.       A form used to authorize the amount of pay.

 

a                   7.       Records including date of employment, personnel investigations, rates of pay, etc.
 

80.

easy

b

 

Payroll checks do not need to be distributed by someone independent of the payroll and timekeeping functions.

a.          True

b.          False

 

81.

easy

a

Hiring personnel initiates the payroll and personnel cycle.

a.      True

b.      False

 

82.

easy

b

Firing personnel terminates the payroll and personnel cycle.

a.      True

b.      False

 

83.

easy

a

Paying employees for their services ends the payroll and personnel cycle.

a.      True

b.      False

 

 

 

84.

easy

a

Auditors seldom expect to find misstatements when testing payroll transactions.

a.      True

b.      False

 

85.

easy

b

Most companies, with the exception of small ones, have effective controls over the payroll cycle.

a.      True

b.      False

 

86.

easy

a

The nature, extent, and timing of substantive tests of payroll transactions vary depending, in part, on assessed control risk.

a.      True

b.      False

 

87.

easy

b

Inherent risk for payroll-related liabilities is normally higher than for accounts receivable.

a.      True

b.      False

 

88.

easy

a

While most cycles include at least two classes of transactions, the payroll and personnel cycle includes only one class of transactions.

a.      True

b.      False

 

89.

easy

b

“Physical control over assets” is not a type of control that is applicable to the payroll cycle.

a.      True

b.      False

 

90.

easy

b

The deduction authorization form authorizes the rate of pay and the deductions for taxes, dues, etc.

a.      True

b.      False

 

91.

easy

a

When auditing the payroll and personnel cycle, tests of controls are routinely performed.

a.      True

b.      False

92.

easy

b

When labor is a material part of inventory, auditors should emphasize tests of details of balances.

a.      True

b.      False

 

93.

easy

a

A signed payroll check that has not been cashed is considered an asset to the company that issued the check.

a.      True

b.      False

 

94.

easy

a

For proper internal control, the person(s) responsible for signing the payroll checks should not have access to timekeeping or be otherwise involved in the preparation of payroll.

a.      True

b.      False

 

 

 

95.

easy

b

The job time ticket indicates the starting and stopping times of work during the pay period.

a.      True

b.      False

 

96.

easy

a

The use of an imprest payroll account prevents losses from payment of unauthorized payroll to no more than the balance in the imprest account.

a.      True

b.      False

 

97.

easy

b

Imprest accounts usually carry a significant balance.

a.      True

b.      False

 

98.

easy

a

There is very little opportunity for confirmation from third parties of balance sheet accounts related to the payroll and personnel cycle.

a.      True

b.      False

 

99.

medium

a

When a client uses an outside payroll service for processing payroll, professional auditing standards permit the auditor to rely on the internal controls of the service organization if the service organization’s auditor has issued a favorable report on the internal controls of the service organization.

a.          True.

b.          False.

 

100.

medium

b

When a client uses an outside payroll service for processing payroll, professional auditing standards require the auditor to rely on the internal controls of the service organization if the service organization’s auditor has issued a favorable report on internal controls.

a.          True.

b.          False.

 

101.

medium

a

For good internal control, the payroll function should be independent of the personnel department.

a.          True.

b.          False.

 

102. (Public)

medium

b

If an audit client is a public company, the understanding of internal control must be sufficient to identify opportunities to increase audit effectiveness.

a.      True

b.      False

 

103.

medium

b

Tests of controls and tests of details of balances are the auditor’s most important means of verifying account balances in the payroll and personnel cycle.

a.      True

b.      False

 

104.

medium

b

Because of the cycle’s pervasive nature, audit tests of the payroll cycle are usually extensive.

a.      True

b.      False

 

 

 

105.

medium

b

The primary purpose of a surprise payroll payoff is to detect employees who have reported more time than was actually worked (fraudulent hours).

a.      True

b.      False

 

106.

medium

a

The two major balance-related audit objectives in testing payroll liabilities are accuracy and cutoff.

a.      True

b.      False

 

107.

medium

b

Because of confidentiality requirements and potential losses of payroll funds, outside service center systems are rarely used by companies for payroll-related functions.

a.      True

b.      False

 

108.

medium

a

Internal control over payroll is normally highly structured and well controlled.

a.      True

b.      False

 

109.

medium

b

Supervisory personnel in the functional department responsible for evaluating employees should be responsible for authorizing the addition and deletion of employees from the payroll.

a.      True

b.      False

 

110.

medium

a

Despite the large dollar amounts involved in the payroll and personnel cycle, auditors typically spend less time auditing this cycle than others.

a.      True

b.      False

 

111.

medium

a

It is generally more difficult for the auditor to detect payment of fraudulent hours than payment of fictitious employees.

a.      True

b.      False

 

112.

medium

a

One common substantive test of payroll transactions for the existence objective is to compare canceled payroll checks with personnel records.

a.      True

b.      False

 

113.

medium

b

The audit procedure “Recompute hours worked from time cards” is normally performed when testing the completeness objective for payroll.

a.      True

b.      False

 

114.

challenging

a

In most audits, payroll tax expense is not tested because the audit risk does not justify the time required to perform the tests.

a.      True

b.      False

 

Chapter 26

 

Multiple-Choice Questions

 

1.

easy

b

The IIA Code of Ethics is based on all but which of the following ethical principles?

a.      Integrity.

b.      Independence.

c.       Competency.

d.      Confidentiality.

 

2.

easy

c

Statements on Internal Auditing Standards are issued by the:

a.      AICPA.

b.      SEC.

c.       Internal Auditing Standards Boards.

d.      Auditing Standards Boards.

 

3.

easy

c

Internal auditors are responsible to:

a.      the board of directors.

b.      management.

c.       both a and b.

d.      neither a nor b.

 

4.

easy

a

Which of the following is not a similarity between external and internal auditors?

a.      Both must be independent of the company.

b.      Both must be competent.

c.       Both use similar methodologies in performing their work.

d.      Both consider risk and materiality in their work.

 

5.

easy

d

External auditors consider internal auditors effective if they are:

a.      independent of the operating units being evaluated.

b.      competent and well trained.

c.       have performed relevant audit tests of the internal controls and financial statements.

d.      all of the above.

 

6.

easy

d

Auditing standards _______ external auditors to use the internal auditors for direct assistance on the audit.

a.      discourage

b.      prohibit

c.       encourage

d.      permit

 

7.

easy

b

The primary source of authoritative literature for doing government audits is the:

a.      Purple Book.

b.      Yellow Book.

c.       Green Book.

d.      Red Book.

 

 

 

8.

easy

c

When a state or local government agency receives federal financial assistance, it is subject to the audit requirements of:

 

 
a   Yellow Book   Single Audit Act   OMB Circular A-133  
  a. Yes   Yes   No
  b. No   No   Yes
  c. Yes   Yes   Yes
  d. Yes   No   No
   
9.

easy

c

Which of the following is not one of the broad categories of operational audits?

a.      Functional audits.

b.      Organizational audits.

c.       Single Audit Act audits.

d.      Special assignment audits.

 

 
10.

easy

d

Which of the following groups could not be involved in an operational audit?

a.      CPA firms.

b.      Internal auditors.

c.       Government auditors.

d.      None of the above answers is correct; that is, all of the above could be involved.

 

 
11.

easy

b

The IIA’s professional practice framework (including its code of ethics and International Standards for the Professional Practice of Internal Auditing) is commonly referred to as the:

a.      Blue Book.

b.      Red Book.

c.       Green Book.

d.      Yellow Book.

 

 
12.

easy

b

The professional organization which is responsible for providing guidance for internal auditors is the:

a.      APA.

b.      IIA.

c.       ABA.

d.      AIA.

 

 
13.

easy

d

The financial auditing standards of the Yellow Book are ______ the 10 GAAS of the AICPA.

a.      the same as

b.      quite different from

c.       incompatible with

d.      consistent with

 

 
14.

easy

b

Which of the following is not one of the three phases in an operational audit?

a.      Planning.

b.      Training and supervising employees.

c.       Evidence accumulation and evaluation.

d.      Reporting and follow-up.

 

 
15.

medium

a

The correct title of the Yellow Book is:

a.      Government Auditing Standards.

b.      IIA Practice Standards.

c.       Statement of Responsibilities of Internal Auditing.

d.      Statement of Standards on Accounting and Review Services.

 

 
16.

medium

b

The Yellow Book recognizes that, because of the sensitivity of government activities and their public accountability, in government audits the thresholds of acceptable audit risk and tolerable misstatement compared to an audit of a commercial enterprise may be:

a.      equal.

b.      lower.

c.       higher.

d.      indeterminable.

 

 

 

17.

medium

b

The Single Audit Act requires that an audit be conducted for recipients who receive total federal funds in any fiscal year of:

a.      $1,000,000 or more.

b.      $500,000 or more.

c.       $300,000 or more.

d.      $100,000 or more.

 

18.

medium

b

An audit conducted in accordance with the Yellow Book must include an audit report that states the audit was performed in accordance with:

a.      GAAS.

b.      GAGAS.

c.       GASA.

d.      SAS.

 

19.

medium

d

An audit designed to evaluate the efficiency and effectiveness of an organization or some part of an organization would not be called a(n):

a.      performance audit.

b.      management audit.

c.       operational audit.

d.      compliance audit.

 

20.

medium

c

Which of the following is not one of the major differences between financial and operational auditing?

a.      The financial audit is oriented to the past, but an operational audit concerns performance for the future.

b.      The financial audit report is distributed to many readers, but the operational audit report goes to a few managers.

c.       Financial audits deal with the information on the financial statements, but operational audits are concerned with the information in the ledgers.

d.      Financial audits are limited to matters that directly affect the financial statements, but operational audits cover any aspect of efficiency and effectiveness.

 

21.

medium

d

Before an operational audit for effectiveness can be performed, there must be:

a.      a financial audit by an independent auditor.

b.      a financial audit by an internal auditor.

c.       a review performed by either an independent or an internal auditor.

d.      specific criteria developed to define effectiveness.

 

22.

medium

d

Auditors involved in planning, performing, or reporting on audits under GAGAS must complete ____ hours of continuing professional education in each two-year period.

a.      20

b.      40

c.       60

d.      80

 

23.

medium

b

Which of the following statements regarding types of operational audits is false?

a.      A functional audit has the advantage of permitting specialization by auditors.

b.      An advantage of functional auditing is its ability to evaluate interrelated functions.

c.       The emphasis in an organizational audit is on how efficiently and effectively functions interact.

d.      Special operational auditing assignments arise at the request of management.

 

 

24.

medium

b

The two most important qualities for an operational auditor are:

a.      personality and appearance.

b.      independence and competence.

c.       competence and technical training.

d.      academic background and sufficient experience.

 

 
25.

medium

a

Which of the following is not a difference between operational auditing and financial auditing?

a.      Both must be CPAs.

b.      Operational audit reports are usually of a restricted distribution while financial audit           reports are widely distributed.

c.       Operational audits often cover non-financial issues while financial audits do not.

d.      None of the above is a difference.

 

 
26.

medium

c

A typical objective of an operational audit is to determine whether an entity’s:

a.      internal control is adequately operating as designed.

b.      financial statements present fairly the results of operations.

c.       specific operating units are functioning efficiently and effectively.

b.      operational information is in accordance with generally accepted government auditing standards.

 

 
27. Which of the following can affect the independence of operational auditors?

 

medium   Responsibilities   Reporting Structure
d a. Yes   No  
  b. No   No  
  c. No   Yes  
  d. Yes   Yes  
     

 

28.

challenging

d

Which is not a purpose of an economy and efficiency audit?

a.      Whether the entity is acquiring, protecting, and using resources economically and           efficiently.

b.      The causes of inefficiencies and uneconomical practices.

c.       Whether the entity has complied with laws and regulations concerning matters of economy               and efficiency.

d.      Each of the above is a purpose.

 

 
29.

challenging

d

A(n) _________ audit emphasizes how efficiently and effectively functions interact.

a.      operational

b.      compliance

c.       financial

d.      organizational

 

 
30.

challenging

b

Which of the following is not a purpose of a program audit as performed by government auditors?

a.      Determination of the extent to which the desired results established by the legislature are being achieved.

b.      Determination of the causes of inefficiencies in sponsored programs.

c.       Determination of the effectiveness of organizations, programs and activities.

d.      Determination as to whether the entity has complied with laws and regulations applicable to the program.

 

 
31.

challenging

c

What distinguishes internal control evaluation and testing for financial and operational auditing?

a.      Purpose of the work.

b.      Scope of the work.

c.       Both a and b.

d.      Neither a nor b.

 

 
32.

challenging

c

Of the many hours of continuing professional education required every two years, how many must be in subjects related to the government environment and government auditing for auditors involved in planning, performing and reporting on audits under GAGAS?

a.      8 hours

b.      16 hours

c.       24 hours

d.      32 hours

 

 
33. To be effective, an internal audit department must report to:  
Challenging    
b   Operating departments   The accounting department
  a. Yes   Yes  
  b. No   No  
  c. Yes   No  
  d. No   Yes  
           
34.

challenging

External financial statement auditors must obtain evidence regarding what attributes of an internal audit department if the external auditors intend to rely on the internal auditor’s work?  
d    
    Independence from the Audit Committee   Competence
  a. Yes   Yes  
  b. No   No  
  c. Yes   No  
  d. No   Yes  
           

 

Essay Questions

 

35.

easy

 

What organization establishes auditing standards for internal auditors and what are those standards commonly called?

 

  Answer:

Auditing standards for internal auditors are established by the Internal Auditing Standards Board. They are commonly known as the “Red Book.”

 

 

36.

medium

What are several similarities between internal and external auditors?

 

  Answer:

·         Both must be competent as auditors and remain objective in performing their work and reporting their results.

·         Both follow a similar methodology in performing their audits, including planning and performing tests of controls and substantive tests.

·         Both consider risk and materiality in deciding the extent of their tests and evaluating results. However, their decisions about materiality and risks may differ, because external users may have different needs than management or the board.

 

 

37.

medium

External auditors typically consider internal auditors effective if they meet three criteria. What are these criteria?

 

  Answer:

External auditors typically consider internal auditors effective if they are:

·         Independent of the operating units being evaluated

·         Competent and well-trained

·         Have performed relevant audit tests of the internal controls and financial statements

 

 

38.

medium

How do the risk and materiality thresholds change in a government audit compared to a financial statement audit of a public company?

 

  Answer:

The Yellow Book recognizes that in government audits the thresholds of acceptable audit risk and materiality may be lower than in an audit of a commercial enterprise. This is because of the sensitivity of government activities and their public accountability.

 

 

 

39.

medium

Discuss each of the three phases of an operational audit.

 

  Answer:

·         Planning. In the planning phase, the auditor must determine the scope of the engagement, staff the engagement, obtain background information about the organizational unit, understand internal control, and decide on the appropriate evidence to accumulate.

·         Evidence accumulation and evaluation. In operational auditing, it is common to use documentation, client inquiry, and observation extensively, while confirmation and reperformance are used less extensively for most operational audits than for financial audits.

·         Reporting and follow-up. The audit report is tailored to address the scope of the audit, findings, and recommendations and is typically sent only to management. When recommendations are made to management, follow-up is done to determine whether the recommended changes were made, and if not, why.

 

 

40.

medium

The Institute of Internal Auditors has established Ethical Principles for its members. List each of the principles.

 

  Answer:

The IIA’s ethical principles are:

·         Integrity.

·         Objectivity.

·         Confidentiality.

·         Competency.

 

 

41.

medium

Define internal auditing.

 

  Answer:

 

According to the IIA: “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”

 

 

42.

medium

Discuss three major differences between operational and financial auditing.

 

  Answer:

·         Purpose of the audit. Financial auditing emphasizes whether historical information was correctly recorded, whereas operational auditing emphasizes effectiveness and efficiency.

·         Distribution of the reports. For financial auditing, the report typically goes to many users of financial statements, such as stockholders and bankers, whereas operational audit reports are intended primarily for management.

·         Inclusion of nonfinancial areas in operational auditing. Operational audits cover any aspect of efficiency and effectiveness in an organization, whereas financial audits are limited to matters that directly affect the fairness of financial statement presentations.

 

 

 

43.

medium

Discuss each of the three broad categories (types) of operational audits.

 

  Answer:

·         Functional. A functional audit deals with auditing one or more functions (e.g., purchasing) in an organization.

·         Organizational. An organizational audit deals with an entire organizational unit, such as a department, branch, or subsidiary.

·         Special assignments. Special assignments audits arise at the request of management when there is a need to investigate a particular area, such as investigating the possibility of fraud in a division, or determining the cause of an ineffective EDP system.

 

 

44.

medium

Operational auditing is the review of an organization for efficiency and effectiveness. Discuss what is meant by the terms “effectiveness” and “efficiency.”

 

  Answer:

·         Effectiveness refers to the degree to which the organization’s objectives and goals are accomplished.

·         Efficiency refers to the degree to which costs are reduced without reducing effectiveness.

 

 

45.

challenging

Audit tests as required by the Single Audit Act must meet several specific objectives. One objective is to determine “whether the amounts reported as expenditures were for allowable services.” Identify three other specific objectives.

 

  Answer:

·         Whether the records show that those who received services or benefits were eligible to receive them.

·         Whether matching requirements, levels of effort, and earmarking limitations were met.

·         Whether federal financial reports and claims for advances and reimbursements contain information that is supported by the books and records from which the basic financial statements have been prepared.

·         Whether amounts claimed or used for matching were determined in accordance with OMB Circular A-87 and OMB Circular A-102.

 

 

46.

challenging

The auditing standards of the Yellow Book are consistent with the ten generally accepted auditing standards of the AICPA. There are, however, important additions/modifications in the Yellow Book. For example, the Yellow Book recognizes that materiality and risk are lower due to the nature of the government enterprise. Discuss the other additions/modifications.

 

  Answer:

·         Quality control. Auditors of government entities must have an appropriate system of internal quality control and participate in an external quality control review program.

·         Compliance auditing. The audit should be designed to provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements that have a material and direct effect on the financial statements.

·         Reporting. The report on financial statements must describe the scope of the auditors’ testing of compliance with laws and regulations and internal controls and present the results of those tests, or refer to a separate report containing that information.

 

 

47.

challenging

In addition to an opinion on whether the financial statements are in accordance with GAAP, identify four other reports required by the OMB Circular A-133.

 

  Answer:

The following reports are required:

·         An opinion as to whether the schedule of federal awards is presented fairly in all material respects in relation to the financial statements as a whole.

·         A report on internal control related to the financial statements and major programs.

·         A report on compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements. This report can be combined with the report on internal control.

·         A schedule of findings and questioned costs.

 

 

 

Other Objective Answer Format Questions

 

48. Match seven of the terms (a-o) with the descriptions/definitions provided below (1-7):
medium  
  a.      Compliance audit
  b.      Economy and efficiency audit
  c.       Effectiveness
  d.      Efficiency
  e.       Functional audit
  f.       Government Auditing Standards
  g.       Government audit
  h.      Institute of Internal Auditors
  i.        Operational auditing
  j.       Organizational audit
  k.      Program audit
  l.        Single Audit Act
  m.     Special assignment
  n.      IIA Practice Standards
  o.      Statements on Internal Auditing Standards
   
f                   1.       The official title of the Yellow Book.

 

m                   2.       A management request for an operational audit for a specific purpose, such as investigating the possibility of fraud in a division or making recommendations for reducing the cost of a manufactured product.

 

b                   3.       A government audit to determine whether an entity is acquiring, protecting, and using its resources economically and efficiently and whether the entity has complied with laws and regulations concerning such matters.

 

c                   4.       The degree to which the organization’s objectives are accomplished.

 

i                   5.       The review of an organization for efficiency and effectiveness.

 

l                   6.       Federal legislation that provides for a single coordinated audit to satisfy the audit requirements of all federal funding agencies.

 

o                   7.       Statements issued by the Internal Auditing Standards Board of the IIA to provide authoritative interpretation of the IIA Practice Standards.

 

49.

easy

b

Independence is a fundamental ethical principle for internal auditors.

a.      True

b.      False

 

50.

easy

b

Current professional auditing standards prohibit external auditors from using internal auditors for direct assistance on external audits.

a.      True

b.      False

 

51.

easy

b

Current professional auditing standards require external auditors to use internal auditors for direct assistance on external audits.

a.      True

b.      False

 

52.

easy

a

The objectives of internal auditors are considerably broader than the objectives of external auditors.

a.          True

b.          False

 

53.

easy

a

For financial auditing, the audit report typically goes to many users of financial statements, whereas operational audit reports are intended primarily for management.

a.      True

b.      False

 

54.

easy

a

Integrity is one of the IIA’s ethical principles.

a.      True

b.      False

 

55.

easy

b

Operational audits are primarily geared toward compliance.

a.      True

b.      False

 

56.

easy

b

Effectiveness refers to the degree to which costs are reduced without reducing efficiency.

a.      True

b.      False

 

57.

easy

a

Efficiency refers to the degree to which costs are reduced without reducing effectiveness.

a.      True

b.      False

 

58.

easy

b

Internal auditing standards are included in the Yellow Book.

a.      True

b.      False

 

59.

easy

a

Government auditing standards are included in the Yellow Book.

a.      True

b.      False

 

60.

easy

a

Effectiveness is concerned with whether defined goals are achieved, whereas efficiency is concerned with whether the goals are achieved with a minimum use of resources.

a.      True

b.      False

 

61.

easy

b

Operational audits may be performed by internal auditors and government auditors, but not by external auditors.

a.      True

b.      False

62.

easy

a

Benchmarking is one source of evaluation criteria for completing an operational audit.

a.      True

b.      False

 

63.

easy

a

The two most important qualities for an internal auditor to possess are independence and competence.

a.      True

b.      False

 

64.

easy

b

Program audits are primarily focused on inefficient uses of federal funds in sponsored programs.

a.      True

b.      False

 

65.

easy

a

The formal name of the Yellow Book is Government Auditing Standards.

a.      True

b.      False

 

66.

medium

a

Professional guidelines for performing internal audits for companies are not as well-defined as for external audits.

a.      True

b.      False

 

67.

medium

b

To help them remain independent of the operations they audit, internal auditors should report directly to the controller.

a.      True

b.      False

 

68.

medium

a

An operational auditor may use “engineered standards” as evaluation criteria.

a.      True

b.      False

 

69.

medium

a

The Internal Auditing Standards Board issues Statements on Internal Auditing Standards.

a.      True

b.      False

 

70.

medium

a

Operational audits are often categorized as functional, organizational, or special assignments.

a.      True

b.      False

 

71.

medium

b

Internal auditors should have the authority to require implementation of suggestions for improvement.

a.      True

b.      False

 

72.

medium

b

The “Red Book” specifies all auditing standards issued by the U.S. General Accounting Office.

a.      True

b.      False

 

73.

challenging

a

One disadvantage of functional auditing is the failure to evaluate interrelated functions.

a.      True

b.      False

 

Reviews

There are no reviews yet.

Be the first to review “Auditing and Assurance Services An Integrated Approach 13th Edition by Arens-Test Bank”

Your email address will not be published. Required fields are marked *