# Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to

###### Question:

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

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

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

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

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

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

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

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

9. Which of the following is notconsidered one of the five major components of internal control?
A. Risk assessment.
B. Segregation of duties.
C. Control activities.
D. Monitoring.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

28. Which of the following is correct with respect to control deficiencies discovered during an audit?
A. Auditors must communicate and recommend corrections relating to all material weaknesses in internal control to management.
B. All material weaknesses in internal control should be reported to the audit committee.
C. All such matters must be communicated to the audit committee and regulatory agencies.
D. All control deficiencies are also significant deficiencies.

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

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

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

32. The program flowcharting symbol representing a decision is a:
A. Triangle.
B. Circle.
C. Rectangle.
D. Diamond.

33. Controls are not designed to provide assurance that:
A. Transactions are executed in accordance with management's authorization.
B. Fraud will be eliminated.
C. Access to assets is permitted only in accordance with management's authorization.
D. The recorded accountability for assets is compared with the existing assets at reasonable intervals.

34. Which of the following audit tests would be regarded as a test of a control?
A. Tests of the specific items making up the balance in a given general ledger account.
B. Tests confirming receivables.
C. Tests of the signatures on canceled checks to board of director's authorizations.
D. Tests of the additions to property, plant, and equipment by physical inspection.

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

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

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

38. Of the following statements about internal control, which one is not valid?
A. No one person should be responsible for the custodial responsibility and the recording responsibility for an asset.
B. Transactions must be properly authorized before such transactions are processed.
C. Because of the cost/benefit relationship, a client may apply control procedures on a test basis.
D. Control activities reasonably insure that collusion among employees can not occur.

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

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

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

42. When performing an audit of internal control under PCAOB requirements, auditors evaluate control:
A. Option A
B. Option B
C. Option C
D. Option D

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