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Auditing and Assurance Services, 14e (Arens)
Chapter 10 Section 404 Audits of Internal Control and Control
Risk
Learning Objective 10-1
1)Which of the following is not one of the three primary objectives of effective
internal control? A) reliability of financial reporting
B) efficiency and effectiveness of
operations C) compliance with laws
and regulations D) assurance of
elimination of business risk Answer:
D
Terms: Internal control objectives
Diff: Easy
Objective: LO 10-1
AACSB: Analytic skills
2)The Public Company Accounting Oversight Board states that reasonable
assurance allows a: A) small likelihood of ineffective internal controls.
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. Answer: B
Terms: Reasonable assurance
Diff: Easy
Objective: LO 10-1
AACSB: Reflective thinking skills
Topic: Public
3)Which of the following is most correct regarding the requirements under Section 404
of the Sarbanes Oxley Act?
A) The audits of internal control and the financial statements provide reasonable
assurance as to misstatements.
B) The audit of internal control provides absolute assurance of misstatement.
C) The audit of financial statements provides absolute assurance of misstatement.
D) The audits of internal control and the financial statements provide absolute
assurance as to misstatements.
Answer: A
Terms: Sarbanes Oxley Act Section 404
Diff: Easy
Objective: LO 10-1
AACSB: Reflective thinking skills
1
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4)Which of management's assertions with respect to implementing internal controls
is the auditor primarily concerned?
A) efficiency of operations
B) reliability of financial
reporting C) effectiveness of
operations
D) compliance with applicable laws and
regulations Answer: B
Terms: Management's assertions
Diff: Easy
Objective: LO 10-1
AACSB: Reflective thinking skills
5)To issue a report on internal control over financial reporting for a public company, an
auditor must: 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. Answer: C
Terms: Internal control over financial reporting for public company
Diff: Moderate
Objective: LO 10-1
AACSB: Reflective thinking skills
Topic: Public
6)A company frequently sells products at a price below inventory cost. Essential
controls in the risk assessment process would include:
A) adequate controls that address the risk of overstating inventory.
B) adequate controls that address the risk of not including a purchased item
in inventory. C) adequate controls that address the risk of understatement of
inventory.
D) adequate controls that address the risk of overstatement of cost of
goods sold. Answer: A
Terms: Controls in risk assessment process
Diff: Moderate
Objective: LO 10-1
AACSB: Analytic skills
7)Internal controls are not designed to provide reasonable assurance that:
A) all frauds will be detected.
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.
Answer: A
Terms: Internal controls; reasonable assurance
Diff: Moderate
Objective: LO 10-1
AACSB: Analytic skills
2
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
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8)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, non-public, and not-for-profit
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 anti-fraud legal provisions.
The auditor's focus in both the audit of financial statements and the audit of internal
controls is on the controls over the reliability of financial reporting plus those controls
over operations and compliance with laws and regulations that could materially affect
financial reporting.
Terms: Three broad objectives management has for internal control
Diff: Easy
Objective: LO 10-1
AACSB: Reflective thinking skills
9)The Sarbanes-Oxley Act of 2002 requires that public companies issue an internal
control report. A) True
B) False
Answer: A
Terms: Sarbanes-Oxley Act
Diff: Easy
Objective: LO 10-1
AACSB: Reflective thinking skills
Topic: SOX
10) 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
Answer:
A
Terms: Evaluating and testing internal controls
Diff: Moderate
Objective: LO 10-1
AACSB: Reflective thinking skills
3
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Learning Objective 10-2
1)Which of the following is responsible for establishing a private company's
internal control? A) Senior Management
B) Internal Auditors
C) Senior Management and
auditors D) Audit committee
Answer: A
Terms: Internal control
Diff: Easy
Objective: LO 10-2
AACSB: Reflective thinking skills
2)Two key concepts that underlie management's design and implementation of
internal control are: A) costs and materiality.
B) absolute assurance and costs.
C) inherent limitations and reasonable
assurance. D) collusion and materiality.
Answer: C
Terms: Internal control design and implementation
Diff: Easy
Objective: LO 10-2
AACSB: Analytic skills
3)The PCAOB places responsibility for the reliability of internal controls over the
financial reporting process to:
A) the company's board of directors.
B) the audit committee of the board of
directors. C) the CEO and the CFO.
D) the CFO and the Independent
Auditors. Answer: C
Terms: PCAOB; internal control responsibility
Diff: Easy
Objective: LO 10-2
AACSB: Reflective thinking skills
Topic: Public
4
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Auditing and Assurance Services, 14e (Arens)
Chapter 10 Section 404 Audits of Internal Control and Control
Risk
Learning Objective 10-1
1)Which of the following is not one of the three primary objectives of effective
internal control? A) reliability of financial reporting
B) efficiency and effectiveness of
operations C) compliance with laws
and regulations D) assurance of
elimination of business risk Answer:
D
Terms: Internal control objectives
Diff: Easy
Objective: LO 10-1
AACSB: Analytic skills
2)The Public Company Accounting Oversight Board states that reasonable
assurance allows a: A) small likelihood of ineffective internal controls.
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. Answer: B
Terms: Reasonable assurance
Diff: Easy
Objective: LO 10-1
AACSB: Reflective thinking skills
Topic: Public
3)Which of the following is most correct regarding the requirements under Section 404
of the Sarbanes Oxley Act?
A) The audits of internal control and the financial statements provide reasonable
assurance as to misstatements.
B) The audit of internal control provides absolute assurance of misstatement.
C) The audit of financial statements provides absolute assurance of misstatement.
D) The audits of internal control and the financial statements provide absolute
assurance as to misstatements.
Answer: A
Terms: Sarbanes Oxley Act Section 404
Diff: Easy
Objective: LO 10-1
AACSB: Reflective thinking skills
1
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
, To
To downloaddownload moremore ebooks,ebooks, slides,slides, SMSM andand TBTB visit:visit: http://testbanklancerhtp:/testbanklancer..blogspotblogspot..comcom
4)Which of management's assertions with respect to implementing internal controls
is the auditor primarily concerned?
A) efficiency of operations
B) reliability of financial
reporting C) effectiveness of
operations
D) compliance with applicable laws and
regulations Answer: B
Terms: Management's assertions
Diff: Easy
Objective: LO 10-1
AACSB: Reflective thinking skills
5)To issue a report on internal control over financial reporting for a public company, an
auditor must: 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. Answer: C
Terms: Internal control over financial reporting for public company
Diff: Moderate
Objective: LO 10-1
AACSB: Reflective thinking skills
Topic: Public
6)A company frequently sells products at a price below inventory cost. Essential
controls in the risk assessment process would include:
A) adequate controls that address the risk of overstating inventory.
B) adequate controls that address the risk of not including a purchased item
in inventory. C) adequate controls that address the risk of understatement of
inventory.
D) adequate controls that address the risk of overstatement of cost of
goods sold. Answer: A
Terms: Controls in risk assessment process
Diff: Moderate
Objective: LO 10-1
AACSB: Analytic skills
7)Internal controls are not designed to provide reasonable assurance that:
A) all frauds will be detected.
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.
Answer: A
Terms: Internal controls; reasonable assurance
Diff: Moderate
Objective: LO 10-1
AACSB: Analytic skills
2
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
, To
To downloaddownload moremore ebooks,ebooks, slides,slides, SMSM andand TBTB visit:visit: http://testbanklancerhtp:/testbanklancer..blogspotblogspot..comcom
8)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, non-public, and not-for-profit
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 anti-fraud legal provisions.
The auditor's focus in both the audit of financial statements and the audit of internal
controls is on the controls over the reliability of financial reporting plus those controls
over operations and compliance with laws and regulations that could materially affect
financial reporting.
Terms: Three broad objectives management has for internal control
Diff: Easy
Objective: LO 10-1
AACSB: Reflective thinking skills
9)The Sarbanes-Oxley Act of 2002 requires that public companies issue an internal
control report. A) True
B) False
Answer: A
Terms: Sarbanes-Oxley Act
Diff: Easy
Objective: LO 10-1
AACSB: Reflective thinking skills
Topic: SOX
10) 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
Answer:
A
Terms: Evaluating and testing internal controls
Diff: Moderate
Objective: LO 10-1
AACSB: Reflective thinking skills
3
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
, To
To downloaddownload moremore ebooks,ebooks, slides,slides, SMSM andand TBTB visit:visit: http://testbanklancerhtp:/testbanklancer..blogspotblogspot..comcom
Learning Objective 10-2
1)Which of the following is responsible for establishing a private company's
internal control? A) Senior Management
B) Internal Auditors
C) Senior Management and
auditors D) Audit committee
Answer: A
Terms: Internal control
Diff: Easy
Objective: LO 10-2
AACSB: Reflective thinking skills
2)Two key concepts that underlie management's design and implementation of
internal control are: A) costs and materiality.
B) absolute assurance and costs.
C) inherent limitations and reasonable
assurance. D) collusion and materiality.
Answer: C
Terms: Internal control design and implementation
Diff: Easy
Objective: LO 10-2
AACSB: Analytic skills
3)The PCAOB places responsibility for the reliability of internal controls over the
financial reporting process to:
A) the company's board of directors.
B) the audit committee of the board of
directors. C) the CEO and the CFO.
D) the CFO and the Independent
Auditors. Answer: C
Terms: PCAOB; internal control responsibility
Diff: Easy
Objective: LO 10-2
AACSB: Reflective thinking skills
Topic: Public
4
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
