Chapter 3 – Internal Control Over Financial Reporting: Responsibilities of Management and the
External Auditors
1. Internal control is a process designed to guarantee the achievement of the objectives of reliable financial
reporting, compliance with laws and regulations and ineffective and inefficient operations.
a.
True
b.
False
False
1
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COSO: A Framework for Internal Control
2. Internal control is a process, effected by an entity’s board of directors, management, and other personnel,
designed to provide reasonable assurance regarding the achievement of objectives relating to operations,
reporting, and compliance.
a.
True
b.
False
True
1
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COSO: A Framework for Internal Control
3. The quality of an organization’s internal control will affect both the audit approach and the amount of testing
needed for an engagement.
a.
True
b.
False
True
1
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COSO: A Framework for Internal Control
4. Control activities are the component of internal control that includes control actions that have been
established by policies and procedures
a.
True
b.
False
True
1
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5. Control activities implemented to mitigate transaction processing risk that typically affect only certain
Chapter 3 – Internal Control Over Financial Reporting: Responsibilities of Management and the
External Auditors
processes, transactions, accounts, and assertions are referred as transaction or application controls.
a.
True
b.
False
False
1
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6. An organization’s commitment to integrity is demonstrated through the tone set by the board and
management.
a.
True
b.
False
True
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Components and Principles of Internal Control
7. Effective control not only identifies risk but also responds to these risks appropriately.
a.
True
b.
False
True
1
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COSO: A Framework for Internal Control
8. Controls to monitor results of operations are considered to be transaction controls.
a.
True
b.
False
False
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AUDT.JOHN.16.03-02 – LO: 03-02
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Defining Internal Control
9. Preventive controls are designed to prevent the occurrence of a misstatement.
a.
True
Chapter 3 – Internal Control Over Financial Reporting: Responsibilities of Management and the
External Auditors
b.
False
True
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Describe the Control Activities Component of Internal Control
10. Generally, highly regulated entities have more complex control activities than less-regulated entities.
a.
True
b.
False
True
1
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COSO Component- Control Activities
11. The better the quality of the internal controls, the more an auditor can rely on the controls.
a.
True
b.
False
True
1
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Importance of Internal Control to Financial Statement Audits
12. The five major components of an organization’s internal control are: the control environment, risk
assessment, control activities, information and communication, and monitoring.
a.
True
b.
False
True
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COSO: A Framework for Internal Control
13. A company’s internal auditing function should not be considered when assessing the effectiveness of
internal controls.
a.
True
b.
False
Chapter 3 – Internal Control Over Financial Reporting: Responsibilities of Management and the
External Auditors
False
1
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Control Environment
14. An organization’s control environment is established and maintained by the internal auditing department.
a.
True
b.
False
False
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COSO: A Framework for Internal Control
15. A material weakness in internal control is a deficiency, or a combination of deficiencies, in internal control
over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s
annual or interim financial statements will not be prevented or detected on a timely basis.
a.
True
b.
False
True
1
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Examples of Common Internal Control Activities
16. Physical controls are necessary to protect and safeguard assets from accidental or intentional destruction and
theft.
a.
True
b.
False
True
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Examples of Common Internal Control Activities
17. Monitoring of the internal controls involves assessment by appropriate personnel of the design and
operation of controls on a timely basis and taking necessary actions.
a.
True
b.
False
True
18. An auditor needs to understand a company’s internal controls in order to anticipate the types of material
misstatements that may occur.
a.
True
b.
False
True
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Importance of Internal Control Over Financial Reporting
19. Segregation of duties is a control activity that is designed to protect against the risk that an individual could
both perpetrate and cover up a fraud.
a.
True
b.
False
True
1
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Examples of Common Internal Control Activities
20. In addition to controls being specific, they may be broad, such as policies regarding a code of ethics.
a.
True
b.
False
True
1
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COSO: A Framework for Internal Control
21. Physical controls to safeguard assets are not intended to include simple controls such as fences and locks.
a.
True
b.
False
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22. Self-checking digit algorithms have been developed to test for transposition errors associated with
identification numbers
a.
True
b.
False
True
1
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23. Preventive controls are generally more cost-efficient than detective controls.
a.
True
b.
False
False
1
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COSO Component: Control Activities
24. A walkthrough involves following a transaction back from when it is reflected in the financial records to
when it originated to determine if the controls are effectively designed and have been implemented.
a.
True
b.
False
False
1
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Auditor Evaluation of Internal Controls
25. Performing a walkthrough provides an understanding of the nature of processing in important accounting
applications.
a.
True
b.
False
True
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Examples of Common Internal Control Activities
26. The payroll department should be responsible for signing payroll checks.
a.
True
b.
False
False
1
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Auditor Evaluation of Internal Controls
27. A strong control environment can reduce all the financial reporting risks to zero.
a.
True
b.
False
False
1
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COSO: A Framework for Internal Control
28. Management’s risk assessment process should be performed only by senior-level management.
a.
True
b.
False
False
1
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COSO Component: Risk Assessment
29. Corporate policies designed to attract, train, and evaluate competent employees are considered to be control
activities in the COSO framework for internal controls.
a.
True
b.
False
False
1
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Auditor Evaluation of Internal Controls
30. Management is obligated to report significant deficiencies in the control structure in their annual report on
internal control effectiveness required by the Sarbanes-Oxley Act.
a.
True
b.
False
False
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Reporting
31. One of the advantages of a computerized accounting system is that the computerized system eliminates the
need for internal controls.
a.
True
b.
False
False
1
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32. A transaction trail includes the documents and records that allow an auditor to trace a transaction from its
origination through to its final disposition, or vice versa.
a.
True
b.
False
True
1
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Auditor Evaluation of Internal Controls
33. Several significant deficiencies in internal controls may constitute a material weakness.
a.
True
b.
False
True
1
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34. Management should test all internal controls for effectiveness when performing their annual evaluation of
the internal control structure.
a.
True
b.
False
False
1
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Reporting
35. Managers must use professional judgment to determine whether identified control deficiencies rise to the
level of a significant deficiency or material weakness.
a.
True
b.
False
True
1
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Management Reports on Internal Control over Financial Reporting
36. Walkthroughs and inquiries are often used to obtain an understanding of internal controls.
a.
True
b.
False
True
1
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Auditor Evaluation of Internal Controls
37. A deficiency in design of internal controls exists when an existing control is not properly designed so that,
even if the control operates as designed, the control objective would not be met.
a.
True
b.
False
True
1
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38. Segregation of duties is considered a part of the monitoring component of the COSO framework for internal
control structure.
a.
True
b.
False
False
1
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COSO Component: Control Activities
39. A well-controlled organization has an appropriate structure and clearly defined lines of responsibility and
authority where everyone in the organization has equal responsibility for the effective operation of internal
control.
a.
True
b.
False
False
1
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Auditor Evaluation of Internal Controls
40. Transaction oriented controls are designed to ensure that transactions are properly valued.
a.
True
b.
False
True
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COSO Component: Control Activities
41. All organizations should evaluates and communicates internal control deficiencies in a timely manner to
those parties responsible for taking corrective action, including senior management and the board of directors,
as appropriate.
a.
True
b.
False
True
1
42. Preventive controls are designed to provide reasonable assurance that the correct program is used for
processing, all transactions are processed, and the transactions update appropriate files.
a.
True
b.
False
False
1
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Importance of Internal Control to Financial Statement Audits
43. One of the components of internal control, monitoring, refers to the process of identifying, capturing, and
exchanging information in a timely fashion to enable accomplishment of the organization’s objectives.
a.
True
b.
False
False
1
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COSO: A Framework for Internal Control
44. A material control weakness is a deficiency in internal control such that a reasonable probability exists that
a material misstatement of the company’s financial statements may not be prevented or detected on a timely
basis..
a.
True
b.
False
False
1
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Reporting
45. Control activities may be implemented at the organizational level and at the transactional level.
a.
True
b.
False
True
Management Reports on Internal Control over Financial Reporting
46. The quality of an organization’s internal controls affect which of the following?
a.
The reliability of financial data.
b.
The ability of management to make good decisions.
c.
The ability to remain in business.
d.
All of the above.
d
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Importance of Internal Control to Financial Statement Audits
47. Internal control is a process designed to achieve objectives in which one of the following categories?
a.
Reliability of financial reporting.
b.
Compliance with applicable laws.
c.
Operational Effectiveness.
d.
All of the above.
d
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COSO: A Framework for Internal Control
48. Which of the following is not a reason that the auditor must gain an understanding of the client’s internal
control system?
a.
Better understand the client, its risks, and how it manages those risks.
b.
Assess control risk and identify the types of financial statement misstatements that are most likely to
occur.
c.
Plan direct tests of account balances to determine if misstatements have occurred.
d.
All are reasons why auditors must gain an understanding of the client’s internal control system.
d
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COSO: A Framework for Internal Control
49. Which one of the following groups is interested in an organization’s control structure?
a.
Board members.
b.
Lenders.
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COSO: A Framework for Internal Control
Chapter 3 – Internal Control Over Financial Reporting: Responsibilities of Management and the
External Auditors
c.
Auditors.
d.
All of the above.
d
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COSO: A Framework for Internal Control
50. With whom does the tone of internal control typically originate?
a.
Auditors.
b.
Employees.
c.
Management.
d.
Stockholders.
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COSO: A Framework for Internal Control
51. Which of the following is not included as a components of an organization’s internal control structure in the
COSO framework?
a.
Control risk.
b.
The control environment.
c.
Risk assessment.
d.
Control activities.
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COSO: A Framework for Internal Control
52. What is the primary benefit of effective internal control in an organization?
a.
Achievement of certain organizational goals.
b.
Completion of a successful audit for the entity.
c.
Shareholder involvement in the company’s success.
d.
Obtaining profitability and financial strength.
1
53. Which one of the following COSO components of internal controls influences the tone for the organization?
a.
Control risk assessment.
b.
Control environment.
c.
Information and communication.
d.
Monitoring.
b
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COSO: A Framework for Internal Control
54. Which of the following is not part of the control environment?
a.
Management philosophy and operating style.
b.
Methods of assigning authority and responsibility.
c.
Personnel policies and practices.
d.
Control activities.
d
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COSO: A Framework for Internal Control
55. Which of the following is not one of the underlying principles of an effective control environment as
developed by COSO?
a.
The organization demonstrates a commitment to integrity and ethical values.
b.
The board of directors demonstrates independence from management and exercises oversight for the
development and performance of internal control.
c.
Management establishes, with board oversight, structures, reporting lines, and appropriate authorities
and responsibilities in pursuit of objectives.
d.
The organization considers the potential for fraud in assessing risks to the achievement of objectives.
d
1
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COSO: A Framework for Internal Control
56. Which of the following is a major component of an organization’s internal control structure?
a.
Major new financing.
b.
The financial environment.
Importance of Internal Control to Financial Statement Audits
Chapter 3 – Internal Control Over Financial Reporting: Responsibilities of Management and the
External Auditors
c.
Risk assessment.
d.
Telecommunication equipment.
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COSO: A Framework for Internal Control
57. Which COSO component of internal control concerns the process of identifying, capturing, and exchanging
information in a timely fashion to enable accomplishment of the organization’s objectives?
a.
Control activities.
b.
Information and communication.
c.
Monitoring.
d.
Control environment.
b
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COSO: A Framework for Internal Control
58. Which of the following services does the PCAOB require auditors of public companies to perform?
a.
A financial statement audit and an attest audit.
b.
A financial statement audit and an assurance audit.
c.
A financial statement audit and agreed upon procedures.
d.
A financial statement audit and an examination of the effectiveness of internal controls.
d
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COSO: A Framework for Internal Control
59. The information and communication component of internal control includes which of the following?
a.
The organization deploys control activities through policies that establish what is expected and in
procedures that put policies into action.
b.
The organization obtains or generates and uses relevant, quality information to support the
functioning of other components of internal control.
c.
The organization identifies and assesses changes that could significantly impact the system of
internal control.
d.
All of the above.
60. Which of the following best describes the purpose of personnel policies and procedures?
a.
Ensure the organization hires the right people.
b.
Ensure the organization complies with federal and state laws in its hiring and retention decisions.
c.
Ensure the organization has employees that are properly trained and supervised.
d.
Ensure the organization performs all of the above.
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COSO: A Framework for Internal Control
61. Which of the following is not part of management’s report on internal controls?
a.
Management responsibility for control of financial reporting.
b.
The framework used to evaluate internal control.
c.
An assessment of the effectiveness of the company’s internal control.
d.
A statement indicating the extent of tests performed to assess controls.
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62. Which one of the following represents a control deficiency?
a.
A missing control that is required for achievement of objectives.
b.
A control that operates as designed.
c.
A control that ensures the reliability of financial reporting.
d.
A control that does not prevent immaterial errors.
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Management Reports on Internal Control over Financial Reporting
63. Internal controls may be preventive or detective.Which of the following controls is preventive?
a.
Requiring two persons to open mail containing payments.
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COSO: A Framework for Internal Control