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Internal Control-3

  1. Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of an internal
    control procedure?

    A. Confirmation with outside parties.

    B. Inquiry of client personnel.

    C. Recomputation of account balanced amounts.

    D. Observation of client personnel.
    D. Observation of client personnel.


    Confirmation with outside parties and recomputation of account balances are substantive procedures designed to gather evidence about the fair presentation of account balances. Inquiry of client personnel would provide some evidence about the operation of an internal control, but the best evidence about the effectiveness of operation of an internal control would be provided through the auditor's observation of client personnel.
  2. An auditor should obtain sufficient knowledge of an entity's accounting system to understand the

    A. Safeguards used to limit access to computer facilities.

    B. Process used to prepare significant accounting estimates.

    C. Procedures used to assure proper authorization of transactions.

    D. Policies used to detect the concealment of irregularities.
    B. Process used to prepare significant accounting estimates.


    Accounting estimates are an area of concern to the auditors because of the amount of judgmentand discretion they entail. The internal control structure may reduce the likelihood of material errors occurring related to the preparation of accounting estimates. As a result, the auditor should understand the internal control structure related to preparing accounting estimates.
  3. In obtaining an understanding of an entity's internal control structure policies and procedures that are relevant to audit planning, anauditor is required to obtain knowledge about the

    A. Design of the policies and procedures pertaining to the internal control structure elements.

    B. Effectiveness of the policies and procedures that have been placed in operation.

    C. Consistency with which the policies and procedures are currently being applied.

    D. Control procedures related to each principal transaction class and account balance.
    A. Design of the policies and procedures pertaining to the internal control structure elements.


    • In obtaining an understanding of an entity's internal controls that are relevant to audit planning, an auditor is required to obtain knowledge about the
    • design of relevant internal controls pertaining to financial reporting in each of the five internal control components. Note that only those
    • internal controls which impact the financialstatements are to be considered. It is not necessary to understand and evaluate all of an entity's internal controls.

    • An auditor is requiredto obtain an understanding of the design of controls relevant to an audit and to determine whether such controls have been placed in
    • operation. Operating effectiveness goes a step further and looks at how the control was applied, the consistency with which it was applied, and by whom it was applied. If the auditor believes that a reduction in control risk could be supported by performing tests of controls, the auditor may opt to test the effectiveness of the internal controls placed in operation. There is no requirement that such tests be
    • performed.
  4. In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to

    A. Identify specific internal control structure procedures relevant to management's financial statement assertions.

    B. Perform tests of controls to evaluate the effectiveness of the entity's accounting system.

    C. Determine whether procedures are suitably designed to prevent or detect material misstatements.


    D. Document the auditor's understanding of the entity's internal control structure.


    The third standard of
    field work requires the auditor to obtain an understanding of the entity
    and its environment, including the internal control structure in order
    to plan the audit. That understanding must be documented.
    D. Document the auditor's understanding of the entity's internal control structure.


    The third standard of field work requires the auditor to obtain an understanding of the entity and its environment, including the internal control structure in order to plan the audit. That understanding must be documented.
  5. An auditor would mostlikely be concerned with internal control structure policies and procedures that provide reasonable assurance about the


    A. Efficiency of management's decision-making process.

    B. Appropriate prices the entity should charge for its products.

    C. Methods of assigning production tasks to employees.

    D. Entity's ability to process and summarize financial data.
    D. Entity's ability to process and summarize financial data.

    • An auditor is primarily concerned with internal controls that provide reasonable assurance as to an entity's ability to prepare financial statements. As a
    • result, the auditor would be interested in controls over the processingand summarization of financial data.
  6. For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by

    A. Reperformance and corroboration.

    B. Observation and inquiry.

    C. Inspection and vouching.

    D. Confirmation and recomputation.
    B. Observation and inquiry.

    Segregation of duties and similar controls which lack documentation of their functioning are best tested through observation and inquiry.
Author
windgrl
ID
129045
Card Set
Internal Control-3
Description
1
Updated

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