1 As part of understanding internal control an auditor is
1. As part of understanding internal control, an auditor is not required to
a. Consider factors that affect the risk of material misstatement.
b. Ascertain whether internal control policies and procedures have been placed in operation.
c. Identify the types of potential misstatements that can occur.
d. Obtain knowledge about the operating effectiveness of internal control.

2. The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with
a. Evidence to use in reducing detection risk.
b. Knowledge necessary to plan the audit.
c. A basis for modifying tests of controls.
d. Information necessary to prepare flowcharts.

3. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that
a. Tests of controls may fail to identify controls relevant to assertions.
b. Material misstatements may exist in the financial statements.
c. Specified controls requiring segregation of duties may be circumvented by collusion.
d. Entity policies may be overridden by senior management.

4. Audit evidence concerning segregation of duties ordinarily is best obtained by
a. Performing tests of transactions that corroborate management’s financial statement assertions.
b. Observing the employees as they apply specific controls.
c. Obtaining a flowchart of activities performed by available personnel.
d. Developing audit objectives that reduce control risk.

5. Regardless of the assessed level of control risk, an auditor would perform some
a. Tests of controls to determine their effectiveness.
b. Analytical procedures to verify the design of controls.
c. Substantive tests to restrict detection risk for significant transaction classes.
d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

6. Which of the following is a step in an auditor’s decision to assess control risk below the maximum?
a. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls.
b. Perform tests of details of transactions and account balances to identify potential errors and fraud.
c. Identify specific controls that are likely to detect or prevent material misstatements.
d. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

7. In an audit of financial statements, an auditor’s primary consideration regarding a control is whether it
a. Reflects management’s philosophy and operating style.
b. Affects management’s financial statement assertions.
c. Provides adequate safeguards over access to assets.
d. Enhances management’s decision-making processes.

8. After gaining an understanding of internal control, the auditor may attempt to assess control risk at less than the maximum. For this purpose, the auditor should (1) identify specific controls that are likely to prevent or detect material misstatements in the relevant financial statement assertions, (2) perform procedures directed at the effectiveness of the design of the controls, and (3) perform tests of controls. The purpose of tests of controls is to
a. Assure that the auditor has an adequate understanding of internal control.
b. Evaluate the effectiveness of such controls.
c. Provide recommendations to management to improve internal control.
d. Evaluate inherent risk.

9. Tests of control are least likely to be omitted with regard to
a. Accounts believed to be subject to ineffective controls.
b. Accounts representing few transactions.
c. Accounts representing many transactions.
d. Subsequent events.

10. When obtaining an understanding of an entity’s internal control, an auditor should concentrate on the substance of controls rather than their form because
a. The controls may be operating effectively but may not be documented.
b. Management may establish appropriate controls but not act on them.
c. The controls may be so inappropriate that no reliance is contemplated by the auditor.
d. Management may implement controls with costs in excess of benefits.

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