Multiple- Choice

1. The Sarbanes- Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity’s annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false?
a. The auditor should evaluate whether internal controls are effective in accurately and fairly reflecting the firm’s transactions.
b. Management’s report should state its responsibility for establishing and maintaining an adequate internal control system.
c. Management should identify material weaknesses in its report.
d. The auditor should provide recommendations for improving internal control in the audit report.
2. A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a
a. Deficiency in design.
b. Deficiency in operation.
c. Significant deficiency.
d. Material weakness.

3. Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance?
a. The susceptibility of the related assets or liability to loss or fraud.
b. The interaction or relationship of the control with other controls.
c. The financial statement amounts exposed to the deficiency.
d. The nature of the financial statement accounts, disclosures, and assertions involved.

4. Entity- level controls can have a pervasive effect on the entity’s ability to meet the control criteria. Which one of the following is not an entity- level control?
a. Controls to monitor results of operations.
b. Management’s risk assessment process.
c. Controls to monitor the inventory taking process.
d. The period- end financial reporting process.

5. Which of the following controls would most likely be tested during an interim period?
a. Controls over non-routine transactions.
b. Controls over the period- end financial reporting process.
c. Controls that operate on a continuous basis.
d. Controls over transactions that involve a high degree of subjectivity.

6. If the financial reporting risks for a location are low and the entity has good entity- level controls, management may rely on which of the following for its assessment?
a. Documentation and test controls over specific risks.
b. Self- assessment processes in conjunction with entity- level controls.
c. Documentation and test entity- level controls over the entire entity.
d. Selective control test at that location.

7. A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to
a. Tour the organization’s facilities and locations before beginning any audit work.
b. Trace a transaction from every class of transactions from origination through the entity’s information system.
c. Trace a transaction from each major class of transactions from origination through the entity’s information system.
d. Trace a transaction from each major class of transactions from origination through the entity’s information system until it is reflected in the entity’s financial reports.

8. When auditors report on the effectiveness of internal control “ as of” a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period?
a. Any significant changes that occurred in internal control subsequent to the interim date.
b. The length of the remaining period.
c. The specific controls tested prior to the “as of” date and the results of those tests.
d. The walkthrough of the control system conducted at interim.

9. AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the entity hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the entity’s internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah’s internal control?
a. An unqualified report.
b. An adverse report.
c. A disclaimer of opinion.
d. An exculpatory opinion.

10. In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of audit report should Natalie issue?
a. An unqualified report.
b. An adverse report.
c. A disclaimer of opinion.
d. An exculpatory opinion.
11. In auditing ICFR for a public company, Emily finds that the entity has a significant subsidiary located in a foreign country. Emily’s accounting firm has no offices in that country, and the entity has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor’s report indicates that there are no material weaknesses in the foreign subsidiary’s ICFR. What should Emily do?
a. Disclaim an opinion because she cannot rely on the opinion of another auditor in dealing with a significant subsidiary.
b. Accept the other auditor’s opinion and express an unqualified opinion, making no reference to the other auditor’s report in her audit opinion.
c. Accept the other auditor’s opinion after evaluating the auditor’s work and make reference to the other auditor’s report in her audit opinion.
d. Qualify the opinion because she is unable to conduct the testing herself, and this constitutes a significant scope limitation.
12. Which of the following statements concerning control deficiencies is true?
a. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.
b. All significant deficiencies are material weaknesses.
c. All control deficiencies are significant deficiencies.
d. An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB.

13. Significant deficiencies and material weaknesses must be communicated to an entity’s audit committee because they represent
a. Material fraud or illegal acts perpetrated by high- level management.
b. Disclosures of information that significantly contradict the auditor’s going concern assumption.
c. Significant deficiencies in the design or operation of internal control.
d. Potential manipulation or falsification of accounting records.

14. Which of the following most likely represents a weakness in internal control of an IT system?
a. The systems analyst reviews output and controls the distribution of output from the IT department.
b. The accounts payable clerk prepares data for computer processing and enters the data into the computer.
c. The systems programmer designs the operating and control functions of programs and participates in testing operating systems.
d. The control clerk establishes control over data received by the IT department and reconciles control totals after processing.
15. A primary advantage of using generalized audit software packages to audit the financial statements of an entity that uses an IT system is that the auditor may
a. Consider increasing the use of substantive tests of transactions in place of analytical procedures.
b. Substantiate the accuracy of data through self- checking digits and hash totals.
c. Reduce the level of required tests of controls to a relatively small amount.
d. Access information stored on computer files while having a limited understanding of the entity’s hardware and software features.