Multiple Choice Questions Select the best answer for each of
Multiple Choice Questions
Select the best answer for each of the following questions. Explain the reason for your selection.
a. Which of the following would be least likely to be considered an objective of internal control?
(1) Checking the accuracy and reliability of accounting data.
(2) Detecting management fraud.
(3) Encouraging adherence to managerial policies.
(4) Safeguarding assets.

b. An entity’s ongoing monitoring activities often include:
(1) Periodic audits by internal auditors.
(2) The audit of the annual financial statements.
(3) Approval of cash disbursements.
(4) Management review of weekly performance reports.

c. A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with:
(1) Knowledge necessary to determine the nature, timing, and extent of further audit procedures.
(2) Audit evidence to use in reducing detection risk.
(3) A basis for modifying tests of controls.
(4) An evaluation of the consistency of application of management policies.

d. An auditor may compensate for a weakness in internal control by increasing the extent of:
(1) Tests of controls.
(2) Detection risk.
(3) Substantive tests of details.
(4) Inherent risk.

e. Controls over financial reporting are often classified as preventative, detective, or corrective. Which of the following is an example of a detective control?
(1) Segregation of duties over cash disbursements.
(2) Requiring approval of purchase transactions.
(3) Preparing bank reconciliations.
(4) Maintaining backup copies of key transactions.

f. Which of the following symbols indicate that a file has been consulted?

g. When a CPA decides that the work performed by internal auditors may have an effect on the nature, timing, and extent of the CPA’s procedures, the CPA should consider the competence and objectivity of the internal auditors. Relative to objectivity, the CPA should:
(1) Consider the organizational level to which the internal auditors report the results of their work.
(2) Review the internal auditors’ work.
(3) Consider the qualifications of the internal audit staff.
(4) Review the training program in effect for the internal audit staff.

h. Effective internal control in a small company that has an insufficient number of employees to permit proper separation of responsibilities can be improved by:
(1) Employment of temporary personnel to aid in the separation of duties.
(2) Direct participation by the owner in key record keeping and control activities of the business.
(3) Engaging a CPA to perform monthly write-up work.
(4) Delegation of full, clear-cut responsibility for a separate major transaction cycle to each employee.

i. Which of the following is not an advantage of establishing an enterprise risk management system within an organization?
(1) Reduces operational surprises.
(2) Provides integrated responses to multiple risks.
(3) Eliminates all risks.
(4) Identifies opportunities.

j. Management of Warren Company has decided to respond to a particular risk by hedging the risk with futures contracts. This is an example of:
(1) Avoidance.
(2) Acceptance.
(3) Reduction.
(4) Sharing.

k. To have an adequate basis to issue a management report on internal control under Section 404(a) of the Sarbanes-Oxley Act, management must do all of the following, except:
(1) Establish internal control with no material weakness.
(2) Accept responsibility for the effectiveness of internal control.
(3) Evaluate the effectiveness of internal control using suitable control criteria.
(4) Support the evaluation with sufficient evidence.

l. When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should:
(1) Modify their report for any significant deficiencies identified.
(2) Use a “bottom-up” approach to identify controls to test.
(3) Test controls for all significant accounts.
(4) Perform a separate assessment of controls over operations.

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