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$7-36.$ Multiple Choice Questions

Select the best answer for each of the following questions. Explain the reason for your selection.

a$.$ A direct control is designed to:

$(1)$ Address the same assertion as another control.

$(2)$ Prevent or detect misstatements due to error or fraud on a timely basis.

$(3)$ Have an indirect effect on the likelihood of misstatement.

$(4)$ Detect only processing misstatements within the accounting information system.

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 audir yrocedures.

$(2)$ 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 poliakes.

d$.$ An auditor may compensate for a weakness in internal control by increasing the catant of

$(1)$ Tests of controls.

$(2)$ Detection risk.

$(3)$ Substantive tests of details.

$(4)$ Inherent risk. tive. 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?

$(1)$

$(2)$

$(3)$

$(4)$

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: $\backslash (\backslash$square $\backslash )$

$(1)$ 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. LO $7-2$

LO $\backslash (7-3\backslash )$

LO $7-8$

LO $7-8$

LO $7-17-37.$ You are performing an audit of Western Electronics Corporation and evaluating various controls. Classify the following controls as being primarily preventive $($P$),$ detective $($D$),$ or corrective $($C$).$ Explain your answers.

a$.$ Annual physical inventory.

b$.$ Monthly reconciliation of bank accounts.

c$.$ Segregation of duties over purchasing.

d$.$ Supervisory approval of time cards.

e$.$ Dual signatures for checks.

f$.$ Adjustment of perpetual inventory records to physical counts.

g$.$ Management review of budget$/$actual information.

h$.$ Internal audits of payroll.