Acc403 Auditing and Assurance Services: Week 7 Quiz 5 (Chapters 10 and 11) – Version 1

Acc403 Auditing and Assurance Services
Week 7 Quiz 5 (Chapters 10 and 11) – Version 1

Question 1
An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as:
A control deficiency
B. A material weakness
C. A significant deficiency
D. Collusion

Question 2
Which of the following is responsible for establishing a private company's internal control?
A. FASB
B. Internal Auditors
C. Audit committee
D. Senior Management

Question 3
Which of the following components of the control environment define the existing lines of responsibility and authority?
A. Organizational structure
B. Management philosophy and operating style
C. Human resource policies and practices
D. Management integrity and ethical values

Question 4
Internal controls:
A. Guarantee that the company complies with all laws and regulations
B. Consist of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals.
C. Only apply to SEC companies
D. Are implemented by and are the responsibilities of the auditors.

Question 5
Audit evidence regarding the separation of duties is normally best obtained by:
A. preparing flowcharts of operational processes.
B. preparing narratives of operational processes.
C. observation of employees applying control activities.
D. inquiries of employees applying control activities.

Question 6
When assessing whether the financial statements are auditable, the auditor must consider:
A. that the integrity of management and the adequacy of accounting records are the two primary factors determining auditability.
B. that the integrity of management and the adequacy of risk management are the two primary factors determining auditability.
C. that if all of the transaction information is available only in electronic form without a visible audit trail, the company cannot be audited.
D. the control risk before determining if the entity is auditable.

Question 7
To issue a report on internal control over financial reporting for a public company, an auditor must:
A. evaluate management's assessment process.
B. independently assess the design and operating effectiveness of internal control.
C. evaluate management's assessment process and independently assess the design and operating effectiveness of internal control.
D. test controls over significant account balances.

Question 8
Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the:
A. adequacy of the computer system.
B. proper implementation by management.
C. ability of the internal audit staff to maintain it.
D. competency and dependability of the people using it.

Question 9
When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is:
A. insufficient.
B. inadequate.
C. ineffective.
D. inefficient.

Question 10
The PCAOB places responsibility for the reliability of internal controls over the financial reporting process on:
A. the company's board of directors.
B. the audit committee of the board of directors.
C. management.
D. the CFO and the independent auditors.

Question 11
Which of management's assertions with respect to implementing internal controls is the auditor primarily concerned?
A. Efficiency of operations
B. Reliability of financial reporting
C. Effectiveness of operations
D. Compliance with applicable laws and regulations

Question 12
When considering internal controls, an important point to consider is that:
A. auditors can ignore controls affecting internal management information.
B. auditors are concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements.
C. management is responsible for understanding and testing internal control over financial reporting.

Question 13
The auditors primary purpose in auditing the client's system of internal control over financial reporting is:
A. to prevent fraudulent financial statements from being issued to the public.
B. to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements.
C. to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements.
D. to efficiently conduct the Audit of Financial Statements.

Question 14
When determining what type of report to issue on internal control under Section 404:
A. an adverse opinion on internal control must be given if any weaknesses in a key internal control is discovered.
B. a scope limitation requires the auditor to disclaim an opinion on internal controls.
C. if the auditor gives a qualified opinion on the financial statements, they must give a qualified opinion on internal controls.
D. a scope limitation requires the auditor to express a qualified opinion or a disclaimer of opinion on internal controls.

Question 15
Reasonable assurance allows for:
A. low likelihood that material misstatements will not be prevented or detected by internal controls.
B. no likelihood that material misstatements will not be prevented or detected by internal control.
C. moderate likelihood that material misstatements will not be prevented or detected by internal control.
D. high likelihood that material misstatements will not be prevented or detected by internal

Question 16
In the fraud triangle, fraudulent financial reporting and misappropriation of assets:
A. share little in common.
B. share most of the same risk factors.
C. share the same three conditions.
D. share most of the same conditions

Question 17
Companies may intentionally understate earnings when income is high to create ________ that may be used in future years to increase earnings.
A. income smoothing
B. cookie jar reserves
C. cash
D. sales

Question 18
Which of the following is least likely to uncover fraud?
A. External auditors
B. Internal auditors
C. Internal controls
D. Management

Question 19
Which of the following best defines fraud in a financial statement auditing context?
A. Fraud is an unintentional misstatement of the financial statements.
B. Fraud is an intentional misstatement of the financial statements.
C. Fraud is either an intentional or unintentional misstatement of the financial statements, depending on materiality.
D. Fraud is either an intentional or unintentional misstatement of the financial statements, depending on consistency

Question 20
Auditing standards specifically require auditors to identify ________ as a fraud risk in most audits.
A. overstated assets
B. understated liabilities
C. improper revenue recognition
D. overstated expenses

Question 21
Analytical procedures can be very effective in detecting inventory fraud. Which of the following analytical procedures would not be useful in detecting fraud?
A) Gross margin percentage
B) Inventory Turnover
C) Cost of sales percentage
D) Accounts receivable turnover

Question 22
Company management is often under pressure to increase revenue and/or net income. One approach is to use a "bill and hold" arrangement. This is an example of which of the following?
A) Significant accounting estimates
B) Fictitious revenue recorded
C) Premature revenue recognized
D) Alteration of cutoff documents

Question 23
Which of the following is not a factor that relates to opportunities to misappropriate assets?
A. Inadequate internal controls over assets
B. Presence of large amounts of cash on hand
C. Inappropriate segregation of duties or independent checks on performance
D. Adverse relationships between management and employees

Question 24
Which of the following is a factor that relates to incentives or pressures to commit fraudulent financial reporting?
A. Significant accounting estimates involving subjective judgments
B. Excessive pressure for management to meet debt repayment requirements
C. Management's practice of making overly aggressive forecasts
D. High turnover of accounting, internal audit, and information technology staff

Question 25
Who is most likely to perpetrate fraudulent financial reporting?
A. Members of the board of directors
B. Production employees
C. Management of the company
D. The internal auditors

Question 26
Research indicates that the most effective way to prevent and deter fraud is to:
A. implement programs and controls that are based on core values embraced by the company.
B. hire highly ethical employees.
C. communicate expectations to all employees on an annual basis.
D. terminate employees who are suspected of committing fraud

Question 27
Which of the following parties is responsible for implementing internal controls to minimize the likelihood of fraud?
A. External auditors
B. Audit committee members
C. Management
D. Committee of Sponsoring Organizations

Question 28
Financial statement manipulation risk is arguably present for all companies' financial statements. However, the risk is elevated for companies that:
A. are heavily regulated.
B. have low amounts of debt.
C. have to make significant judgments for accounting estimates.
D. operate in stable economic environments

Question 29
Which of the following is a factor that relates to attitudes or rationalization to commit fraudulent financial reporting?
A. Significant accounting estimates involving subjective judgments
B. Excessive pressure for management to meet debt repayment requirements
C. Management's practice of making overly aggressive forecasts to third parties
D. High turnover of accounting, internal audit and information technology staff

Question 30
When assessing the risk for fraud, the auditor must be cognizant of the fact that:
A. the existence of fraud risk factors means fraud exists.
B. analytical procedures must be performed on revenue accounts.
C. horizontal analysis is not useful in helping to determine unusual financial statement relationships.
D. the auditor cannot make inquiries about fraud to company personnel who have no financial statement responsibilities.
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