Which of the following controls is least likely to be relevant to a financial statement audit?
Answer(s): A
Choice "a" is correct. Procedures to reduce inefficiency on the production line relate to operational objectives, and not necessarily to financial reporting objectives. Choices "b", "c", and "d" are incorrect. Compliance with income tax regulations, use of passwords to limit data access, and generation of reports to facilitate variance analysis are all important controls related to financial reporting.
If a budgetary reporting system provides adequate reports, but the reports are not analyzed and acted upon:
Answer(s): B
Choice "b" is correct. The fact that budgetary reports are being generated indicates that the control has been implemented. The control, however, does not provide any assurance regarding achievement of the entity's objectives, since the report is not being analyzed or acted upon.Accordingly, the control is not operating effectively.Choices "a", "c", and "d" are incorrect. The control has been implemented but is not operating effectively per the explanation above.
In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would:
Choice "a" is correct. In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor would most likely review the entity's descriptions of inventory controls.Choice "b" is incorrect. Performing test counts of inventory during the entity's physical count is a substantive procedure performed after obtaining an understanding of internal control.Choice "c" is incorrect. Analyzing inventory turnover statistics to identify slow-moving and obsolete items is a substantive procedure performed after obtaining an understanding of internal control. Choice "d" is incorrect. Analyzing monthly production reports to identify variances and unusual transactions is a substantive procedure performed after obtaining an understanding of internal control.
Which of the following services performed by another entity would not be considered to be part of the client's information system?
Answer(s): D
Choice "d" is correct. Services performed by another organization are not considered to be part of the client's information system if the services provided are limited to executing transactions that are specifically authorized by the client.Choice "a" is incorrect. A service organization's services are part of an entity's information system if they affect any of the following: How the entity's transactions are initiated; the accounting records, supporting information, and specific accounts in the financial statements involved in the processing and reporting of the entity's transactions; the accounting processing involved from the initiation of transactions to their inclusion in the financial statements, including electronic means used to transmit, process, maintain, and access information; and the financial reporting process used to prepare the entity's financial statements, including significant accounting estimates and disclosures. Choice "b" is incorrect. As described more fully above, a service organization's services are part of an entity's information system if they affect the initiation, processing, or reporting of the entity's transactions.Choice "c" is incorrect. As described more fully above, a service organization's services are part of an entity's information system if they affect the initiation, processing, or reporting of the entity's transactions.
Which of the following is an inherent limitation in internal control?
Answer(s): C
Choice "c" is correct. Inherent limitations in internal control are limitations that exist despite implementation of appropriate controls. For example, faulty human judgment may result in errors in the design or use of internal controls.Choice "a" is incorrect. Assigning incompatible duties to a particular individual indicates a missing control, rather than an inherent limitation in internal control. Choice "b" is incorrect. Lack of segregation of duties indicates a missing control, rather than an inherent limitation in internal control.Choice "d" is incorrect. Lack of an audit committee indicates a missing control, rather than an inherent limitation in internal control.
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