An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts:
Answer(s): B
Choice "b" is correct. An advantage of using systems flowcharts to document internal information is that flowcharts provide a visual depiction of clients' activities. Choice "a" is incorrect. Identification of internal control weaknesses requires the understanding, testing, and evaluation of controls. Either flowcharts or questionnaires can be used to obtain an understanding of internal control for this purpose.Choice "c" is incorrect. Determining whether control activities are operating effectively requires tests of controls, and generally cannot be determined based on a flowchart or a questionnaire. Choice "d" is incorrect. Observing tasks being performed (routine or otherwise) are tests of controls. The need to perform tests of controls is not affected by the form of audit documentation selected.
An auditor's risk assessment is based on the assumption that controls are operating effectively. Which of the following was not a step in making this assessment?
Answer(s): C
Choice "c" is correct. Tests of details of transactions are used to detect material misstatements in the financial statements after the auditor has assessed risk, not as part of making this assessment. Choice "a" is incorrect. Tests of controls are required to support the auditor's assumption that controls are operating effectively.Choice "b" is incorrect. Obtaining an understanding of each of the five components of internal control is required before making an assessment of control risk. The entity's accounting system (part of the information and communication component) and control environment are part of the five components.Choice "d" is incorrect. Considering whether control activities can have a pervasive effect on financial statement assertions is part of the auditor's risk assessment process.Internal Control
Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control activities are suitably designed to prevent or detect material misstatements?
Answer(s): D
Choice "d" is correct. Observation and inspection may be used to evaluate the design of controls. Observation of entity personnel applying control activities is a procedure that would likely provide evidence about the design of the activities.Choice "a" is incorrect. Reperforming control activities provides the auditor with evidence about the operating effectiveness of specific control activities, not the design effectiveness. Choice "b" is incorrect. Analytical procedures would not provide the auditor with evidence about the design of specific control activities.Choice "c" is incorrect. Vouching a sample of transactions directly related to control activities would not provide the auditor with evidence about the design of specific control activities.
Management philosophy and operating style most likely would have a significant influence on an entity's control environment when:
Choice "b" is correct. Management philosophy and operating style encompass a broad range of characteristics. Such characteristics may include the following: management's approach to taking and monitoring business risks, management's attitudes and actions toward financial reporting, and management's attitudes toward information processing and accounting functions and personnel. These characteristics are more likely to have a significant influence on the control environment when management is dominated by one individual, since there will be few alternative viewpoints presented.Choice "a" is incorrect. The internal audit function is part of the monitoring component of internal control, not part of the control environment. If the internal auditor reports directly to management, this would reduce their objectivity and perhaps make the monitoring function less effective, but it would have minimal impact on the control environment.Choice "c" is incorrect. Accurate management job descriptions would not change the influence that management philosophy and operating style have on the entity's control environment. Choice "d" is incorrect. The involvement of those charged with governance in the reporting process would tend to moderate or offset the influence that management philosophy and operating style have on the entity's control environment.
Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively?
Choice "c" is correct. The use of budgets and forecasts to identify variances improves managers' ability to supervise company activities. Variances from budgets serve as signals to managers that a potential problem exists.Choice "a" is incorrect. Compliance with internal controls mandated by a regulatory body may be necessary, but would not necessarily enhance the ability of a manager to supervise company activities.Choice "b" is incorrect. Limiting access to assets serves as a deterrent to employee theft, but does not really improve managers' ability to supervise company activities. Choice "d" is incorrect. Supporting employees with adequate resources is important, but it does not necessarily increase the supervisory capability of a manager.
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