Test bank principles of auditing and other assurance principles chapter 18 integrated audits of public company

The appropriate audit report on internal control under PCAOB standards on reporting on internal control is: of December 31?. Under PCAOB internal control reporting standards, what are th

Integrated Audits of Public Companies

True / False Questions

1 Section 404 of the Sarbanes-Oxley Act of 2002 includes internal control reporting

requirements for both management and auditors

7 An auditor's report on internal control ordinarily includes negative assurance on the

effectiveness of internal control

True False

8 Tests of operating effectiveness ordinarily include reperformance of the application of controls

Multiple Choice Questions

11 Which of the following is most likely to be considered a material weakness in internal control?

A An ineffective control environment

B Restatement of previously issued financial statements due to a change in accounting principles

C Inadequate controls over non-systematic transactions

D Weaknesses in risk assessment

12 Which must management communicate to the audit committee?

13 Which must the auditor communicate to management?

16 According to PCAOB standards, determining the allowance for doubtful accounts is referred to as a(n):

A Substantive transaction

B Routine transaction

C Nonroutine transaction

D Accounting estimate transaction

17 The framework most likely to be used by the client in its internal control assessment is the:

A COSO internal control framework

B COSO enterprise risk management framework

C FASB 37 internal control definitional framework

D AICPA internal control analysis manager

18 A material weakness that exists at year end will result in what type of audit report on internal control?

A Adverse

B Qualified

C Unqualified

D Unqualified with explanatory language

19 Assume that an auditor is focusing on two weaknesses in internal control Although neither is by itself a material weakness, the two significant deficiencies in combination

represent a material weakness The client effectively remediates one of them prior to year-end but does not have time to remediate the other prior to year-end What type of audit report on internal control is appropriate?

20 Which of the following is a weakness in internal control that allows a reasonable

possibility that a significant (but less than material) misstatement may occur and not be detected?

A Adverse

B Unqualified

C Disclaimer

D Qualified

23 An auditor identified a material weakness in internal control in December The client was informed and the client corrected the material weakness shortly after year-end (December 31);the auditor agrees that the correction eliminates the material weakness as of January 31 The appropriate audit report on internal control under PCAOB standards on reporting on internal control is:

of December 31 The appropriate audit report on internal control under a PCAOB Standard

No 2 audit of internal control is:

B A detailed description of the COSO criteria

C Management's assessment of the operating effectiveness for the period from the beginning

to the end of the fiscal year under audit

D Identification of the framework used for evaluating internal control

26 Which of the following is a strong indicator that a material weakness in internal control exists?

A Restatement of previously issued financial statements to reflect a correction

B Inadequate controls over non-routine transactions

C Inadequate controls over the period-end financial reporting process

D Weaknesses in a control activity

27 A circumstance caused scope limitation in a Sarbanes/Oxley 404 internal control audit is most likely to result in a(n):

A Withdrawal from the engagement

B Disclaimer of opinion

C Unqualified opinion with explanatory language

D All of the above are equally likely

28 Under PCAOB internal control reporting standards, what are the auditor's communication requirements to the audit committee with respect to material weaknesses?

A All must be communicated in written form

B All must be communicated in written form or orally

C Only those that violate the Foreign Corrupt Practices Act need be communicated, but in written form

D Only those that violate the Foreign Corrupt Practices Act need be communicated, in written form or orally

29 A material weakness because the oversight of the external financial reporting function by the audit committee is ineffective will ordinarily result in communication to:

A Must be communicated to the board of directors, the audit committee, and management

B Must be reported to the audit committee and management

C Must be communicated to management, with the audit committee only informed of the communication to management

D Need not be disclosed unless they in aggregate equal (at least) a significant deficiency

31 Which is least likely to be a question asked of employee personnel during a walkthrough?

A Have you ever been asked to override the process?

B Have you assessed the operating effectiveness of the system?

C What do you do when you find an error?

D What are you looking for to determine if there is an error?

32 Which of the following fits most directly under the control activities components of the COSO IC framework?

A Company-level controls dealing with tone at the top

B Overall methods for assigning authority and responsibility

C The control environment

D Accounting for shipping documents to ensure that all sales are recorded

33 Consider a company whose sales are initiated by customers either through the Internet, or

in a retail store Which of the following is correct?

A These types of sales represent two major classes of transactions within the sales process

B These types of sales represent two sales processes within a major evaluation processing cycle

C These sales represent a sales assertion on completeness

D These events represent nonroutine transactions that must be investigated in detail

34 According to PCAOB standards for reporting on internal control, calculating depreciation expense or adjusting for foreign currencies is referred to as:

A Substantive transactions

B Routine transactions

C Nonroutine transactions

D Accounting Estimate transactions

35 A material weakness involves a reasonable possibility that what size misstatement will not

36 A control deficiency that is less than a significant deficiency is most likely to result in what form of audit opinion on internal control?

A Adverse

B Qualified

C Unqualified

D Unqualified with explanatory language

37 Under a PCAOB standards for an internal control audit, which of the following is least likely to indicate a significant deficiency relating to a client's antifraud programs?

A No program for anonymous submissions of alleged fraud

B Audit committee active engagement in discussions on the topic of fraud

C Senior management delegates to lower levels responsibility for oversight of antifraud programs

D Lack of audit committee interaction with the internal audit department

38 The minimum likelihood of loss involved in the consideration of a control deficiency that

is less than a significant deficiency is:

41 The existence of a material weakness led to an adverse opinion in the internal control audit report of a publicly traded company Which of the following statements is correct if management believes that it has remediated the weakness?

A Management may engage the auditors to report on whether the material weakness

continues to exist prior to its next annual audit

B Management is required to engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit

C Management may not engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit

D Management may engage the auditors to modify the prior adverse audit report be modified

to an unqualified report

42 An audit firm has been engaged to report on whether a material weakness that previously resulted in an adverse opinion on internal control has been remediated Which of the

following statements is correct?

A A significant scope limitation on the auditor's procedures results in a qualified opinion or

an adverse opinion

B If there has been an auditor change, the successor auditor may issue such a report

C If while performing the engagement another material weakness is identified, it will result

in an adverse opinion relating to the current engagement to report upon the other material weakness

D The engagement may only take place at year-end during the next year's audit of internal control

Essay Questions

43 The PCAOB has outlined a number of circumstances that are indicators of a material weakness In addition, other control deficiencies may or may not be a material weakness depending upon details of the circumstances involved Categorize the following:

*May be material weakness, significant deficiency, or lesser deficiency, but is not ordinarily

considered a strong indicator of a material weakness in internal control

Chapter 18 Integrated Audits of Public Companies Answer Key

True / False Questions

1 Section 404 of the Sarbanes-Oxley Act of 2002 includes internal control reporting requirements for both management and auditors

6 PCAOB standards suggest that auditors emphasize nonroutine transactions as contrasted to routine transactions in their consideration of internal control

FALSE

Difficulty: Hard

7 An auditor's report on internal control ordinarily includes negative assurance on the

effectiveness of internal control

11 Which of the following is most likely to be considered a material weakness in internal control?

A An ineffective control environment.

B Restatement of previously issued financial statements due to a change in accounting principles

C Inadequate controls over non-systematic transactions

D Weaknesses in risk assessment

14 Walkthroughs provide the auditors with evidence to:

17 The framework most likely to be used by the client in its internal control assessment is the:

A COSO internal control framework.

B COSO enterprise risk management framework

C FASB 37 internal control definitional framework

D AICPA internal control analysis manager

20 Which of the following is a weakness in internal control that allows a reasonable

possibility that a significant (but less than material) misstatement may occur and not be detected?

23 An auditor identified a material weakness in internal control in December The client was informed and the client corrected the material weakness shortly after year-end (December 31);the auditor agrees that the correction eliminates the material weakness as of January 31 The appropriate audit report on internal control under PCAOB standards on reporting on internal control is:

of December 31 The appropriate audit report on internal control under a PCAOB Standard

No 2 audit of internal control is:

B A detailed description of the COSO criteria

C Management's assessment of the operating effectiveness for the period from the beginning

to the end of the fiscal year under audit

D Identification of the framework used for evaluating internal control.

Difficulty: Medium

26 Which of the following is a strong indicator that a material weakness in internal control exists?

A Restatement of previously issued financial statements to reflect a correction.

B Inadequate controls over non-routine transactions

C Inadequate controls over the period-end financial reporting process

D Weaknesses in a control activity

C Unqualified opinion with explanatory language

D All of the above are equally likely

Difficulty: Medium

28 Under PCAOB internal control reporting standards, what are the auditor's communication requirements to the audit committee with respect to material weaknesses?

A All must be communicated in written form.

B All must be communicated in written form or orally

C Only those that violate the Foreign Corrupt Practices Act need be communicated, but in written form

D Only those that violate the Foreign Corrupt Practices Act need be communicated, in written form or orally

Difficulty: Medium

29 A material weakness because the oversight of the external financial reporting function by the audit committee is ineffective will ordinarily result in communication to:

A Must be communicated to the board of directors, the audit committee, and management

B Must be reported to the audit committee and management

C Must be communicated to management, with the audit committee only informed of the

communication to management

D Need not be disclosed unless they in aggregate equal (at least) a significant deficiency

Difficulty: Hard

31 Which is least likely to be a question asked of employee personnel during a walkthrough?

A Have you ever been asked to override the process?

B Have you assessed the operating effectiveness of the system?

C What do you do when you find an error?

D What are you looking for to determine if there is an error?

Difficulty: Hard

32 Which of the following fits most directly under the control activities components of the COSO IC framework?

A Company-level controls dealing with tone at the top

B Overall methods for assigning authority and responsibility

C The control environment

D Accounting for shipping documents to ensure that all sales are recorded.

Difficulty: Medium

33 Consider a company whose sales are initiated by customers either through the Internet, or

in a retail store Which of the following is correct?

A These types of sales represent two major classes of transactions within the sales process.

B These types of sales represent two sales processes within a major evaluation processing cycle

C These sales represent a sales assertion on completeness

D These events represent nonroutine transactions that must be investigated in detail

36 A control deficiency that is less than a significant deficiency is most likely to result in what form of audit opinion on internal control?

A No program for anonymous submissions of alleged fraud

B Audit committee active engagement in discussions on the topic of fraud.

C Senior management delegates to lower levels responsibility for oversight of antifraud programs

D Lack of audit committee interaction with the internal audit department

Difficulty: Medium

38 The minimum likelihood of loss involved in the consideration of a control deficiency that

is less than a significant deficiency is:

40 The minimum likelihood of loss involved in the consideration of a possible material weakness is:

A Management may engage the auditors to report on whether the material weakness

continues to exist prior to its next annual audit

B Management is required to engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit

C Management may not engage the auditors to report on whether the material weakness continues to exist prior to its next annual audit

D Management may engage the auditors to modify the prior adverse audit report be modified

to an unqualified report

Difficulty: Medium.

42 An audit firm has been engaged to report on whether a material weakness that previously resulted in an adverse opinion on internal control has been remediated Which of the

following statements is correct?

A A significant scope limitation on the auditor's procedures results in a qualified opinion or

an adverse opinion

B If there has been an auditor change, the successor auditor may issue such a report.

C If while performing the engagement another material weakness is identified, it will result

in an adverse opinion relating to the current engagement to report upon the other material weakness

D The engagement may only take place at year-end during the next year's audit of internal control

Difficulty: Hard

Essay Questions