University of Michigan ACCOUNTING

ACC 575

CHAPTER 3:

1)The primary responsibility for establishing and maintaining an internal control rests with

1. 1. The external auditors
   2. The internal auditors
   3. Management and those charged with governance
   4. The controller or the treasurer

2. The fundamental purpose of an internal control is to
   1. Safeguard the resources of the organization
   2. Provide reasonable assurance that the objectives of the organization are achieved
   3. Encourage compliance with organization objectives
   4. Ensure the accuracy, reliability and timeliness of information

3. Which of the following is not one of the three primary objectives of effective internal control?
   1. Reliability of financial reporting
   2. Efficiency and effectiveness of operations
   3. Compliance with laws and regulations
   4. Assurance of elimination of business risk.

4. Which of the following internal control objectives would be most relevant to the audit?
   1. Operational objective
   2. Compliance objective
   3. Financial reporting objective
   4. Administrative control objective

5. An act of two or more employee to steal assets and cover their theft by misstating the accounting records would be referred to as:
   1. Collusion
   2. A material weakness
   3. A control deficiency
   4. A significant deficiency

6. Which of the following is not one of the components of an entity’s internal control?
   1. Control risk
   2. Control activities
   3. Information and communication
   4. The control environment

7. The overall attitude and awareness of an entity’s board of director concerning the importance of the internal control usually is reflected in its
   1. Computer-based controls
   2. System of segregation of duties
   3. Control environment
   4. Safeguard over access of assets
8. In evaluating the design of the entity’s internal control environment, the auditor considers the certain subcomponents of control environment and how they have been incorporated into the entity’s processes. Subcomponents of control environment would include
   1. Integrity and ethical values
   2. Commitment to competence
   3. Organizational structure
   4. Information and communications systems

9. Which of the following components of an entity’s internal control structure includes the development of employee promotion and training policies?
   1. Control activities
   2. Control environment
   3. Information and communication
   4. Quality control system

10. Which of the following subcomponents of the control environment define the existing lines of responsibility and authority?
    1. Organizational structure
    2. Management philosophy and operating style
    3. Human resource policies and practices
    4. Management integrity and ethical values

11. Which of the following is not one of the subcomponents of the control environment?
    1. Management philosophy and operating style
    2. Organizational structure
    3. Adequate separation of duties
    4. Commitment to competence

12. Which of the following deal with ongoing or periodic assessment of quality of internal control by management?
    1. Quality control activities
    2. Monitoring activities
    3. Oversight activities
    4. Management activities

13. The policies and procedures that help ensure that management directives are carried out are referred to as the:
    1. Control environment
    2. Control activities
    3. Monitoring of controls
    4. Information systems

14. Which of the following is not one of the specific control activities that are relevant to financial statement audit?
    1. Performance reviews
    2. Physical controls
    3. Segregation of duties
    4. Monitoring

15. Proper segregation of functional responsibilities in an effective structure of internal control calls for separation of functions of
    1. Authorization, execution, and payment
    2. Authorization, recording, and custody
    3. Custody, execution, and reporting
    4. Authorization, payment, and recording

16. Which of the following best describes the purpose of the control activities?
    1. The actions, policies and procedures that reflect the overall attitudes of the management
    2. The identification and analysis of risks and relevant to the preparation of the financial statements
    3. The policies and procedures that help ensure that necessary actions are taken in order to

achieve the entity’s objectives

1. 4. Activities that deal with the ongoing assessment of the quality of internal control by management

17. When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be:

1. 1. Tracing
   2. Vouching
   3. Performing a walk through
   4. Testing controls

18. Which of the following is not a medium that can normally be used by an auditor to record information concerning a client’s internal control policies and procedures?
    1. Narrative memorandum
    2. Flowchart
    3. Procedures manual
    4. Questionnaire

19. An auditor uses the knowledge provided by the understanding of internal control and the final assessed level of control risk primarily to determine the nature, timing and extent of the
    1. Attribute tests
    2. Tests of controls
    3. Compliance tests
    4. Substantive tests
20. Based on the requirement of PSA 3330, how frequently must an auditor test operating effectiveness of controls that appear to functions as they have in past years and on which the auditor wishes to rely in the current year?
    1. Monthly
    2. Each audit
    3. At least every second audit
    4. At least every third audit