Which of the following controls most likely would reduce the risk of diversion?

1. Which of the following most likely would not be considered an inherent limitation of the potential effectiveness of an entity’s internal control? a. Incompatible duties. b. Management override. c. Mistakes in judgment. d. Collusion among employees.
2. When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that a. Internal control may be ineffective due to mistakes in judgment and personal carelessness. b. Adequate safeguards over access to assets and rec-ords should permit an entity to maintain proper accountability. c. Establishing and maintaining internal control is an important responsibility of management. d. The cost of an entity’s internal control should not exceed the benefits expected to be derived.
3. Proper segregation of functional responsibilities calls for separation of the functions of a. Authorization, execution, and payment. b. Authorization, recording, and custody. c. Custody, execution, and reporting. d. Authorization, payment, and recording.
4. An entity’s ongoing monitoring activities often include a. Periodic audits by the audit committee. b. Reviewing the purchasing function. c. The audit of the annual financial statements. d. Control risk assessment in conjunction with quarterly reviews.
5. The overall attitude and awareness of an entity’s board of directors concerning the importance of internal control usually is reflected in its a. Computer-based controls. b. System of segregation of duties. c. Control environment. d. Safeguards over access to assets.
6. Management philosophy and operating style most likely would have a significant influence on an entity’s control environment when a. The internal auditor reports directly to management. b. Management is dominated by one individual. c. Accurate management job descriptions delineate specific duties. d. The audit committee actively oversees the financial reporting process.
7. Which of the following factors are included in an entity’s control environment? Audit Integrity and committee ethical values Organizational a. Yes Yes No b. Yes No Yes c. No Yes Yes d. Yes Yes Yes
8. Which of the following is not a component of an entity’s internal control? a. Control risk. b. Control activities. c. Monitoring. d. Control environment.
9. Which of the following is a provision of the Foreign Corrupt Practices Act? a. It is a criminal offense for an auditor to fail to detect and report a bribe paid by an American business entity to a foreign official for the purpose of obtaining business.

b. The auditor’s detection of illegal acts committed by officials of the auditor’s publicly held client in conjunction with foreign officials should be reported to the Enforcement Division of the Securities and Exchange Commission. c. If the auditor of a publicly held company concludes that the effects on the financial statements of a bribe given to a foreign official are not susceptible of reasonable estimation, the auditor’s report should be modified. d. Every publicly held company must devise, document, and maintain internal control sufficient to provide reasonable assurances that internal control objectives are met. 10. An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors’ invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all a. Cash disbursements. b. Approved vouchers. c. Receiving reports. d. Vendors’ invoices. 11. 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? a. Reperforming the activities for a sample of transactions. b. Performing analytical procedures using data aggregated at a high level. c. Vouching a sample of transactions directly related to the activities. d. Observing the entity’s personnel applying the activities. 12. Which statement is correct concerning the relevance of various types of controls to a financial audit? a. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken. b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant. c. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant. d. All controls are ordinarily relevant to an audit. 13. In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to a. Document the auditor’s understanding of the entity’s internal control. b. Search for significant deficiencies in the operation of internal control. c. Perform tests of controls to evaluate the effectiveness of the entity’s internal control. d. Determine whether controls are suitably designed to prevent or detect material misstatements. 14. In obtaining an understanding of an entity’s internal control relevant to audit planning, an auditor is required to obtain knowledge about the a. Design of the controls pertaining to internal control components. b. Effectiveness of controls that have been implemented. c. Consistency with which controls are currently being applied. d. Controls related to each principal transaction class and account balance. 15. An auditor should obtain sufficient knowledge of an entity’s information system to understand the a. Safeguards used to limit access to computer facilities. b. Process used to prepare significant accounting estimates. c. Controls used to assure proper authorization of transactions. d. Controls used to detect the concealment of fraud.

c. The entity’s controls pertain to any financial statement assertions. d. Additional audit evidence sufficient to support a further reduction is likely to be available. 25. Assessing control risk at a low level most likely would involve a. Performing more extensive substantive tests with larger sample sizes than originally planned. b. Reducing inherent risk for most of the assertions relevant to significant account balances. c. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end. d. Identifying specific controls relevant to specific assertions. 26. An auditor assesses control risk because it a. Is relevant to the auditor’s understanding of the control environment. b. Provides assurance that the auditor’s materiality levels are appropriate. c. Indicates to the auditor where inherent risk may be the greatest. d. Affects the level of detection risk that the auditor may accept. 27. When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the a. Extent of tests of controls. b. Level of detection risk. c. Extent of tests of details. d. Level of inherent risk. 28. An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risk of material misstatement primarily to a. Determine whether procedures and records concerning the safeguarding of assets are reliable. b. Ascertain whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized. c. Modify the initial assessments of inherent risk and preliminary judgments about materiality levels. d. Determine the nature, timing, and extent of substantive tests for financial statement assertions. 29. An auditor may compensate for a weakness in internal control by increasing the a. Level of detection risk. b. Extent of tests of controls. c. Preliminary judgment about audit risk. d. Extent of analytical procedures. 30. Which of the following statements is correct concerning an auditor’s assessment of control risk? a. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity’s internal control. b. Evidence about the operation of internal control in prior audits may not be considered during the current year’s assessment of control risk. c. The basis for an auditor’s conclusions about the assessed level of control risk need not be documented unless control risk is assessed at the maximum level. d. The lower the assessed level of control risk, the less assurance the evidence must provide that the control procedures are operating effectively. 31. Regardless of the assessed level of control risk, an auditor would perform some a. Tests of controls to determine the effectiveness of internal control policies. b. Analytical procedures to verify the design of internal control. c. Substantive tests to restrict detection risk for significant transaction classes. d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk. 32. How frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely in the current year? a. Monthly. b. Each audit. c. At least every second audit.

d. At least every third audit. 33. Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that controls are in use and operating effectively. This assurance is most likely obtained in part by a. Preparing flowcharts. b. Performing substantive tests. c. Analyzing tests of trends and ratios. d. Inspection of documents. 34. An auditor generally tests the segregation of duties related to inventory by a. Personal inquiry and observation. b. Test counts and cutoff procedures. c. Analytical procedures and invoice recomputation. d. Document inspection and reconciliation. 35. The objective of tests of details of transactions performed as tests of controls is to a. Monitor the design and use of entity documents such as prenumbered shipping forms. b. Determine whether controls have been implemented. c. Detect material misstatements in the account balances of the financial statements. d. Evaluate whether controls operated effectively. 36. After obtaining an understanding of internal control and assessing the risk of material misstatement, an auditor decided to perform tests of controls. The auditor most likely decided that a. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests. b. Additional evidence to support a further reduction in the risk of material misstatement is not available. c. An increase in the assessed level of the risk of material misstatement is justified for certain financial statement assertions. d. There were many internal control weaknesses that could allow misstatements to enter the accounting system. 37. In assessing control risk, an auditor ordinarily selects from a variety of techniques, including a. Inquiry and analytical procedures. b. Reperformance and observation. c. Comparison and confirmation. d. Inspection and verification. 38. Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed? a. Confirmations of receivables verifying account balances. b. Letters of representations corroborating inventory pricing. c. Attorneys’ responses to the auditor’s inquiries. d. Client records documenting the use of computer programs. 39. Which of the following is not a step in an auditor’s assessment of control risk? a. Evaluate the effectiveness of internal control with tests of controls. b. Obtain an understanding of the entity’s information system and control environment. c. Perform tests of details of transactions to detect material misstatements in the financial statements. d. Consider whether controls can have a pervasive effect on financial statement assertions. 40. To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including a. Inquiry. b. Analytical procedures. c. Calculation. d. Confirmation.

b. Identification of the framework for evaluating internal control. c. Management’s assessment of the effectiveness of internal control. d. Management’s statement of responsibility to establish and maintain internal control that has no significant deficiencies. 49. Which of the following is an accurate statement about internal control weaknesses? a. Material weaknesses are also control deficiencies. b. Significant deficiencies are also material weaknesses. c. Control deficiencies are also material weaknesses. d. All control deficiencies must be communicated to the audit committee. 50. In an integrated audit, which of the following is defined as a weakness in internal control that is less severe than a material weakness but important enough to warrant attention by those responsible for oversight of the financial reporting function? a. Control deficiency. b. Unusual weakness. c. Unusual deficiency. d. Significant deficiency. 51. A material weakness is a significant deficiency (or combination of significant deficiencies) that results in a reasonable possibility that a misstatement of at least what amount will not be prevented or detected? a. An amount greater than zero. b. An amount greater than zero, but at least inconsequential. c. An amount greater than inconsequential. d. A material amount. 52. The minimum likelihood of loss involved in the consideration of a control deficiency is a. Remote. b. More than remote. c. Probable. d. Not explicitly considered. 53. Assume that a company has a control deficiency regarding the processing of cash receipts. Reconciliation of cash accounts by a competent individual otherwise independent of the cash function might make the likelihood of a significant misstatement due to the control deficiency remote. In this situation, reconciliation may be referred to as what type of control? a. Compensating. b. Preventive. c. Adjustive. d. Nonroutine. 54. According to Public Company Accounting Oversight Board Standard 5, what type of transaction involves establishing a loan loss reserve? a. Substantive transaction. b. Routine transaction. c. Nonroutine transaction. d. Estimation transaction. 55. How do the scope, procedures, and purpose of an examination of internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit? Scope Procedures Purpose a. Similar Different Similar b. Different Similar Similar c. Different Different Different d. Different Similar Different

1. A procedure that involves tracing a transaction from its origination through the company’s information systems until it is reflected in the company’s financial report is referred to as a(n) a. Analytical analysis. b. Substantive procedure. c. Test of a control. d. Walk-through.
2. For purposes of an audit of internal control performed under Public Company Accounting Oversight Board standards, the “as of date” is ordinarily a. The first day of the year. b. The last day of the fiscal period. c. The last day of the auditor’s fieldwork. d. The average date for the entire fiscal period.
3. Consider an issuer (public) company whose purchases are made through the Internet and by telephone. Which of the following is correct? a. These types of purchases represent control objectives for the audit of internal control. b. These purchases are the assertions related to the purchase class of transactions. c. These types of purchases represent two major classes of transactions within the purchases process. d. These two types of transactions represent routine transactions that must always be investigated in extreme detail.
4. For an issuer (public) company audit of internal control, walkthroughs provide the auditor with primary evidence to Evaluate the effectiveness Confirm whether controls of the design of controls have been placed in operation a. Yes Yes b. Yes No c. No Yes d. No No
5. Which is most likely to be a question asked of employee personnel during a walk-through in an audit of the internal control of an issuer (public) company? a. Have you ever been asked to override the process? b. Do you believe that you are underpaid? c. What do you do when you find a fraudulent transaction? d. Who trained you for this job?
6. How large must the actual loss identified by the auditor be for a control deficiency to possibly be considered a material weakness? Immaterial Material a. Yes Yes b. Yes No c. No Yes d. No No
7. For purposes of an audit of internal control performed under Public Company Accounting Oversight Board requirements, an account is significant if there is more than a a. Reasonably possible likelihood that it could contain immaterial or material misstatements. b. Reasonably possible likelihood that it could contain material misstatements. c. Remote likelihood that it could contain material misstatements. d. Remote likelihood that it could contain more than inconsequential misstatements.
8. A control deficiency that is more than a significant deficiency is most likely to result in what form of audit opinion relating to internal control? a. Adverse. b. Qualified. c. Unqualified.

d. There is no limitation and is likely to reduce auditor liability since the auditors will then share legal responsibility with those who have performed the service. 72. In an integrated audit, which must the auditor communicate in writing to management? a. Only material weaknesses. b. Material weaknesses and significant deficiencies. c. Material weaknesses, significant deficiencies and other control deficiencies. d. Material weaknesses, significant deficiencies, other control deficiencies, and all suspected and possible employee law violations. 73. Which of the following is correct when applying a top-down approach to identify controls to test in an integrated audit? a. For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those controls. b. Starting at the top—controls over specific assertions—the auditor should link to major accounts and reporting items. c. The goal is to focus on details of accounting controls, while avoiding consideration of overall entity- level controls. d. The goal is to focus on all controls related to assertions, omitting consideration of controls related to the financial statements. 74. Which of the following is not included in a standard unqualified opinion on internal control over financial reporting performed under PCAOB requirements? a. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. b. In our opinion, [company name] maintained, in all material respects, effective internal control over financial reporting. c. Our audit included obtaining an understanding of internal control over financial reporting. d. The [company name] management and audit committee is responsible for maintaining effective internal control over financial reporting. 75. Walk-throughs ordinarily provide evidence that helps the auditor to Evaluate design Confirm whether controls effectiveness of controls have been placed in operation a. Yes Yes b. Yes No c. No Yes d. No No 76. In reporting on an entity’s internal control over financial reporting, a practitioner should include a paragraph that describes the a. Documentary evidence regarding the control environment factors. b. Changes in internal control since the prior report. c. Potential benefits from the practitioner’s suggested improvements. d. Inherent limitations of any internal control. 77. When an independent auditor reports on internal control based on criteria established by governmental agencies, the report should a. Not include the agency’s name in the report. b. Indicate matters covered by the study and whether the auditor’s study included tests of controls with the procedures covered by the study. c. Not express a conclusion based on the agency’s criteria. d. Assume responsibility for the comprehensiveness of the criteria established by the agency and include recommendations for corrective action. 78. When an examination has been performed on the effectiveness of entity’s internal control over financial reporting and a material weakness has been noted, the practitioner’s report should express an opinion on

a. The assertion. b. The subject matter to which the assertion relates. c. Neither of the above. d. Both of the above. 79. Which of the following procedures would an auditor most likely perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet? a. Observe the consistency of the employees’ use of cash registers and tapes. b. Inquire about employees’ access to recorded but undeposited cash. c. Trace deposits in the cash receipts journal to the cash balance in the general ledger. d. Compare the cash balance in the general ledger with the bank confirmation request. 80. Sound internal control dictates that immediately upon receiving checks from customers by mail, a responsible employee should a. Add the checks to the daily cash summary. b. Verify that each check is supported by a prenumbered sales invoice. c. Prepare a duplicate listing of checks received. d. Record the checks in the cash receipts journal. 81. Tracing shipping documents to prenumbered sales invoices provides evidence that a. No duplicate shipments or billings occurred. b. Shipments to customers were properly invoiced. c. All goods ordered by customers were shipped. d. All prenumbered sales invoices were accounted for. 82. Which of the following controls most likely would reduce the risk of diversion of customer receipts by an entity’s employees? a. A bank lockbox system. b. Prenumbered remittance advices. c. Monthly bank reconciliations. d. Daily deposit of cash receipts. 83. An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the a. Dates checks are deposited per bank statements with the dates remittance credits are recorded. b. Daily cash summaries with the sums of the cash receipts journal entries. c. Individual bank deposit slips with the details of the monthly bank statements. d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded. 84. Upon receipt of customers’ checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the a. Internal auditor to investigate the listing for unusual transactions. b. Treasurer to compare the listing with the monthly bank statement. c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records. d. Entity’s bank to compare the listing with the cashier’s deposit slip. 85. Which of the following procedures most likely would not be a control designed to reduce the risk of misstatements in the billing process? a. Comparing control totals for shipping documents with corresponding totals for sales invoices. b. Using computer programmed controls on the pricing and mathematical accuracy of sales invoices. c. Matching shipping documents with approved sales orders before invoice preparation. d. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger. 86. Which of the following audit procedures would an auditor most likely perform to test controls relating to management’s assertion concerning the completeness of sales transactions? a. Verify that extensions and footings on the entity’s sales invoices and monthly customer statements have been recomputed.

a. The owner reviews errors in billings to customers and postings to the subsidiary ledger. b. The controller receives the monthly bank statement directly and reconciles the checking accounts. c. The owner reviews credit memos after they are recorded. d. The controller reconciles the total of the detail accounts receivable accounts to the amount shown in the ledger. 94. When a customer fails to include a remittance advice with a payment, it is common practice for the person opening the mail to prepare one. Consequently, mail should be opened by which of the following four company employees? a. Credit manager. b. Receptionist. c. Sales manager. d. Accounts receivable clerk. 95. To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is a. Supported by a vendor’s invoice. b. Stamped “paid” by the check signer. c. Prenumbered and accounted for. d. Approved for authorized purchases. 96. In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also a. Reviews the monthly bank reconciliation. b. Returns the checks to accounts payable. c. Is denied access to the supporting documents. d. Is responsible for mailing the checks. 97. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? a. Completeness. b. Existence or occurrence. c. Valuation or allocation. d. Rights and obligations. 98. Which of the following controls is not usually performed in the vouchers payable department? a. Matching the vendor’s invoice with the related receiving report. b. Approving vouchers for payment by having an authorized employee sign the vouchers. c. Indicating the asset and expense accounts to be debited. d. Accounting for unused prenumbered purchase orders and receiving reports. 99. With properly designed internal control, the same employee most likely would match vendors’ invoices with receiving reports and also a. Post the detailed accounts payable records. b. Recompute the calculations on vendors’ invoices. c. Reconcile the accounts payable ledger. d. Cancel vendors’ invoices after payment. 100. An entity’s internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all a. Purchase orders. b. Canceled checks. c. Receiving reports. d. Approved vouchers.

1. Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases? a. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? b. Are purchase requisitions prenumbered and independently matched with vendor invoices? c. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? d. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

2. For effective internal control, the accounts payable department generally should a. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. b. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee. c. Obliterate the quantity ordered on the receiving department copy of the purchase order. d. Establish the agreement of the vendor’s invoice with the receiving report and purchase order.

3. Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the a. Department that initiated the requisition. b. Receiving department. c. Purchasing agent. d. Accounts payable department.

4. A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner? a. Footing the purchases journal. b. Reconciling vendors’ monthly statements with subsidiary payable ledger accounts. c. Tracing totals from the purchases journal to the ledger accounts. d. Sending written quarterly confirmations to all vendors.

5. With well-designed internal control, employees in the same department most likely would approve purchase orders, and also a. Reconcile the open invoice file. b. Inspect goods upon receipt. c. Authorize requisitions of goods. d. Negotiate terms with vendors.

6. In obtaining an understanding of a manufacturing entity’s internal control over inventory balances, an auditor most likely would a. Analyze the liquidity and turnover ratios of the inventory. b. Perform analytical procedures designed to identify cost variances. c. Review the entity’s descriptions of inventory policies and procedures. d. Perform test counts of inventory during the entity’s physical count.

7. Which of the following controls most likely would be used to maintain accurate inventory records? a. Perpetual inventory records are periodically compared with the current cost of individual inventory items. b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum. c. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved. d. Periodic inventory counts are used to adjust the perpetual inventory records.

8. A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably

9. In determining the effectiveness of an entity’s controls relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and a. Observe the segregation of duties concerning personnel responsibilities and payroll disbursement. b. Inspect evidence of accounting for prenumbered payroll checks. c. Recompute the payroll deductions for employee fringe benefits. d. Verify the preparation of the monthly payroll account bank reconciliation.

10. An auditor most likely would assess control risk at a high level if the payroll department supervisor is responsible for a. Examining authorization forms for new employees. b. Comparing payroll registers with original batch transmittal data. c. Authorizing payroll rate changes for all employees. d. Hiring all subordinate payroll department employees.

11. Which of the following controls most likely would prevent direct labor hours from being charged to manufacturing overhead? a. Periodic independent counts of work in process for comparison to recorded amounts. b. Comparison of daily journal entries with approved production orders. c. Use of time tickets to record actual labor worked on production orders. d. Reconciliation of work-in-process inventory with periodic cost budgets.

12. In meeting the control objective of safeguarding of assets, which department should be responsible for Distribution of paychecks Custody of unclaimed paychecks a. Treasurer Treasurer b. Payroll Treasurer c. Treasurer Payroll d. Payroll Payroll

13. Proper internal control over the cash payroll function would mandate which of the following? a. The payroll clerk should fill the envelopes with cash and a computation of the net wages. b. Unclaimed pay envelopes should be retained by the paymaster. c. Each employee should be asked to sign a receipt. d. A separate checking account for payroll be maintained.

14. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the a. Authorization of transactions from the custody of related assets. b. Operational responsibility from the recordkeeping responsibility. c. Human resources function from the controllership function. d. Administrative controls from the internal accounting controls.

15. To minimize the opportunities for fraud, unclaimed cash payroll should be a. Deposited in a safe-deposit box. b. Held by the payroll custodian. c. Deposited in a special bank account. d. Held by the controller.

16. The auditor may observe the distribution of paychecks to ascertain whether a. Pay rate authorization is properly separated from the operating function. b. Deductions from gross pay are calculated correctly and are properly authorized. c. Employees of record actually exist and are employed by the client. d. Paychecks agree with the payroll register and the time cards.

17. Which of the following departments most likely would approve changes in pay rates and deductions from employee salaries? a. Personnel. b. Treasurer. c. Controller.

d. Payroll. 125. Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed for the entity’s continued existence? b. Are two or more authorized signatures required on checks that repay notes payable? c. Are the proceeds from notes payable used for the purchase of noncurrent assets? d. Are direct borrowings on notes payable authorized by the board of directors? 126. The primary responsibility of a bank acting as registrar of capital stock is to a. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation. b. Account for stock certificates by comparing the total shares outstanding to the total in the shareholders subsidiary ledger. c. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock. d. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation. 127. Where no independent stock transfer agents are employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should a. Be defaced to prevent reissuance and attached to their corresponding stubs. b. Not be defaced but segregated from other stock certificates and retained in a canceled certificates file. c. Be destroyed to prevent fraudulent reissuance. d. Be defaced and sent to the secretary of state. 128. Which of the following is not a control that is designed to protect investment securities? a. Custody over securities should be limited to individuals who have recordkeeping responsibility over the securities. b. Securities should be properly controlled physically in order to prevent unauthorized usage. c. Access to securities should be vested in more than one individual. d. Securities should be registered in the name of the owner. 129. Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed? a. The investment committee of the board of directors periodically reviews the investment decisions delegated to the treasurer. b. Two company officials have joint control of marketable securities, which are kept in a bank safe- deposit box. c. The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger. d. The chairman of the board verifies the marketable securities, which are kept in a bank safe-deposit box, each year on the balance sheet date. 130. A weakness in internal control over recording retirements of equipment may cause an auditor to a. Inspect certain items of equipment in the plant and trace those items to the accounting records. b. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year. c. Trace additions to the “other assets” account to search for equipment that is still on hand but no longer being used. d. Select certain items of equipment from the accounting records and locate them in the plant. 131. Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions? a. Are requests for major repairs approved at a higher level than the department initiating the request? b. Are prenumbered purchase orders used for equipment and periodically accounted for?

b. The auditor must communicate in writing. c. Previously communicated weaknesses that have not been corrected need not be recommunicated. d. A communication indicating that no significant deficiencies were identified should not be issued.

1. Which of the following matters would an auditor most likely consider to be a material weakness to be communicated to those charged with governance of an audit client? a. Management’s failure to renegotiate unfavorable long-term purchase commitments. b. Recurring operating losses that may indicate going concern problems. c. Ineffective oversight of financial reporting by those charged with governance. d. Management’s current plans to reduce its ownership equity in the entity.
2. Which of the following statements is correct concerning significant deficiencies in an audit? a. An auditor is required to search for significant deficiencies during an audit. b. All significant deficiencies are also considered to be material weaknesses. c. An auditor may communicate significant deficiencies during an audit or after the audit’s completion. d. An auditor may report that no significant deficiencies were noted during an audit.
3. An auditor’s letter issued on significant deficiencies relating to an entity’s internal control observed during a financial statement audit should a. Include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses. b. Indicate that the significant deficiencies should be disclosed in the annual report to the entity’s shareholders. c. Include a paragraph describing management’s assertion concerning the effectiveness of internal control. d. Indicate that the audit’s purpose was to report on the financial statements and not to express an opinion on internal control.
4. Which of the following statements is correct concerning an auditor’s required communication of significant deficiencies? a. A significant deficiency previously communicated during the prior year’s audit that remains uncorrected causes a scope limitation. b. An auditor should perform tests of controls on significant deficiencies before communicating them to the client. c. An auditor’s report on significant deficiencies should include a restriction on the distribution of the report. d. An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.
5. Which of the following statements is correct concerning significant deficiencies noted in an audit? a. Significant deficiencies are material weaknesses in the design or operation of specific internal control components. b. The auditor is obligated to search for significant deficiencies that could adversely affect the entity’s ability to record and report financial data. c. Significant deficiencies need not be recommunicated each year if management has acknowledged its understanding of such deficiencies. d. The auditor should separately communicate those significant deficiencies considered to be material weaknesses.
6. Which of the following representations should not be included in a report on internal control related matters noted in an audit? a. Significant deficiencies related to internal control exist. b. There are no significant deficiencies in the design or operation of internal control.

c. Corrective follow-up action is recommended due to the relative significance of material weaknesses discovered during the audit. d. The auditor’s consideration of internal control would not necessarily disclose all significant deficiencies that exist. 145. Which of the following statements concerning material weaknesses and significant deficiencies is correct? a. An auditor should not identify and communicate material weaknesses separately from significant deficiencies. b. Compensating controls may limit the severity of a material weakness or significant deficiency. c. Upon discovery an auditor should immediately report all material weaknesses and significant deficiencies identified during an audit. d. All significant deficiencies are material weaknesses. 146. During the audit the independent auditor identified the existence of a weakness in the client’s internal control and communicated this finding in writing to the client’s senior management and those charged with governance. The auditor should a. Consider the weakness a scope limitation and therefore disclaim an opinion. b. Consider the effects of the condition on the audit. c. Suspend all audit activities pending directions from the client’s audit committee. d. Withdraw from the engagement. 147. In identifying matters for communication with those charged with governance of an audit client, an auditor most likely would ask management whether a. The turnover in the accounting department was unusually high. b. It consulted with another CPA firm about accounting matters. c. There were any subsequent events of which the auditor was unaware. d. It agreed with the auditor’s assessed level of control risk. 148. Which of the following statements is correct concerning an auditor’s required communication with those charged with governance of an audit client? a. This communication is required to occur before the auditor’s report on the financial statements is issued. b. This communication should include discussion of any significant disagreements with management concerning the financial statements. c. Any significant matter communicated to the audit committee also should be communicated to management. d. Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance. 149. An auditor would least likely initiate a discussion with those charged with governance of an audit client concerning a. The methods used to account for significant unusual transactions. b. The maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated. c. Indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor. d. Disagreements with management as to accounting principles that were resolved during the current year’s audit. 150. Which of the following statements is correct about an auditor’s required communication with those charged with governance of an audit client? a. Any matters communicated to the entity’s audit committee also are required to be communicated to the entity’s management. b. The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management.

Which of the following controls would most likely reduce the risk of diversion?

Which of the following controls would an entity most likely use to assist in satisfying the completeness?

Which of the following procedures would the auditors most likely perform to test controls?

Which of the following is not a control that generally is established over cash transactions?