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

Chapter 18 - Integrated Audits of Public Companies Chapter 18 Integrated Audits of Public Companies True / False Questions Section 404 of the Sarbanes-Oxley Act of 2002 includes internal control reporting requirements for both management and auditors True False The Sarbanes-Oxley Act changed auditor association with a client's internal control from the review to the audit form of association True False The amount involved with a significant deficiency is at least a material amount True False The "as of date" for internal control reporting is ordinarily the last day of the fiscal year True False The lack of effective antifraud programs is always considered a material weakness True False PCAOB standards suggest that auditors emphasize nonroutine transactions as contrasted to routine transactions in their consideration of internal control True False An auditor's report on internal control ordinarily includes negative assurance on the effectiveness of internal control True False 18-1 Chapter 18 - Integrated Audits of Public Companies Tests of operating effectiveness ordinarily include reperformance of the application of controls True False A client imposed scope limitation relating to the audit of internal control ordinarily results in a qualified report True False 10 If management's report on internal control discloses a material weakness, the auditors (who agree that it is a material weakness) will issue a report that includes a qualified opinion True False 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? A Option A B Option B C Option C D Option D 18-2 Chapter 18 - Integrated Audits of Public Companies 13 Which must the auditor communicate to management? A Option A B Option B C Option C D Option D 14 Walkthroughs provide the auditors with evidence to: A Option A B Option B C Option C D Option D 15 Walkthroughs provide evidence that helps the auditor to: A Option A B Option B C Option C D Option D 18-3 Chapter 18 - Integrated Audits of Public Companies 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? A Adverse B Qualified C Unqualified D Unqualified with explanatory language 18-4 Chapter 18 - Integrated Audits of Public Companies 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 Control deficiency B Material weakness C Reportable material item D Significant deficiency 21 Which of the following would most likely be included in a SEC 10K filing in which a material weakness in internal control exists? A Option A B Option B C Option C D Option D 22 An auditor identified a material weakness in internal control in August The client was informed and the client corrected the material weakness prior to year-end (December 31); the auditor agrees that the correction eliminates the material weakness prior to year-end The appropriate audit report on internal control under PCAOB standards on reporting on internal control is: A Adverse B Unqualified C Disclaimer D Qualified 18-5 Chapter 18 - Integrated Audits of Public Companies 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: A Adverse B Unqualified C Unqualified with explanatory language relating to the material weakness D Qualified 24 An auditor identified a significant deficiency in internal control in December The client was informed and the client corrected the significant deficiency shortly before year-end (December 31); the auditor agrees that the correction eliminates the significant deficiency as of December 31 The appropriate audit report on internal control under a PCAOB Standard No audit of internal control is: A Adverse B Unqualified C Unqualified with explanatory language relating to the significant deficiency D Qualified 25 Which of the following must be included in management's report internal control under section 404 of the Sarbanes/Oxley Act of 2002? A It is management's responsibility to eliminate or publicly report on significant deficiencies in internal control 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 18-6 Chapter 18 - Integrated Audits of Public Companies 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 Option A B Option B C Option C D Option D 30 Deficiencies in internal control identified by the auditor that are lesser than significant deficiencies 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 18-7 Chapter 18 - Integrated Audits of Public Companies 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 you 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 be prevented or detected? A Immaterial B Material C More than inconsequential D Substantial 18-8 Chapter 18 - Integrated Audits of Public Companies 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: A Remote B More than remote C Probable D Not considered 39 The minimum likelihood of loss involved in the consideration of a possible significant deficiency is: A Remote B Reasonably possible C Probable D Not considered 40 The minimum likelihood of loss involved in the consideration of a possible material weakness is: A Remote B Reasonably possible C Probable D Not considered 18-9 Chapter 18 - Integrated Audits of Public Companies 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 18-10 Chapter 18 - Integrated Audits of Public Companies 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 18-11 Chapter 18 - Integrated Audits of Public Companies Chapter 18 Integrated Audits of Public Companies Answer Key True / False Questions Section 404 of the Sarbanes-Oxley Act of 2002 includes internal control reporting requirements for both management and auditors TRUE Difficulty: Easy The Sarbanes-Oxley Act changed auditor association with a client's internal control from the review to the audit form of association FALSE Difficulty: Medium The amount involved with a significant deficiency is at least a material amount FALSE Difficulty: Medium The "as of date" for internal control reporting is ordinarily the last day of the fiscal year TRUE Difficulty: Easy The lack of effective antifraud programs is always considered a material weakness FALSE Difficulty: Hard 18-12 Chapter 18 - Integrated Audits of Public Companies PCAOB standards suggest that auditors emphasize nonroutine transactions as contrasted to routine transactions in their consideration of internal control FALSE Difficulty: Hard An auditor's report on internal control ordinarily includes negative assurance on the effectiveness of internal control FALSE Difficulty: Medium Tests of operating effectiveness ordinarily include reperformance of the application of controls TRUE Difficulty: Easy A client imposed scope limitation relating to the audit of internal control ordinarily results in a qualified report FALSE Difficulty: Medium 10 If management's report on internal control discloses a material weakness, the auditors (who agree that it is a material weakness) will issue a report that includes a qualified opinion TRUE Difficulty: Medium Multiple Choice Questions 18-13 Chapter 18 - Integrated Audits of Public Companies 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 Difficulty: Hard 12 Which must management communicate to the audit committee? A Option A B Option B C Option C D Option D Difficulty: Medium 13 Which must the auditor communicate to management? A Option A B Option B C Option C D Option D Difficulty: Medium 18-14 Chapter 18 - Integrated Audits of Public Companies 14 Walkthroughs provide the auditors with evidence to: A Option A B Option B C Option C D Option D Difficulty: Medium 15 Walkthroughs provide evidence that helps the auditor to: A Option A B Option B C Option C D Option D Difficulty: Easy 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 Difficulty: Medium 18-15 Chapter 18 - Integrated Audits of Public Companies 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 Difficulty: Easy 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 Difficulty: Medium 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? A Adverse B Qualified C Unqualified D Unqualified with explanatory language Difficulty: Hard 18-16 Chapter 18 - Integrated Audits of Public Companies 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 Control deficiency B Material weakness C Reportable material item D Significant deficiency Difficulty: Easy 21 Which of the following would most likely be included in a SEC 10K filing in which a material weakness in internal control exists? A Option A B Option B C Option C D Option D Difficulty: Hard 22 An auditor identified a material weakness in internal control in August The client was informed and the client corrected the material weakness prior to year-end (December 31); the auditor agrees that the correction eliminates the material weakness prior to year-end The appropriate audit report on internal control under PCAOB standards on reporting on internal control is: A Adverse B Unqualified C Disclaimer D Qualified Difficulty: Easy 18-17 Chapter 18 - Integrated Audits of Public Companies 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: A Adverse B Unqualified C Unqualified with explanatory language relating to the material weakness D Qualified Difficulty: Medium 24 An auditor identified a significant deficiency in internal control in December The client was informed and the client corrected the significant deficiency shortly before year-end (December 31); the auditor agrees that the correction eliminates the significant deficiency as of December 31 The appropriate audit report on internal control under a PCAOB Standard No audit of internal control is: A Adverse B Unqualified C Unqualified with explanatory language relating to the significant deficiency D Qualified Difficulty: Hard 25 Which of the following must be included in management's report internal control under section 404 of the Sarbanes/Oxley Act of 2002? A It is management's responsibility to eliminate or publicly report on significant deficiencies in internal control 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 18-18 Chapter 18 - Integrated Audits of Public Companies 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 Difficulty: Hard 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 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 18-19 Chapter 18 - Integrated Audits of Public Companies 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 Option A B Option B C Option C D Option D Difficulty: Easy 30 Deficiencies in internal control identified by the auditor that are lesser than significant deficiencies 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 you when you find an error? D What are you looking for to determine if there is an error? Difficulty: Hard 18-20 Chapter 18 - Integrated Audits of Public Companies 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 Difficulty: Hard 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 Difficulty: Medium 35 A material weakness involves a reasonable possibility that what size misstatement will not be prevented or detected? A Immaterial B Material C More than inconsequential D Substantial Difficulty: Medium 18-21 Chapter 18 - Integrated Audits of Public Companies 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 Difficulty: Easy 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 Difficulty: Medium 38 The minimum likelihood of loss involved in the consideration of a control deficiency that is less than a significant deficiency is: A Remote B More than remote C Probable D Not considered Difficulty: Hard 39 The minimum likelihood of loss involved in the consideration of a possible significant deficiency is: A Remote B Reasonably possible C Probable D Not considered Difficulty: Easy 18-22 Chapter 18 - Integrated Audits of Public Companies 40 The minimum likelihood of loss involved in the consideration of a possible material weakness is: A Remote B Reasonably possible C Probable D Not considered Difficulty: Easy 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 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 18-23 Chapter 18 - Integrated Audits of Public Companies 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 18-24 Chapter 18 - Integrated Audits of Public Companies *May be material weakness, significant deficiency, or lesser deficiency, but is not ordinarily considered a strong indicator of a material weakness in internal control Difficulty: Hard 18-25 ... considered a strong indicator of a material weakness in internal control 18- 11 Chapter 18 - Integrated Audits of Public Companies Chapter 18 Integrated Audits of Public Companies Answer Key True... year's audit of internal control Essay Questions 18- 10 Chapter 18 - Integrated Audits of Public Companies 43 The PCAOB has outlined a number of circumstances that are indicators of a material.. .Chapter 18 - Integrated Audits of Public Companies Tests of operating effectiveness ordinarily include reperformance of the application of controls True False A client