MODULE 6

CONSIDERATIONS OF INTERNAL CONTROL

PSA-BASED QUESTIONS

1. An auditor considers internal control in order to:

A. Determine whether assets are safeguarded.

B. Suggest improvements in internal control.
C. Plans the audit procedures.
D. Express an opinion.

2. The primary purpose of the auditor’s consideration of internal control is to provide a basis for

A. Determine whether procedures and records that are concerned with the safeguarding of assets are
reliable.
B. Constructive suggestions to clients concerning deficiencies in internal control.
C. Determine the nature, timing and extent of audit tests to be applied.
D. The expression of an opinion.

3. The primary objective of procedures to be performed in obtaining an understanding of internal control is to

provide an auditor with

A. An evidential matter for use in reducing detection risk.

B. Knowledge necessary to plan the audit.
C. A basis for which to modify tests of controls.
D. Information necessary to prepare flowcharts.

4. A reason to establish internal control is to

A. Have a basis of planning the audit.

B. Provide reasonable assurance that the objectives of the organization are achieved.
C. Encourage compliance with organizational objectives.
D. Ensure the accuracy, reliability, and timeliness of information.

5. What is the primary purpose of effective internal control in an organization?

A. Achievement of certain organizational goals.

B. Completion of a successful audit for the entity.
C. Shareholders’ involvement in the company’s success.
D. Obtaining profitability and financial strength.

6. An effective internal control is not expected to provide a reasonable assurance regarding the achievement of
objectives concerning

A. Reliability of financial reporting.

B. Compliance to applicable laws and regulations.
C. Elimination of material misstatements.
D. Effectiveness and efficiency of operations.

7. Internal control is primarily established within a company to accomplish which of the following objective?

A. Prevent irregularities
B. Provide reasonable assurance that the company’s objectives will be achieved
C. Catch all errors that may occur in the company
D. Aid in the effective auditing of the company
8. Which of the following is not an element of an entity’s internal control?

A. Control risk
B. Control activities
C. The information system
D. The control environment

9. One of the major components of an organization’s internal control structure includes:

A. Audit control risk

B. The cost-benefit ratio
C. Risk assessment
D. Communication

10. Which of the following best describes the interrelated components of internal control?

A. Organizational structure, management philosophy, and planning.

B. Control environment, risk assessment, control activities, information and communication systems, and
monitoring.
C. Risk assessment, backup facilities, responsibility accounting and natural laws.
D. Legal environment of the firm, management philosophy, and organizational structure.

11. Which of the following is not typically one of management’s concerns in designing an effective internal control
structure?

A. Reliability of financial reporting.

B. Obtaining the best internal control system possible.
C. Compliance with applicable laws and regulations.
D. Efficiency and effectiveness of operations.

12. The auditor’s review of the client’s internal control is documented in order to substantiate

A. Conformity of the accounting records with Philippine Financial Reporting Standards.

B. Representation as to adherence to requirements of management.
C. Representation as to compliance with Philippine Standards on Auditing.
D. The fairness of the financial statement presentation.

13. An auditor would most likely be concerned with internal control policies and procedures that provide reasonable
assurance about:

A. The efficiency of management’s decision-making process.

B. Appropriate prices that the entity should charge for its products.
C. Methods of assigning production tasks to employees.
D. The entity’s ability to process and summarize financial data.

14. When considering the effectiveness of internal control, the auditor should recognize that inherent limitations do
exist. Which of the following is an example of inherent limitations in a client’s internal control?

A. The effectiveness of procedures depends on the segregation of employee duties.

B. Procedures are designed to assure the execution and recording of transactions in accordance with
management’s authorization.
C. In the performance of most control procedures, there are possibilities of errors arising from mistakes in
judgment.
D. Procedures for handling large numbers of transactions are processed by electronic data processing
equipment.
15. Which of the following is least likely to be an evidence of operating effectiveness of controls?

A. Cancellation of supporting documents.

B. The policy of documenting the usage of computer programs.
C. Confirmation of bank balances.
D. Signatures on authorization forms.

16. Which of the following is an inherent limitation of any client’s internal control?

A. The benefits expected to be derived from effective internal control should not exceed the costs of such
control.
B. The competence and integrity of client personnel provide an environment conducive to control and provide
assurance that effective control will be achieved.
C. The procedures that are designed to assure the execution and recording of transactions in accordance with
proper authorizations are effective against frauds perpetrated by management.
D. The procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.

17. A system of internal control, regardless of how carefully designed and implemented, contains certain inherent
limitations. Which of the following errors or irregularities is not caused by an inherent limitation?

A. The president and chief executive officer, with the assistance of the corporate controller, inflated earnings
by recording fictitious sales at year-end.
B. A newly-installed electronic data processing system failed to provide for a comparison of sales order
amount with prior customer balance and credit limit. This resulted in numerous sales to customers who had
already exceeded their credit limits.
C. Numerous recording errors occurred because persons analyzing and recording transactions did not have the
necessary accounting background.
D. A computer programmer and a computer operator conspired to divert funds from the company to an
account controlled by the dishonest employees.

18. Corporate directors, management, external auditors, and internal auditors all play important roles in creating a
proper control environment. Top management is primarily responsible for

A. Establishing a proper environment and specifying overall internal control.

B. Reviewing the reliability and integrity of financial information and the means used to collect and report
such information.
C. Ensuring that external and internal auditors adequately monitor and control environment.
D. Implementing and monitoring controls that are designed by the board of directors.

19. The primary responsibility for establishing and maintaining internal control rests with the

A. Internal auditors.
B. Management.
C. Securities and Exchange Commission.
D. External auditors.

20. Which of the following is not part of control environment?

A. Management philosophy and operating style

B. Organizational structure
C. Information and communication systems
D. Assignment of authority and responsibility

21. Internal control is a function of management, and effective control is based upon the concept of charge and
discharge of responsibility and duty. Which of the following is an important feature of effective internal control?
 A. Responsibility for accounting and financial duties should be assigned to one responsible officer.
B. Responsibility for the performance of each duty must be fixed.
C. Responsibility for accounting duties must be borne by the auditing committee of the company.
D. Responsibility for accounting activities and duties must be assigned only to employees who are bonded.

22. The control environment includes which of the following?

A. Control activities
B. Management philosophy and operating style
C. Assessing activity level risks
D. Application level controls

23. Which of the following is not a major emphasis in the design of effective internal accounting control?

A. Assets are properly protected.

B. Duties are segregated.
C. Transactions are authorized.
D. Processes are efficient.

24. A proper understanding of the client’s internal control is an integral part of the audit planning process. The
results of the understanding

A. Must be reported to the major stockholders.

B. Always require the auditor in testing the control policies and procedures.
C. Are not reported to client management.
D. May be used as the basis for withdrawing from an audit engagement.

25. The auditor who becomes aware of reportable conditions is required to communicate such a weakness to the

A. Audit committee and client’s legal counsel.

B. Board of directors and internal controls.
C. Senior management and board of directors.
D. Internal auditors and senior management.

26. As part of understanding internal controls, an auditor is not required to

A. Consider factors that affect the risk of material misstatement.

B. Ascertain whether internal control policies and procedures have been placed in operation.
C. Identify the types of potential misstatements that may occur.
D. Obtain knowledge about the operating effectiveness of internal control.

27. The purpose of tests of controls is to provide reasonable assurance that the

A. Accounting treatment of transactions and balances is valid and proper.

B. Control procedures are functioning as intended.
C. Entity has complied with disclosure requirements of PFRS.
D. Entity has complied with requirements of quality control.

28. Tests of controls are used to test whether controls are

A. Operating effectively.
B. Placed in operation (implemented).
C. Properly accumulated into balance sheet totals.
D. Properly documented by the client.
29. After documenting internal control in an audit engagement, the auditor may perform tests on

A. Those controls that the auditor plans to rely on.

B. Those controls in which deficiencies were identified.
C. Those controls that have a material effect on the financial statement balances.
D. A random sample of the controls that were reviewed.

30. Which of the following audit techniques would most likely provide an auditor with the most assurance about the
effectiveness of the operation of an internal control procedure?

A. Inquiry of client personnel

B. Recomputation of an account balance
C. Observation of client personnel
D. Confirmation of balances or transactions with outside parties

31. After the study and evaluation of a client’s internal control policies and procedures has been completed, an
auditor might decide to

A. Increase the extent of substantive testing in areas where the internal control policies and procedures are
strong.
B. Reduce the extent of control testing in areas where the internal control policies and procedures are strong.
C. Reduce the extent of both substantive and control testing in areas where the internal control policies and
procedures are strong.
D. Increase the extent of substantive testing in areas where the internal controls are weak.

32. The Philippine Standards on Auditing require the auditor to obtain an understanding of the client’s internal
controls

A. For every audit.

B. For first-time audits.
C. Sufficient to find any frauds which may exist.
D. Whenever it would be appropriate.

33. Control testing is performed in order to determine whether or not

A. The assessed level of control risk can be reduced.

B. Necessary controls are absent.
C. Incompatible functions exist.
D. Material peso errors exist.

34. The auditor is studying internal control policies and procedures within the sales, shipping, and billing subset of
the revenue cycle. Which of the following conditions suggests a need for additional testing of controls?

A. Internal control is found to be weak with regard to shipping and billing.

B. Internal control over sales, billing, and shipping appears strong, but 80% of sales revenue is attributable to
three major customers.
C. Internal control over billing and shipping s thought to be strong and the auditor considers additional testing
of selected controls will result in a major reduction in substantive testing.
D. Internal control over the recording of sales is found to be weak and the sales are evenly divided among a
large number of customers.

35. To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of
the following except:

A. Make inquiries.
B. Make observations.
 C. Inspect documents and records.
D. Design substantive tests.

36. It is the most appropriate that tests of controls be applied to transactions and controls

A. At the balance sheet date.

B. At each quarterly interim period.
C. For the entire period under audit.
D. At the beginning of the fiscal year.

37. To obtain evidence about control risk, an auditor ordinarily selects tests from a variety of techniques, including:

A. Analysis
B. Confirmation
C. Reperformance
D. Comparison

38. An auditor wishes to perform tests of controls on a client’s cash disbursements procedures. If the controls leave
no audit trail of documentary evidence, the auditor most likely will test the procedures by

A. Confirmation and observation.

B. Analytical procedures and confirmation.
C. Observation and inquiry.
D. Inquiry and analytical procedures.

39. Management’s attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals
most likely would significantly influence an entity’s control environment when

A. An audit committee is active in overseeing the entity’s financial reporting policies.

B. External policies established by parties outside the entity affect its accounting practices.
C. Management is dominated by one individual who is also a shareholder.
D. Internal auditors have direct access to the board of directors and entity management.

QUIZZERS

1. Of the following control environment characteristics, identify the one that contributes most to effective
internal control.

A. The audit committee consists of the president, two vice-presidents, and the corporate controller.
B. The company does not have a centralized human resource function.
C. The company has an effective internal audit staff that monitors controls on a continuous basis.
D. The company routinely transacts business with related parties.

2. Effective internal control

A. Reduces the need for management to review exception reports on a day-to-day basis.
B. Eliminates risk and potential loss to the organization.
C. Cannot be circumvented by management.
D. Is unaffected by changing circumstances and conditions encountered by the organization.

3. Effective internal control requires organizational independence of different departments. Organizational

independence would be impaired in which of the following situations?

A. The internal auditors report to the audit committee of the board of directors.
B. The controller reports to the vice president of production.
 C. The payroll accounting department reports to the chief accountant.
D. The cashier reports to the treasurer.

4. Internal controls are designed to provide reasonable assurance that:

A. Control policies have not been circumvented through management’s joint effort.
B. The internal auditing department’s guidance and oversight of management’s performance is
accomplished economically and efficiently.
C. Management’s planning, organizing, and directing processes are properly evaluated.
D. Material errors or fraud would be prevented or detected and corrected within a timely period by
employees in the course of performing their assigned duties.

5. Which of the following is not an assurance to be provided by an effective internal control system?

A. Management is responsible for knowledge and authorization of transactions.

B. Transactions are recorded to maintain accountability for assets.
C. Access to assets is limited to members of management.
D. Transactions are recorded to permit the preparation of reliable financial statements.

6. An entity’s internal control consists of policies and procedures established to provide reasonable assurance
that specific entity objectives will be achieved. Only some of these objectives, policies, and procedures are
relevant to a financial statement audit. Which of the following would most likely be considered in an audit
of financial statements?

A. Timely reporting and review of quality control results.

B. Maintenance of control over unused checks.
C. Marketing analysis of sales generated by advertising projects.
D. Maintenance of statistical production analyses.

7. When an organization has strong internal control, management can expect various benefits. The benefit
least likely to occur is

A. A reduced cost of an external audit.

B. An elimination of employee fraud.
C. The availability of reliable data for decision-making purposes and protection of important documents
and records.
D. An assurance of compliance to applicable laws and regulations.

8. Which of the following statements about internal control is correct?

A. Effectively designed internal control reasonably ensures that collusion among employees cannot occur.
B. The establishment and maintenance of internal control are important responsibilities of the internal
auditor.
C. Exceptionally strong internal control is enough for the auditor to eliminate substantive tests on
significant account balance.
D. The cost benefit relationship is a primary criterion that should be considered in designing internal
control.

9. Internal control can only provide reasonable and not an absolute assurance of achieving entity’s control
objectives. One of the factors limiting the likelihood of achieving those objectives is that

A. The auditor’s primary responsibility is the detection of fraud.

B. The board of directors is active and independent.
C. The cost of internal control should not exceed its benefits.
D. Management monitors internal control.
10. A proper segregation of duties required that an individual who is:

A. Authorizing a transaction records it.

B. Authorizing a transaction maintains custody of the asset that results from the transaction.
C. Maintaining a custody of an asset be entitled to have access to the accounting records for the asset.
D. Recording a transaction not compares the accounting record of the asset with the asset itself.

11. External factors can either strengthen or weaken an entity’s internal control. Which of the following
conditions supports strong internal control?

A. Strict monitoring by the Bureau of Internal Revenue.

B. The existence of related parties and related-party transactions.
C. Pressure imposed by the financial community to improve earnings performance.
D. An economic downturn.

12. Proper segregation of functional responsibilities in an effective system of internal control calls for
separation of the functions on:

A. Authorization, execution, and payment.

B. Authorization, recording, and custody.
C. Custody, execution, and reporting.
D. Authorization, payment, and recording.

13. For good internal control, which of the following functions should not be the responsibility of the
treasurer’s department?

A. Data processing.
B. Handling of cash.
C. Custody of securities.
D. Establishing credit policies.

14. In general, a material internal control weakness may be defined as a condition in which material errors or
fraud would ordinarily not be detected within a timely period by

A. An auditor during the normal study and evaluation of the system of internal control.
B. A controller when reconciling accounts in the general.
C. Employees in the normal course of performing their assigned functions.
D. The chief financial officer when reviewing interim financial statements.

15. In general, material irregularities perpetrated by which of the following are most difficult to detect?

A. Internal auditor
B. Computer operator
C. Cashier
D. Controller

16. Controls that enhance the reliability of the financial statements may be classified as prevention controls and
detection controls. Which of the following is primarily a detection control?

A. Separation of duties between recording cash receipts and cash custody.

B. Bank accounts are reconciled monthly by persons who are independent of cash recording and cash
custody.
C. The human resource department authorizes the hiring of only those persons for accounting positions
that meet the written job requirements specified by the corporate controller.
D. An accounting manual, accompanied by a detailed chart of accounts, carefully and clearly describes
each type of transactions affecting the entity.
17. One aspect on internal control requires companies to maintain adequate documentation and records. Which
of the following statements is not correct with respect to an entity’s maintenance of documents and
records?

A. Documents should be pre-numbered only if the client has no other means to maintain records of which
documents have been used.
B. Documents should be sufficiently simple to ensure that they are clearly understood.
C. Documents should be prepared at the time a transaction occurs or as soon thereafter as possible.
D. Documents should be pre-numbered consecutively to facilitate control over missing documents.

18. Which of the following factors are included in an entity’s control environment?

Audit Committee
Internal Audit Function
Management Style
 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

A. YES YES NO
B. YES NO YES
C. NO YES YES
D. YES YES YES

19. Emir is responsible for the custody of finished goods in the warehouse. If his company wishes to maintain
strong internal control, which of the following responsibilities are incompatible with his primary job?

A. He is also responsible for the company’s fixed asset control ledger.

B. He is responsible for receiving of goods into the warehouse.
C. He is responsible for the accounting records for all receipts and shipments of goods from the
warehouse.
D. He is responsible for issuing goods for shipment.

20. A part of a periodic planning exercise, a company discovers that an eastern European political dispute may
interfere with supply sources. This is an example of:

A. Control environment
B. Risk assessment
C. Control activities
D. Monitoring

21. Internal control procedures are not designed to provide reasonable assurance that

A. Transactions are executed in accordance with management’s authorization.

B. Irregularities will be eliminated.
C. Access to assets is permitted only in accordance with management’s authorization.
D. The recorded accountability for assets is compared with the existing assets at reasonable intervals.

22. Transaction authorizing within an organization may be either specific or general. An example of specific
transaction authorization is the

A. Setting of automatic reorder points.

B. Approval of a construction budget for a new warehouse.
C. Establishment of a customer’s credit limits.
D. Establishment of sales prices.

23. Which of the following statements best describes a weakness often associated with computers?

A. Computer equipment is more subject to a systems error than manual processing which is subject to
human error.
B. Computer equipment processes and records similar transactions in a similar manner.
C. Control activities for detecting invalid and unusual transactions are less effective than manual control
activities.
D. Functions that would normally be separated in a manual system are combined in a computer system.

24. The financial statements are not likely to correctly reflect Philippine Financial Reporting Standards if

A. The controls affecting the reliability of financial reporting are inadequate.

B. The company’s controls do not promote efficiency.
C. The company’s controls do not promote effectiveness.
D. All of them are true.

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

25. The basic concept of internal control which recognizes that the cost of internal control should not exceed
the benefits expected to be derived is known as:

A. Management by exception.
B. Management responsibility.
C. Limited assurance.
D. Reasonable assurance.

26. Internal control should provide reasonable (but not necessarily absolute) assurance which means that:

A. Internal control is a management’s, not auditor’s, responsibility.

B. An attestation engagement about management’s internal control assertions may not necessarily detect
all reportable conditions.
C. The cost of control activities should not exceed the benefits.
D. There is always a risk that reportable conditions may result in material misstatements.

27. When considering internal control, an auditor must be aware of the concept of reasonable assurance which
recognizes that

A. The employment of competent personnel provides assurance that the objectives of internal control will
be achieved.
B. The establishment and maintenance of a system of internal control is an important responsibility of the
management and not of the auditor.
C. The cost of internal control should not exceed the benefits expected to be derived from internal control.
D. The segregation of incompatible functions is necessary to obtain assurance that the internal control is
effective.

28. To qualify as an “outside director” in an audit committee, one must

A. Not own any stock in client company.

B. Not be a part of management.
C. Not receive any remuneration or expense reimbursement.
D. Work for a CPA firm.

29. Adequate separation of duties within an EDP department would ensure that

A. The programmer does not have an access to computer operation.

B. The librarian has no physical control over the computer programs.
C. The computer operator does not have access to computer run instructions.
D. The data control group have as little independence as possible.

30. Which of the following duties would indicate a weakness in the internal control system?

A. The accounting function is under the controller.

B. The custodianship of cash is the responsibility of the treasurer’s function.
C. The internal auditor reports to the board of directors.
D. The custodianship of buildings and equipment is the responsibility of the controller’s function.

31. Control risk is a measure of the auditor’s expectation that the internal control structure

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

A. Will prevent material misstatements from occurring.

B. Will detect and correct material misstatements.
C. Will either prevent material misstatements or detect and correct them.
D. Will neither prevent material misstatements nor detect and correct them.

32. Of the following statements about an internal control system, which one is not valid?

A. No one person should be responsible for the custodial responsibility and the recording responsibility
for an asset.
B. Transactions must be properly authorized before such transactions are processed.
C. Because of the cost benefit relationship, a client may apply control procedures on a test basis.
D. Control procedures reasonably ensure that collusion among employees cannot occur.

33. An entity should consider the cost of a control in relation to the risk. Which of the following controls best
reflects this philosophy for a large peso investment in heavy machine tools?

A. Conducting a weekly physical inventory.

B. Placing security guards at every entrance 24 hours a day.
C. Imprinting a controlled identification number on each tool.
D. Having all dispositions approved by the vice president of sales.

UNDERSTANDING AND DOCUMENTATION OF INTERNAL CONTROL

34. In an audit of financial statements, an auditor’s primary consideration regarding internal control is whether
it

A. Incorporates management’s philosophy and operating style.

B. Affects management’s financial statement assertions.
C. Provides adequate safeguards over access to assets.
D. Supports management’s decision-making processes.

35. The procedures to test effectiveness of control policies and procedures in support of a reduced assessed
control risk are called

A. Tests of transactions.
B. Analytical tests.
C. Tests of controls.
D. A walk-through.

36. The actual operation of an internal control system may be the most objectively evaluated by

A. Completing a questionnaire and flowchart related to the accounting system in the year under audit.
B. A review of the previous year’s audit work papers to update the report of the internal control
evaluation.
C. A selection of items processed by the system and determination of the presence or absence of errors
and compliance deviations.
D. Substantive tests of accounts balances based on the auditor’s assessment of internal control strength.

38. The three key concepts that underlie the study of an internal control structure and the assessment of control risk
would not include a criterion that
a. the control risk may range from zero to 100%.
b. management, not the auditor, must establish and maintain the entity’s controls.

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

c. the internal control structure provides reasonable, but not absolute, assurance that the financial
statements are fairly stated.
d. the internal control structure can never be regarded as completely effective.

39. Even with the most effectively designed internal control structure, the must obtain audit evidence, beyond testing
the controls, for every
a. financial statement account.
b. material financial statement account.
c. financial statement account that will be relied upon by third parties.
d. transaction.

40. The primary purpose of performing tests of controls is to provide reasonable assurance that:
a. The internal control is effective.
b. the accounting system is documented accurately.
c. transactions are recorded at the amounts executed.
d. All control activities leave visible evidence.

41. a consideration of internal control made during an audit is usually not sufficient to express an opinion on an
entity’s controls because
a. weaknesses in the system may go unnoticed during the audit engagement.
b. a consideration of internal control is not necessarily made during an audit engagement.
c. only those controls on which n auditor intends to rely are reviewed, tested, and evaluated.
d. controls can change each year.

42. An auditor’s report on internal control of a publicly held company would ordinarily be least use to
a. shareholders.
b. directors.
c. officers.
d. regulatory agencies.

43. The accountant’s report that expresses an opinion on an entity’s internal controls should state that the
a. establishment and maintenance of internal control is the responsibility of management.
b. objective of the client’s internal controls are being met.
c. consideration of the internal controls is conducted in accordance with generally accepted auditing
standards.
d. inherent limitations of the client’s internal controls are examined.

44. Reportable conditions are matters that come to an auditor’s attention and that should be communicated to an
entity’s audit committee because they represent
a. material irregularities or illegal acts perpetrated by management.
b. significant deficiencies in the design or operation of internal control.
c. fragrant violations of the entity’s documented conflict-of-interest policies.
d. intentional attempts by client personnel to limit the scope of the auditor’s work.

45. The accountant’s report that expresses an opinion on an entity’s internal controls would not include a
a. description of the scope of the engagement.
b. specific date that the report covers rather than a period of time.
c. brief explanation of the broad objectives and inherent limitations of internal control.
d. statements that the entity’s internal controls are consistent with that of the prior year after giving effect to
subsequent changes.

46. A CPA’s consideration of internal control in an audit

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

a. is generally more limited than that made in connection with an engagement to express an opinion on
internal control.
b. is generally more extensive than that made in connection with an engagement to express an opinion on
internal control.
c. will generally be identical to that made in connection with an engagement to express an opinion on
internal control.
d. will generally result in the CPA expressing an opinion on the internal control.

47. The understanding of internal control that relates to a financial statement assertion should be used to do all of the
following except:
a. Determine the inherent risk for that assertion
b. Identify types of potential misstatements for that assertion.
c. Consider factors that affect the risk of material misstatement for that assertion and asses control risk.
d. Design substantive tests that correspond with the assessment of control risk.

48. The sequence of steps in gathering, evidence as the basis of the auditor’s opinion is:
a. Substantive tests, documentation of control structure, and tests of controls.
b. Documentation of control structure, substantive tests, and tests of control.
c. Documentation of control structure, tests of controls, and substantive tests.
d. Tests of controls, documentation of controls structure, and substantive tests.

49. Which of the following procedures is essential in determining whether necessary control activities are prescribed
are being followed
a. Development of questionnaires and checklists.
b. Evaluation of the entity’s procedures for risk assessment.
c. Documentation of and testing controls.
d. Observing employees and making inquiries.

50. Which of the following is the logical order of performing the following auditing procedures?
a. Tests of internal control procedures
b. Preparation of a flowchart depicting the client’s internal control system.
c. Substantive tests

a. a b c
b. a c b
c. b a c
d. b c a

51. A secondary purpose of an auditor’s consideration of internal control is to provide a(an)

a. basis of constructive suggestions about improvement in internal control structure.
b. basis for assessing control risk.
c. assurance that the records and documents have been maintained in accordance with existing company
policies and procedures.
d. basis for the determination of the resultant extent of the tests to which auditing procedures are to be
restricted.

52. Which of the following statements with respect to the independent auditor’s evaluation of internal control is
correct?
a. The auditor should decrease control testing when weaknesses in cash receipts are mitigated by strong
controls in cash disbursement procedures.
b. The auditor should increase control testing when weaknesses in billing procedures are mitigated by
strong controls in collection procedures.

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 Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

c. The auditor generally should not evaluate the overall effectiveness of internal control, but should
separately evaluate each of the transaction cycles.
d. The auditor should evaluate all internal control weaknesses before determining the control procedures
that should prevent or detect errors or irregularities.

53. The auditor concludes that a public company has significant deficiencies in its internal control over financial
reporting. Which of the following is not a proper response to this finding?
a. Report the deficiencies to management and the audit committee.
b. report the deficiencies to the shareholders.
c. Expand the planned testing of account balances to consider the types of errors that might occur because
of the deficiency.
d. Any of the responses.

54. The development of constructive suggestions to clients for improvements in internal accounting control is
a. a requirement of the auditor’s study and evaluation of internal accounting control.
b. a desirable by-product of an audit engagement.
c. only addressed by the auditor during a special engagement.
d. as important as establishing a basis for reliance on internal accounting control system.

55. Which of the following statements concerning the independent auditor’s required communication of material
weaknesses in internal control is correct?
a. Weaknesses reported at interim dates must be repeated in the final communication.
b. If the auditor is not aware of any material weaknesses during examination, that fact must be
communicated.
c. Weaknesses that had been reported in prior years communication and have not been corrected need not
be repeated in the current year’s communication.
d. although written communication is preferable, the auditor may communicate the findings orally.

56. After obtaining a sufficient understanding of internal control, the auditor assesses
a. the need to apply PSAs.
b. detection risk to determine the acceptable level of inherent risk.
c. detection risk and inherent risk to determine the acceptable level of control risk.
d. control risk to determine the acceptable level of detection risk.

57. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that
a. tests of controls may fail to identify controls relevant to assertion.
b. material misstatement may exist in the financial statements.
c. specified controls requiring segregation of duties may be circumvented by collusion.
d. entity policies may be circumvented by senior management.

58. It is important for the auditor to consider the competence of the audit client’s employees because their
competence bears directly and importantly upon the
a. cost-benefit relationship of internal control
b. achievements of the objectives of internal control
c. comparison of recorded accountability with assets
d. timing of the tests to be performed

59. In gaining an understanding of internal control, the auditor may trace to several transaction through the control
process, including how the transactions interface with any service organizations whose services are part of the
information system. The primary purpose of this task is to
a. replace substantive tests.
b. determined whether the controls have been placed in operation.

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Marawi City

c. determined the effectiveness of the control procedures.

d. detect fraud.

60. When obtaining an understanding of the entity’s internal control, the auditor should concentrate on the substance
of controls rather than on their form because
a. the control may be operating effectively but may not be documented.
b. management may establish appropriate controls but not act on them.
c. the control may be so inappropriate that no reliance is contemplated by the auditor.
d. management may implement controls with costs in excess of benefits

61. In obtaining an understanding of an entity’s internal control in a financial statement audit, an auditor is not
required to
a. determine whether the controls have been placed in operation.
b. perform procedures to understand the design of controls.
c. document the understanding of the entity’s internal control components.
d. search for significant deficiencies in the operation of internal control.

62. Which of the following tasks should be performed prior to the final audit?
a. Determining the fairness of property, plant, and equipment.
b. confirming accounts receivable.
c. understanding internal control
d. collecting and evaluating evidence supporting the fairness of inventory values.

63. A conceptual approach to the auditor’s evaluation of internal accounting control consists of the following four
steps:
I. Determine whether the necessary procedures are prescribed are being followed satisfactorily
II. Consider the types of errors and frauds that could occur.
III. Determine the internal control policies and procedures that should prevent or detect errors and fraud.
IV. Evaluate any weakness to determine its effect on the nature, timing, or extent of auditing procedures to
be applied and suggestions to be made to the client.

a. III, IV, I, II
b. III, I, II, IV
c. II, III, I, IV
d. II, I, III, IV

64. An auditor evaluate the existing internal control in order to

a. determine the extent of substantive tests which must be performed.
b. determine the extent of control tests which must be performed.
c. ascertain whether irregularities or probable.
d. ascertain whether any employees have incompatible functions.

65. The auditor’s study and evaluating of internal control may be done for all but which of the following reasons?
a. To provide a basis for offering the client other value-added services designed to increase efficient and
effective operations.
b. To determine the nature, timing, and extent of other audit tests.
c. to establish a basis for reliance on internal controls.
d. to provide training and development for staff accountants.

66. Regardless of the assessed level of control risk, an auditor would perform some
a. tests of control policies and procedures in order to determine their operating effectiveness.
b. analytical procedures to verify the design controls.

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DEPARTMENT OF ACCOUNTANCY
Marawi City

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.

67. A procedures that involves tracing a transaction from its origination through the company’s information systems
is referred to as a(n):
a. Inquiry/analysis basis
b. Re-analysis approach
c. Remediation
d. Walkthrough

68. Auditors frequently use flowcharts in connection with which of the following?
a. Preparation of generalized computer audit programs.
b. Review of the client’s internal control procedures.
c. Use of statistical sampling in performing an audit.
d. Performance of analytical review procedures for account balances.

69. A well-prepared flowchart should make it easier for the auditor to

a. prepare audit procedure manuals.
b. prepared detailed job description.
c. trace the origin and disposition of documents.
d. assess the degree of accuracy of financial data.

70. Flowcharting as a means of internal control evaluation provides the following advantages over the use of
questionnaire and descriptive narratives
a. ease of preparation.
b. comprehensive coverage of controls.
c. simplicity.
d. ease in following information flow.

71. As part of the evaluation of a client’s system if internal control, to determine whether the necessary procedures
are prescribed and have been implemented satisfactorily, an audit must
a. develop questionnaires and checklists
b. obtain an understanding of internal control
c. perform tests of internal control procedures
d. evaluate administrative policies

72. Which of the following is an appropriate form of documenting the auditor’s understanding of a client‘s internal
controls?
a. Narratives
b. Flowcharts
c. Internal control questionnaires
d. Each of the three documentation techniques is appropriate to do

73. Which of the following is of least concern to an auditor regarding a client’s internal control?
a. Efficiency and effectiveness of operations
b. Controls related to the reliability of financial reporting
c. Controls over classes of transactions
d. Auditors are equally concerned with each issue

74. An auditor is least likely to test for an internal control that provides for
a. segregation of the functions of recording disbursement and reconciling the bank account.
b. comparison of receiving reports and vendors invoices with purchase orders

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

c. approval of the purchase and sale of marketable securities

d. classification of revenue and expense transactions by product

75. An internal control questionnaire (ICQ) contains the following question: “Does a single individual receive and
list cash receipts and perform posting to sales and general ledgers?” What action should an auditor take if the
accounting manager responds “yes” to the question?
a. No action is required because “yes” response on an ICQ indicate the presence of good control.
b. Statistically sample the response along with other “yes” responses to verify their accuracy.
c. Treat it as a potential control weakness and perform appropriate testing.
d. Include it with other reportable findings in the next audit report.

76. Which of the following would be considered an advantage of using an internal control questionnaire in
understanding and documenting the controls for an important accounting application? The questionnaires can be:
a. computerized to provide linkages of weaknesses to particular types of error that might occur in the
account balances.
b. used for many years without updating
c. easily understood and provide easy identification of potential control deficiencies through “no” responses
to questions.
d. adapted to both large and small business as well as to different industries.

77. Which method provides the auditor with the best visual grasp of a system and a means for analyzing complex
operations?
a. a flowcharting approach
b. a questionnaire approach
c. a matrix approach
d. a detailed narrative approach

78. In addition to gaining an understanding of the internal controls, an external auditor, at the minimum, would be
expected to
a. evaluate the internal auditor’s work as an important part of the accounting system element of the internal
control.
b. observe client employees to determine the extent if their compliance with quality control standards.,
c. trace a few transactions through the control process to obtain evidence that the controls have been placed
in operations
d. study the organization charts to obtain an understanding of the informal lines of communication

79. An advantage of an internal control questionnaire is:

a. Flexibility in design and application
b. Its strict adherence to a yes / no format
c. That it provides sufficient data for the assessment of control risk
d. ease of completion

80. The auditor understanding of their client’s internal control provides a basis for:
Assessing Planning Assessing
Sufficient Risk the audit Control Risk
a. Yes Yes Yes
b. Yes Yes No
c. No Yes Yes
d. No Yes No

81. With respect to the client’s system of internal control, the auditing is concerned that the existing policies and
procedures provide reasonable assurance that

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

a. operational efficiency can be achieved in accordance with management plans.

b. errors and fraud can be prevented or detected.
c. fraud cannot be committed through collusion.
d. management cannot override the internal controls.

82. Which of the following best describes the primary reason why an auditor uses flowcharts during an audit
engagement?
a. To comply with the requirements of the Philippines standards on Auditing.
b. To classify the client’s documents and transactions by major transaction cycle, e.g., cash receipts, cash
disbursements, etc.
c. to report the auditors a=understanding of the client’s internal control policies and procedures
d. to interpret the operational effectiveness of the client’s existing organizational; structure

83. Regardless of whether the auditor decides to test or not the controls for operating effectiveness, he/she must fully
document his or her understanding of the internal control policies and procedures obtained through whatever means.
Which of the following does not describe an appropriate means for documenting his/her understanding of the control
system?
a. internal control flowchart
b. internal control implementation
c. internal control memorandum
d. internal control questionnaire

84. Which of the following questions an auditor most likely include in an internal control questionnaire for notes
payable?
a. Are assets that collateralize note 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 for, note payable used for the purchased of noncurrent assets?
d. Are direct borrowings on notes payables authorized by the board of directors?

85. In an auditor’s consideration of internal control, the completion of a questionnaire is most closely associated
with which of the following?
a. Separation of duties
b. Flowchart accuracy
c. Understanding the system
d. terms of control

86. During the review of the client’s system of internal control, the auditor observes the clients employees as they
apply the operating controls in order to
a. prepare a flowchart
b. update information contained in the organization and procedure manuals.
c. corroborate the information obtained during the initial review of the system
d. determine the extent of compliance with quality control standards.

87. An auditor’s flowchart of a client’s internal control is diagram depicting the auditor’s
a. understanding of the internal control.
b. program for tests of controls.
c. documentation of consideration of inherent controls
d. understanding of the type or irregularities that are probable

88. Which of the following statements regarding the auditor’s documentation of the client’ internal control structure
is correct?
a. Documentation must include flow charts.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

b. Documentation must include procedural write-ups.

c. No documentation is necessary although it is desirable.
d. No one particular form of documentation is necessary and the extent of documentation may vary.

TEST OF CONTROLS

89. Which of the following is the auditor’s purpose for further testing the internal control procedures?

A. Provide a basis for reducing the assessed level of control risk.

B. Reduce the risk that error or fraud that has not been prevented or detected by the internal control system is
not detected by the independent audit.
C. Provide assurance that transactions are executed in accordance with management’s authorization and
access to assets is limited by a segregation of functions.
D. Provide assurance that transactions are recorded as necessary to permit the preparation of the financial
statements in conformity with PFRS.

90. Tests of controls are concerned primarily with each of the following questions except:

A. How were the controls applied?

B. Why were the controls applied?
C. Were the necessary controls consistently performed?
D. By whom were the controls applied?

91. The objective of tests of details of transactions that are being performed as tests of controls procedures is to

A. Monitor the design and use of entity documents such as pre-numbered shipping form.
B. Determine whether controls have been placed in operation.
C. Detect material misstatements in the account balance in the financial statements.
D. Evaluate whether controls operate effectively.

92. Which of the following is ordinarily considered a test of internal control procedures?

A. Send confirmation letters to banks.

B. Count and list cash on hand.
C. Examine signatures on checks.
D. Obtain or prepare reconciliation of bank accounts as of the balance sheet date.

93. Auditors can use several types of audit procedures to test controls. Which of the following type of audit
procedures is least likely to be used during tests of controls?

A. Physical examination of assets

B. Inquiries of client personnel
C. Examination of documents, records, and reports
D. Observation of control-related activities.

94. The objective of dual-purpose tests is to:

A. Evaluate whether internal controls are operating effectively.

B. Detect material misstatements in the financial statements.
C. Identify unusual trends or patterns in comparative financial statements.
D. Test internal controls as well as transactions and balances using the same test procedures.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

95. Which of the following types of evidence will be gathered in order to test internal controls?

A. Confirmations of accounts receivable with customers.

B. Observation of client personnel receiving inventory shipments.
C. Observation of inventory accounts.
D. Inquiry of management regarding significant litigation.

96. Tests of controls least likely include:

A. Inquiries of appropriate client vendors.

B. Reperformance of a control.
C. Observation of the application of an accounting procedure.
D. Inspection of documents.

97. A procedure that would most likely be used by an auditor in performing tests of control regarding segregation of
functions on which no audit trail is available:

A. Inspection.
B. Observation.
C. Reprocessing.
D. Reconciliation.

98. The primary purpose of performing further control tests is to provide

A. A basis for reducing the assessed level of control risk below the maximum level.
B. A basis for understanding the flow of transactions through the accounting system.
C. Assurance that transactions are properly recorded.
D. All accounting control procedures leave visible evidence.

99. Which of the following procedures most likely would be included as part of an auditor’s tests of control
procedures?

A. Inspection
B. Reconciliation
C. Confirmation
D. Analytical procedures

100. Which of the following audit tests would be a test of controls?

A. Tests of the specific items making up the balance in a financial statement account.
B. Comparing inventory prices to vendor’s invoices.
C. Tracing signatures on canceled checks to board of director’s authorizations.
D. Tests of the additions to property, plant, and equipment by physical inspections.

101. Which of the following statements is true?

A. Tests of controls are necessary if the auditor plans to use the primarily substantive approach.
B. Tests of controls are necessary if the auditor plans to assess the level of control risk at maximum.
C. The auditor can simultaneously obtain an understanding of internal control and perform tests of controls.
D. After performing tests of controls, the auditor will always assess control risk at maximum.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

102. In considering the evidence needed to assess control risk during the period from interim to year-end, all of the
following should be considered except the:

A. Significance of the assertion being tested.

B. Specific internal control policies and procedures tested during the interim period.
C. Degree to which the policies and procedures were tested and the test results.
D. Control risk on other assertions.

103. After obtaining an understanding of a client’s controls, an auditor may decide to omit tests of controls. Which
of the following is not an appropriate reason to omit tests of controls?

A. The controls appear adequate.

B. The controls duplicate other controls.
C. Reportable conditions preclude the auditor of assessing control risk below the maximum.
D. The effort to test controls exceeds the effort saved by not performing tests.

104. The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the
extensions.

A. Test of controls.
B. Dual purpose test.
C. Substantive test.
D. Test of balances.

105. Which of the following statements about tests of controls is not valid?

A. The auditor may perform inquiry and observation and gathering audit evidence about the effectiveness of
the control.
B. Ordinarily, making inquiries provides more reliable audit evidence than doing observation when testing
segregation of functional responsibilities.
C. Audit evidence obtain by doing observation pertains only to the point in time at which the procedure was
applied.
D. Observation of who applies a control procedure is useful as a test of control procedures when evaluating
control effectiveness of both computerized and manual system.

106. Which of the following is appropriate about risk assessment?

A. The assessed level of inherent and control risk can be sufficiently low, thus resulting to eliminating the
need for substantive tests.
B. Audit risk may be more effectively determined by assessing inherent and control risk separately.
C. There is an inverse relationship between detection risks and the combined level of inherent and control risk.
D. Detection risk is eliminated if an auditor were to examine 100 percent of the account balance or class of
transactions.

107. Tests of controls are directed toward the control’s

A. Efficiency.
B. Efficiency and effectiveness.
C. Effectiveness.
D. Cost benefit ratio.

108. Audit evidence concerning segregation of duties ordinarily is best obtained by

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

A. Performing tests of transactions that corroborate management’s financial statement assertions.

B. Observing the employees as they apply specific controls.
C. Obtaining a flowchart of activities performed by available personnel.
D. Developing audit objectives that reduce control risk.

ASSESSMENT OF CONTROL RISK

109. Which of the following is a step in an auditor’s decision to assess control risk at below the maximum?

A. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that
may indicate weak controls.
B. Perform tests of details of transactions and account balances to identify potential errors and fraud.
C. Identify specific controls that are likely to detect or prevent material misstatements.
D. Documents that the additional audit effort to perform tests of controls exceeds the potential reduction in
substantive testing.

110. Which of the following statements concerning control risk is correct?

A. Assessing control risk and obtaining an understanding of an entity’s internal control may be performed
concurrently.
B. When control risk is at the maximum level, an auditor is required to document the basis for that assessment.
C. Control risk may be assessed sufficiently low to eliminate substantive testing for significant transaction
classes.
D. When assessing control risk, an auditor should not consider evidence obtained in prior audits about the
operation of controls.

111. After obtaining an understanding of internal control and assessing control risk, an auditor decides not to
perform additional tests of controls. The auditor most likely concludes that the

A. Additional evidence to support a further reduction in control risk is not cost-beneficial to obtain.
B. Assessed level of inherent risk exceeds the assessed level of control risk.
C. Internal control is properly designed and can be relied on.
D. Evidence obtainable through tests of controls would not support an increased assessment of control risk.

112. Which of the following models expresses the general relationship of risks associated with the auditor’s
evaluation of internal control (CR), study of the business and application of analytical procedures (IR), and overall
audit risk (AR), that would lead the auditor to conclude that additional substantive tests of details of an account
balance are not necessary?

IR CR AR
A. 20% 40% 10%
B. 20% 60% 5%
C. 10% 70% 4.5%
D. 30% 40% 5.5%

113. In studying internal control and assessing control risk, the auditor applies the following steps:

A. Determine the internal control policies and procedures necessary to prevent or detect errors or fraud that
could occur in case of the absence of controls.
B. Identify control weakness.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

C. Determine whether the necessary policies and procedures have been designed and whether they have been
placed in operation.
D. Design substantive audit programs.
E. Consider the types of errors that could occur in the absence of necessary controls.
The proper sequence in applying these steps is:

A. CDEAB
B. CBAED
C. EACBD
D. AECBD

114. After obtaining an understanding of the client’s internal control, the auditor should consider whether

A. The projected degree of effectiveness of internal control is justified.

B. The evidential matter obtained from the study of the internal control system can provide a reasonable basis
for an opinion.
C. Further testing of internal control procedures is likely to permit further reduction in the assessed-level of
control risk.
D. Sufficient knowledge has been obtained about the entity’s entire system of internal control.

115. An independent auditor has concluded that the client’s records, procedures and representations can be relied
upon based on tests made during the year when internal control was found to be effective. The auditor should test
the records, procedures, and representations again at year-end if:

A. Inquiries and observations lead the auditor to believe that conditions have changed significantly.
B. Comparisons of year-end balances with like balances at prior dates revealed significant fluctuations.
C. Unusual transactions occurred subsequent to the completion of the interim audit work.
D. Client records are in a condition that facilitates effective and efficient testing.

116. In assessing control risk, the auditor must, as a minimum,

A. Perform tests of all significant controls.

B. Obtain an understanding of the design and implementation of the client’s internal control.
C. Obtain an understanding of the design of the client’s internal control.
D. Obtain an understanding of the design, implementation, and operating effectiveness of the client’s internal
control.

117. In the assessment of control risk, the auditor is basically concerned that the client’s internal control provides
reasonable assurance that

A. Management cannot override the system.

B. Operational efficiency has been achieved in accordance with management plans.
C. Errors and fraud have been presented or detected.
D. Controls have not been circumvented by collusion.

118. Which of the following is one of the most fundamental and effective controls?

A. Increased use of computers for recording accounting transactions.

B. Increased reliance on internal auditors to monitor accounting systems.
C. Segregation of incompatible duties across several people.
D. Having internal auditors report only on the Board of Directors.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

119. Which circumstance would be consistent with both the planned assessed level and the assessed level of control
risk being low?

A. No tests of control have been performed.

B. Tests of controls have been performed.
C. Externally generated evidence supports management’s contentions relating to internal control.
D. The results of the consideration of internal control suggest that controls are not operating effectively.

120. The results of the considerations of internal control least likely affect the auditors’ decisions pertaining to:

A. The use of analytical procedures.

B. The assessment of control risk.
C. The assessment of inherent risk.
D. Detailed tests of ending balances.

121. A material weakness in the design and the operation of controls that have been discovered in an audit of
internal control results in:

A. A management letter
B. An unfavorable opinion
C. Firing of the auditors
D. Adjusting audit journal entries.

122. Which of the following requirements of internal control is expected of management of a public entity?

A. Accept responsibility for the effectiveness of internal control.

B. Evaluate the effectiveness of internal control using a written assertion.
C. Prepare a detailed flowchart that summarizes the company’s internal control.
D. Provide a monthly updated report on internal control.

123. The definition of which type of control deficiency explicitly includes an amount that is more than
inconsequential?

A. Material weakness.
B. Reportable condition
C. Significant deficiency.
D. Strong control deficiency.

124. Which of the following terms includes the concept that least likely to have a likelihood of occurrence?

A. Material Weakness—Yes; Reportable Condition—Yes

B. Material Weakness—Yes; Reportable Condition—No
C. Material Weakness—No; Reportable Condition—Yes
D. Material Weakness—No; Reportable Condition—No

125. When performing an audit of internal control for a public company, the auditors will consider which of the
following types of controls?

A. Preventive—Yes; Detective—Yes
B. Preventive—Yes; Detective—No
C. Preventive—No; Detective—Yes
D. Preventive—No; Detective—No

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

126. Which of the following is not a strong indicator of the existence of a material weakness in internal control?

A. An ineffective control environment.

B. An ineffective internal audit function.
C. Inadequate controls over the selection of the best investment opportunities.
D. Ineffective oversight of external reporting by the audit committee.

127. A control that reduces the risk that an existing or potential control weakness will result in a failure to meet a
control objective is referred to as a:

A. Compensating control.
B. Conditional control.
C. Non-routine control.
D. Walkthrough control.

128. Which of the following is not s characteristic of the primarily substantive approach?

A. The auditor usually gathers all or most of the evidence with substantive tests.
B. Usually little or no reliance is placed on controls.
C. The assessment of control risk is usually at or near maximum level.
D. Extensive tests of controls are performed.

129. Which of the following is not a characteristic of the lower control risk approach?

A. Control risk is usually assessed at maximum level.

B. Substantive tests are usually restricted.
C. The auditor usually plans to place considerable reliance on the controls.
D. The auditor plans to perform extensive tests of controls.

130. If the auditor uses the primarily substantive approach of the lower risk approach

A. A higher level of understanding of internal control is required.

B. The auditor plans to assess control risk at a lower level.
C. The auditor plans a heavier reliance on substantive tests.
D. The auditor plans to restrict substantive tests.

131. After obtaining an understanding of an entity’s internal control, an auditor may assess control risk at the
maximum level for some assertions because he

A. Believes the internal control policies and procedures are unlikely to be effective.
B. Determines the pertinent internal control components are not well documented.
C. Performs tests of controls to restrict detection risk to an acceptable level.
D. Identifies internal control policies and procedures that are likely to prevent material misstatements.

132. An auditor may decide to assess control risk at the maximum level for certain assertions because he believes

A. Sufficient evidential matter to support the assertions is likely to be available.

B. Evaluating the effectiveness of policies and procedures is inefficient.
C. More emphasis on tests of controls than substantive tests is warranted.
D. Considering the relationship of assertions to specific account balances is more efficient.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

133. The assessment of control risk can be made at any of the following times except:

A. Immediately or after obtaining an understanding of internal control.

B. After some tests of controls are performed concurrently with obtaining an understanding.
C. After the performance of additional tests of controls designed to further lower the assessment of control
risk.
D. After performing all the necessary substantive tests.

134. Which of the following statements is true? If control risk is assessed at the maximum, the

A. Nature of related substantive tests should be changed from more to less effective.
B. Nature of related substantive tests should be changed less to more effective.
C. Timing of related substantive tests should be changed from year-end to an interim date.
D. Extent of related substantive tests should be changed from a larger to a smaller sample.

135. After obtaining an understanding of an entity’s internal controls and assessing control risk, an auditor may next:

A. Perform tests of controls to verify management’s assertions that are embodied in the financial statements.
B. Consider whether he can reduce the assessed level of control risk further.
C. Discontinue searching for reportable condition.
D. Evaluate whether control activities can detect material misstatements.

136. After considering a client’s internal control, the auditor has concluded that the system is well designed and is
functioning as anticipated. Under these circumstances, the auditor would most likely

A. Cease to perform further substantive tests.

B. Not increase the extent of planned substantive tests.
C. Increase all tests of controls to the extent outlined in the preplanned audit program.

137. Which of the following statements is correct concerning reportable conditions in an audit?

A. An auditor is required to search for reportable conditions during an audit.

B. All reportable conditions are also considered to be material weakness.
C. An auditor may communicate reportable conditions during an audit or after the audit’s completion.
D. An auditor may report that no reportable conditions were noted during an audit.

138. As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This
assessment occurred because the true deviation rate in the population was

A. Less than the risk assessing control risk too low, based on the auditor’s sample.
B. Less than the deviation rate in the auditor’s sample.
C. More than the risk of assessing control risk too low, based on the auditor’s sample.
D. More than the deviation rate in the auditor’s sample.

139. After obtaining an understanding of internal control and assessing control risk, 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 control risk is not available.
C. An increase in the assessed level of control risk is justified for certain financial statement assertion.
D. There were many internal control weakness that could allow errors to enter the accounting system.

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College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City

140. Once an understanding of the internal control structure that is sufficient for audit planning is obtained, then the
auditor must first assess

A. Whether a lower level of control risk could be supported.

B. Whether the financial statements are auditable.
C. The level of control risk supported by the understanding obtained.
D. The level of control risk to use.

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