Saint Ferdinand College

College of Accountancy
Operations Auditing
Name: _________________________________________ Score: ____________

Course and Year: _________________________________ Date: _____________

Finals Drill __ - Internal Control

INSTRUCTIONS: Write your final answers on the answer sheet provided below. STRICTLY NO ERASURES.

1. 11. 21. 31.

2. 12. 22. 32.
3. 13. 23. 33.
4. 14. 24. 34.
5. 15. 25. 35.
6. 16. 26. 36.
7. 17. 27. 37.
8. 18. 28. 38.
9. 19. 29. 39.
10. 20. 30. 40.

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

2. The primary responsibility for establishing and maintaining an internal control rests with
A . The external auditors
B. The internal auditors
C. Management and those charged with governance
D. The controller or the treasurer

3. Which of the following controls is not usually performed in the accounts payable department?
A. Indicating on the voucher the affected asset and expense accounts to be debited.
B. Approving vouchers for payment by having an authorized employee sign the vouchers.
C. Accounting for unused prenumbered purchase orders and receiving reports.
D. Matching the vendors invoice with the related purchase requisition, purchase order, and receiving report.

4. An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor
believes
A. Controls are unlikely to pertain to the assertions.
B. The entity’s control components are interrelated.
C. Sufficient appropriate audit evidence to support the assertions is likely to be available.
D. More emphasis on tests of controls than substantive tests is warranted.

5. Which of the following deal with ongoing or periodic assessment of the quality of internal control by
management?
A. Quality control activities
B. Monitoring activities
C. Oversight activities
D. Management activities

6. Which of the following is not one of the components of an entity’s internal control?
A. Control risk
B. Control activities
 C. Information a and communication
D. The control environment

7. An auditor should consider two key issues when obtaining an understanding of a clients internal controls.
These issues are
A. The effectiveness and efficiency of the controls.
B. The frequency and effectiveness of the controls.
C. The design and implementation of the controls.
D. The implementation and efficiency of the controls.

8. 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. Tests of controls

9. Test of controls are directed toward the control’s

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

10. 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

11. An auditor considers internal control in order to

A. Determine whether assets are safeguarded
B. Suggest improvements in internal control.
C. Plan audit procedures
D. Express an opinion

12. Which of the following is least likely to be an evidence of effectiveness of controls?

A. Cancelation of supporting document.
B. The policy of documenting the usage of computer program
C. Confirmation of bank balances.
D. Signatures on authorization forms.

13. 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

14. 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

15. 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

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. 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-dents, and the corporate controller.
B. The company does not have a centralized human resource function
C. The company has an effective internal audit staffs that monitors controls on a continuous basis.
D. The company routinely transacts business with related parties.

18. Effective internal control

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

19. Proper segregation of functional responsibilities in an effective system control calls for separation of the
functions of:
A. Authorization, execution and payment
B. Authorization, recording and custody
C. Custody, execution and reporting.
D. Authorization, payment, and recording.

20. 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

21. An auditor evaluates 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 are probable.
D. ascertain whether any employees have incompatible functions.

22. 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 procedure
C. Use of statistical sampling in performing on
D. Performance of analytical review procedures for account balances.

23. Which of the following is of least concern to an auditor regarding a client‘s internal controls?
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

24. Which of the following statements regarding the auditor’s documentation of the client‘s internal control
structure is correct?
A. Documentation must include flow chart.
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

25. 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 control risk.
D. Control risk to determine the acceptable level of detection risk.

26. The understanding of internal control that relates to a financial statement assertion should be used to do all
of the following except:
A. Determine 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 assess control risk.
D. Design substantive tests that correspond with the assessment of control risk.

27. 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.

28. 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

29. Which of the following Internal control components relates to an entity’s process for identifying and
responding to business risks?
A . Control activities
B. Information and communication
C. Risk assessment
D. Monitoring of controls

30. Which of the following components of an entity’s internal control includes development and use of that
communicate prospective roles and training police responsibilities employees?
A. Monitoring of controls
B. Control activities
C. Control environment
D. Information and communication

31. Proper segregation of duties reduces persons to be in positions to both opportunities for persons to be in
positions to both
A. Establish internal control and authorize transactions
B. Perpetrate and conceal errors or fraud.
C. Record cash receipts and cash disbursements.
D. Record transactions and prepare financial statement

32. In obtaining an understanding of internal control relevant to the audit, an auditor the is required to obtain
knowledge about the
A. Effectiveness of controls that have been implemented
B. Consistency with which controls are currently being applied
C. Design of the controls pertaining to internal control components
D. Controls related to each class of transactions and account balance.
33. Which of the following procedures is essential in determining whether necessary control activities are
prescribed and 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

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

35. 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.

36. Which of the following is not a part of the control environment?

A. Management philosophy and operating style
B. Organizational structure
C. Information rind communication systems
D. Assignment of authority and responsibility

37. 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

38. 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 account 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.

39. An auditor’s report on internal control of a publicly held company would ordinarily be of least use to
A. shareholders.
B. directors.
C. officers.
D. regulatory agencies.

40. 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