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Which of the following statements regarding external auditors is true?

a. they are employees of the IRS who evaluate the internal controls of companies filing tax returns

b. they are hired by a company to evaluate the effectiveness of internal controls

c. they cannot evaluate the system of internal controls of the company that employs them because they are not independent

d. they perform internal controls for the companies that employ them

 

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Casey Durgan
Casey DurganLv2
9 Mar 2020

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Related questions

1) A properly designed internal control system is a key part of accounting information systems' design, analysis, and performance. True False

2) The use of internal controls provides guaranteed protection against losses due to operating activities. True False

3) Good internal control dictates that a person who controls an asset should also maintain the accounting records for that asset. True False

4) Once a good system of internal control is in place, it rarely needs review. True False

5) Two important limitations of internal control systems are (1) human error or human fraud and (2) cost-benefit. True False

6)The main principles of internal control include which of the following:

Establish responsibilities.

Maintain minimal records.

Use only computerized systems.

Bond all employees.

Require automated sales systems.

7) A good system of internal control:

Urges adherence to prescribed managerial policies.

Insures profitable operations.

Eliminates the need for an audit.

Requires the use of noncomputerized systems.

Is not necessary if the company uses a computerized system.

8) A company's internal control system:

Eliminates the risk of loss.

Monitors and controls business activities.

Eliminates human error.

Eliminates the need for audits.

Is not necessary in large companies.

Which of the following statements is most correct regarding the independent auditor's reliance on the tests of controls performed by the internal auditors to reduce their substantive testing?

1-The independent auditor must obtain assurance of the independence of the internal auditors but need not test their work.
2-It is not acceptable for the independent auditor to rely upon the work of the internal auditors.
3-There are no restrictions in relying upon the work of internal auditors.
4-The independent auditor must evaluate the competency and objectivity of the internal auditors and must test a sample of the work of the internal auditors in order to rely upon their work.

The term "materiality" as used in auditing is best described as the

1-substance of the auditing procedures.
2-amount of misstatement on the financial statements that would influence a decision maker.
3-underlying evidence upon which the audit opinion is based.
4-amount of material the auditor gathers as evidence to support the audit opinion.

Prior to accepting an audit client an auditor has a professional obligation to

1-contact the predecessor auditor.
2-perform preliminary analytical review procedures.
3-do all of the listed actions.
4-obtain approval for the audit engagement from the SEC.

Which of the following best represents financial statement fraud?

1-The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors.
2-The controller of the company decreases a contingent liability by $3 million so the company will meet analysts' expectations this quarter.
3-The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.
4-The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

Sampling risk is the risk that

1-errors are inherent and may be present in the population without regard to the internal controls.
2-the population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect.
3-internal controls are not adequate to prevent or detect material errors.
4-the sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect.

Control risk that is assessed excessively high (i.e. the auditor believes control risk is high when in reality it is moderate or low) leads to:

1-audit inefficiency.
2-a less expensive audit.
3-reduced substantive testing.
4-errors that are more likely to occur than anticipated.

The purchasing process consists of each of the following phases except

1-receipts of goods and services.
2-approval of items for payment.
3-authorized request for goods and services.
4-cash receipts.

The West End Boutiques company was founded by Libbie Williams in 1990 with a single store in College Station, Texas, and the company now has 21 shops located in the triangle of Dallas, San Antonio, and Austin, Texas. Libbie was an accounting major in college, passed the entire CPA exam in her first attempt with high scores, and worked for one of the large CPA firms for 11 years prior to opening her first store. Based on her work experience, she fully understands the value of strong internal controls. Further, she recently selected a state-of-the art accounting system that connects all of her stores' financial transactions and reports.

Libbie employs two internal auditors who monitor internal controls and also search for ways to improve operational effectiveness. As part of the monitoring process, the internal auditors take turns conducting periodic reviews of the accounting records. For instance, the company takes a physical inventory at all stores once each year and an internal auditor oversees the process. Chris Domain, the most senior internal auditor, just completed a review of the accounting records and discovered several items of concern. These were:

Physical inventory counts varied from inventory book amounts by more than 6% at two of the stores. In both cases, physical inventory was lower.

Two of the stores seem to have an unusually high amount of sales returns for cash.

In 9 of the stores, gross profit has dropped significantly from the same time last year.

At 4 of the stores, bank deposit slips did not match cash receipts.

One of the stores had an unusual number of bounced checks. It appeared that the same employee was responsible for approving each of the bounced checks.

In 7 of the stores, the amount of petty cash on hand did not correspond to the amount in the petty cash account.

Requirements

For each of these concerns, identify a risk that may have created the problem.

Recommend an internal control procedure to prevent the problem in the future.

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