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Exam 7: Auditing Internal Control Over Financial Reporting

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Question 21

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When auditing a public company, the auditor must form an opinion on the effectiveness of internal control over financial reporting, or issue a disclaimer in the event of a scope limitation.

A) True
B) False

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Question 22

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The likelihood of an event is "more than remote" when it is "highly possible."

A) True
B) False

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Question 23

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What is wrong with the following report on internal control over financial reporting for AB Corporation? The auditor believes an unqualified opinion on the effectiveness of internal control over financial reporting is warranted. Report of Registered Public Accounting Firm We have audited AB Corporation's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). AB's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the entity's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. An entity's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. An entity's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity's assets that could have a material effect on the financial statements. In our opinion, AB Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of AB Corporation, and our report dated February 20, 2014 expressed an unqualified opinion. Protzman & Hull Morgan Hill, CA February 10, 2014

Discuss the differences between a control deficiency, a significant deficiency, a material weakness, and the two dimensions of the control deficiency - likelihood and magnitude.

The advantages of generalized audit software include all of the following except:

For which of the following internal controls would an auditor be least likely to perform tests of internal controls closer to the "as of" date?

Trumpeter Corporation is a small publicly traded company that specializes in the restoration and sale of fine musical instruments. The audit committee is made up of a CEO from a technology company, a college accounting professor, and a local marketing executive. All are sufficiently independent from management. Members of the audit committee meet three times a year. Each time they meet, a different member, who chooses the topics to discuss, leads the meeting. The audit committee then sends the minutes of its meetings to the entity's CFO. Solely from this information, what are your conclusions about this audit committee's role within the control environment?

Which of the following is false?

Identify indicators of a material weakness in internal control over financial reporting.

Which of the following is not a primary objective of internal control as established by COSO?

Which of the following is true of generalized audit software packages?

Examples of entity-level controls include

In a public company, management must assess and report on internal control over financial reporting.

AS5 requires that the auditor appropriately document the processes, procedures, judgments, and results relating to the audit of internal control. Specifically, what must this documentation include?

Which of the following statements is false?

An "integrated audit" as stated in Section 404 of the Sarbanes-Oxley Act means

When testing a computerized accounting system, which of the following is false regarding the test data approach?

The primary purpose of a generalized computer audit program is to allow the auditor to

The PCAOB's definition of internal control over financial reporting specifically mentions all of the following control activities except:

You are performing an audit on North South Natural Gas (NSNG). Alana, an NSNG employee, has responsibility for reconciling bank statements with the entity's cash accounts. You determine, however, that Alana has never been taught how to reconcile statements. In effect, the statements have not been properly reconciled for two years. How would you judge the significance of this control deficiency? How would you classify this deficiency?