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Operations Auditing Quiz #2: Independence

This document provides definitions and concepts related to internal auditing. It defines key terms like independence, governance, code of ethics, control environment, and conflict of interest. It also discusses engagement planning, controls, inherent risk, control risk, detection risk, analytical procedures, and reasonable assurance. The document concludes with 20 multiple choice questions testing these concepts.
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0% found this document useful (0 votes)
750 views6 pages

Operations Auditing Quiz #2: Independence

This document provides definitions and concepts related to internal auditing. It defines key terms like independence, governance, code of ethics, control environment, and conflict of interest. It also discusses engagement planning, controls, inherent risk, control risk, detection risk, analytical procedures, and reasonable assurance. The document concludes with 20 multiple choice questions testing these concepts.
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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OPERATIONS AUDITING

QUIZ #2
Coverage:
Definitions on IPPF
Engagement Planning
Controls

INDEPENDENCE
The freedom from conditions that threaten the ability of the internal audit activity to carry out internal
audit responsibilities in an unbiased manner.

GOVERNANCE
The combination of processes and structures implemented by the board to inform, direct, manage, and
monitor the activities of the organization toward the achievement of its objectives.

CODE OF ETHICS
Are principles relevant to the profession and practice of internal auditing, and Rules of Conduct that
describe behavior expected of internal auditors.

CONTROL ENVIRONMENT
The attitude and actions of the board and management regarding the importance of control within the
organization. The control environment provides the discipline and structure for the achievement of the
primary objectives of the system of internal control.

CONFLICT OF INTEREST
Any relationship that is, or appears to be, not in the best interest of the organization. A conflict of interest
would prejudice an individual’s ability to perform his or her duties and responsibilities objectively.

ENGAGEMENT LETTER
A formal communication between the auditor and auditee that details the terms of the engagement.
Including the auditee’s responsibilities.

SCOPE
This relates to both the engagement objectives and engagement procedures.

AUDIT CRITERIA
Reasonable and attainable standards which provides a basis for developing audit observations and
formulations of conclusion.

APPROPRIATE
Refers to the mix of knowledge, skills and other competencies needed to perform the plan.

ANALYTICAL PROCEDURES
It refers to the analysis of significant ratios and trends, including the resulting investigation of fluctuations
and relationships in both financial and non-financial information.

PRELIMINARY SURVEY
Is a process for gathering information without detailed verification, on the activity being examined.

RISK
Is the uncertainty of an event occurring that could have an impact on the achievement of objectives.

INHERENT RISK
Attention should be focused on this type of risk at the planning stage

FEEDFORWARD CONTROLS
Are controls that anticipate and prevent problems. These controls require long-term perspective.

REASONABLE ASSURANCE
The degree of confidence expected to be provided by the internal controls

1.
Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.

2.
Inherent risk and control risk differ from detection risk in that inherent risk and control risk are
a. Elements of audit risk while detection risk is not.
b. Changed at the auditor’s discretion while detection risk is not.
c. Considered at the individual account-balance level while detection risk is not.
d. Functions of the client and its environment while detection risk is not.

3.
Which of the following would heighten an auditor's concern about the risk of fraudulent financial
reporting?
A. Inability to generate positive cash flows from operations, while reporting large increases in earnings.
B. Management's lack of interest in increasing the dividend paid on common stock.
C. Large amounts of liquid assets that are easily convertible into cash.
D. Inability to borrow necessary capital without obtaining waivers on debt covenants.

4.
If the business environment is experiencing a recession, the auditor most likely would focus increased
attention on which of the following accounts?
A. Purchase returns and allowances.
B. Allowance for doubtful accounts.
C. Common stock.
D. Noncontrolling interest of a subsidiary purchased during the year.

5
An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for
sales and inventories would most likely be identified in the planning phase of the audit by the use of:
A. Tests of transactions and balances.
B. An assessment of internal control.
C. Specialized audit programs.
D. Analytical procedures

6.
Which of the following is not considered one of the five major components of internal control?
A. Risk assessment.
B. Segregation of duties.
C. Control activities.
D. Monitoring.

7.
This organization developed a set of criteria that provide management with a basis to evaluate controls
not only over financial reporting, but also over the effectiveness and efficiency of operations and
compliance with laws and regulations:
A. Foreign Corrupt Practices Corporation.
B. Committee of Sponsoring Organizations.
C. Cohen Commission.
D. Financial Accounting Standards Board.

8.
The definition of internal control developed by the Committee of Sponsoring Organizations (COSO)
includes controls related to the reliability of financial reporting, the effectiveness and efficiency of
operations, and:
A. Compliance with applicable laws and regulations.
B. Effectiveness of prevention of fraudulent occurrences.
C. Safeguarding of entity equity.
D. Incorporation of ethical business practice standards.

9.
Which of the following is not a factor that is considered a part of the client's overall
control environment?
A. The organizational structure.
B. The information system.
C. Management philosophy and operating style.
D. Board of directors.

10.
Which of the following would be least likely to be considered a benefit of effective
internal control?
A. Eliminating all employee fraud.
B. Restricting access to assets.
C. Detecting ineffectiveness.
D. Ensuring authorization of transactions.

11.
To provide for the greatest degree of independence in performing internal auditing
functions, an internal auditor most likely should report to the:
A. Financial vice-president.
B. Corporate controller.
C. Audit committee.
D. Corporate stockholders.

12.
Which of the following factors would most likely be considered an inherent limitation to
an entity's internal control?
A. The complexity of the information processing system.
B. Human judgment in the decision-making process.
C. The ineffectiveness of the board of directors.
D. The lack of management incentives to improve the control environment.

13.
When considering internal control, an auditor must be aware of the concept of reasonable assurance,
which recognizes that
a. Employment of competent personnel provides assurance that the objectives of internal control will be
achieved.
b. Establishment and maintenance of internal control is an important responsibility of the management
and not of the auditor.
c. Cost of internal control procedures should not exceed the benefits expected to be derived from the
control.
d. Segregation of incompatible functions is necessary to ascertain that the control procedures are
effective.

14.
Transaction authorization 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.

15.
An auditor's flowchart of a client's internal controls is a diagram depicting the auditor's
a. Understanding of the internal controls.
b. Program for tests of controls.
c. Documentation of having considered the internal controls.
d. Understanding of the types of irregularities that are probable.

16.
Most auditors assess inherent risk as high for related parties and related-party transactions because:
a. of the unique classification of related-party transactions required on the balance sheet.
b. of the lack of independence between the parties.
c. of the unique classification of related-party transactions required on the income statement.
d. it is required by generally accepted accounting principles.

17.
The purpose of an engagement letter is to:
a. document the CPA firm’s responsibility to external users of the audited financial
statements.
b. document the terms of the engagement in writing to minimize misunderstandings.
c. notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated.
d. emphasize management’s responsibility for approving the audit program.

18.
Analytical procedures performed during an audit indicate that accounts receivable doubled since the end
of the prior year. However, the allowance for doubtful accounts as percentage of accounts receivable
remained about the same. Which of the following client explanations would satisfy the auditor?
A. A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category
than in the prior year.
B. Internal control activities over the recording of cash receipts have been improved since the end of the
prior year.
C. The client opened a second retail outlet during the current year and its credit sales
approximately equaled the older outlet.
D. The client tightened its credit policy during the current year and sold considerably less merchandise to
customers with poor credit ratings.

19.
Which of the following fraudulent activities most likely could be perpetrated due to lack of effective
internal controls in the revenue cycle?
A. Merchandise received is not promptly reconciled to the outstanding purchase order file.
B. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value.
C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
D. Fictitious transactions are recorded that cause an understatement of revenue and
overstatement of receivables.

20.
Which of the following sets of duties would ordinarily be considered incompatible in terms of good
internal control?
A. Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary
ledger.
B. Posting to the general ledger and approval of additions and terminations relating to the payroll.
C. Custody of unsent signed checks and maintenance of expense subsidiary ledger.
D. Collection of receipts on account and maintaining accounts receivable records.

21.
An auditor discovered that a client's accounts receivable turnover is substantially lower for the current
year than for the prior year. This may indicate that
A. Obsolete inventory has not yet been reduced to fair market value.
B. There was an improper cutoff of sales at the end of the year.
C. An unusually large receivable was written off near the end of the year.
D. The aging of accounts receivable was improperly performed in both years.

22.
Which of the following is not a control that should be established for purchases of equipment?
A. Establishing a budget for capital acquisitions.
B. Requiring that the department in need of the equipment order the equipment.
C. Requiring that the receiving department receive the equipment.
D. Establishing an accounting policy regarding the minimum dollar amount of purchase that will be
considered for capitalization.

23.
The series of corporate scandals such as Enron and WorldCom led to the enactment of which of the
following?
A. Committee of Sponsoring Organizations of the Treadway Commission
B. Sarbanes-Oxley Act of 2002
C. Sardines with Onion Act of 2004
D. Socks 404

24.
Which of the following is not a part of the sponsoring organization of the COSO?
A. Institute of Internal Auditors
B. International Accounting Standards Board
C. Institute of Management Accountants
D. American Accounting Association
25.
Which of the following is not a characteristic of an effective control?
A. Operational
B. Meaningful
C. Simpleton
D. Cost-effective

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