Ch. 6 True/False

True or False. An integrated audit involves auditing a public company’s internal control as well as their financial statements.
True.
True or False. A material weakness in internal control is a deficiency in the design or operation of the control that adversely affects the company’s ability to initiate, record, process or report “external financial data” reliably in accordance with GAAP.
False.

A SIGNIFICANT DEFICIENCY in internal control is a deficiency in the design or operation of the control that adversely affects the company’s ability to initiate, record, process or report “external financial data” reliably in accordance with GAAP.

True or False. The concept of reasonable assurance regarding controls recognizes that the benefits of internal controls should not exceed the cost.
True.
True or False. The auditor is required to report material weaknesses to the audit committee.
True.
True or False. In an integrated audit both management and the auditor are required to report on the fairness of the internal control of the company.
True.
True or False. The purpose of tests of controls is to determine that account balances are properly stated.
False.
True or False. The purpose of the auditor consideration of the strength of internal controls is to determine the nature, extent and timing of substantive testing.
True.
True or False. Pervasive controls are those that affect the processing of specific computer applications of the client.
False.
True or False. In an integrated audit the auditor is only responsible to form an opinion on the fairness of the internal controls of the client.
False.

In an integrated audit the auditor is responsible to form an opinion on the fairness of the internal controls of the client IN ADDITION TO the opinion on the financial controls.

True or False. If the auditor finds material weaknesses in the internal controls of the client a qualified report would be issued.
False.
True or False. The auditor’s report on the internal controls and the financial statements of the client are required to be reported in the same report.
False.
True or False. The major changes in guidance since the original issuance of AS 2 include encouragement to both management and auditors to implement a top down, risk-based approach.
True.
True or False. The reporting must be based on evidence of both the design and the operation of internal controls.
True.
True or False. In an integrated audit the auditor is required to issue two reports. One on the fairness of the internal controls and a second on the fairness of the financial statements.
False.
True or False. In an integrated audit the auditor is required to issue a report expressing an opinion on management’s assessment of the effectiveness of controls.
True.
True or False. If management’s report on internal control indicates a material weakness, the auditor would express an unqualified opinion on that assessment and an adverse opinion on the internal controls.
True.
True or False. If management’s report on internal control indicates a material weakness, the auditor would express a qualified opinion on the assessment and an qualified opinion on the internal controls.
False.
True or False. The auditor is responsible to understand the controls of the client and to test all of its controls in the process of evaluating the strength of the internal control system.
False.
True or False. Controls of the client that the auditor expects to depend upon in reducing substantive testing must be tested.
True.
True or False. A risk-based approach to an integrated audit requires auditors to consider the materiality of account balances and processes along with the risks that the account balance may be misstated.
True.
True or False. Obtaining sufficient evidence to support control risk assessments of low for purposes of the financial statement audit ordinarily allows the auditor to reduce the amount of audit work that otherwise would have been necessary to opine (render an opinion) on the financial statements.
True.
True or False. The direct tests of account balances are determined, in large part, by the specific nature of the identified control deficiencies.
True.
True or False. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is more severe than a material weakness.
False.
True or False. In evaluating the strength of internal control in determining the nature, timing and extent of substantive audit evidence to collect the auditor must form his or her own independent assessment. Audit evidence cannot be reduced based upon the work of the internal auditor.
False.
True or False. In evaluating the strength of internal control in determining the nature, timing and extent of substantive audit evidence to collect the auditor must form his or her own independent assessment. Audit evidence can be reduced based upon the effectiveness of management’s monitoring controls.
True.
True or False. The assessment of internal control is at the end of the client’s reporting period. There is often an opportunity to correct a deficiency before the end of the year if it is identified early enough.
True.
True or False. If the auditor finds material weaknesses in the internal controls of the client an adverse report would be issued.
True.
True or False. The size of the account (materiality) influences, but does not totally dictate, whether substantive testing should be performed.
True.
True or False. In an integrated audit the auditor’s testing of internal control must be independent of management’s testing of internal control.
True.
True or False. In an integrated audit the auditor’s testing of internal control must be independent of management’s testing of internal control. The auditor cannot consider the work done by others in the organization.
False.
True or False. No matter how low control risk is assessed, some substantive testing of account balances must be conducted.
True.
True or False. Most investors saw benefit to the additional information on the quality of a company’s internal controls as a result of AS 2, but many businesses complained about the added cost of both management’s assessment and the external audit.
True.
True or False. In an integrated audit the auditor conducts his or her audit of the internal controls of the company in accordance with the standards of COSO which requires reasonable assurance of maintenance in material respects.
False.
True or False. In an integrated audit an unqualified opinion on the internal controls over financial reporting can be issued by the auditor if no misstatements are found in the financial statement audit.
False.
True or False. Management is responsible to document the COSO control elements, especially the control environment, risk analysis, and monitoring.
True.
True or False. The financial competencies needed by an organization are directly correlated with the complexity of transactions in which the company engages and the size of the company.
True.
True or False. Once a company establishes that it has effective internal control over processes, monitoring can be effective by assuring that any changes made to the processes are fully documented and tested and that controls have not deteriorated.
True.
True or False. Regardless of the level of assessed control risk, the auditor must conduct some substantive procedures for material account balances.
True.
True or False. In the risk-based audit approach the control environment serves as the first line of defense in mitigating the risks that a company has to manage.
True.
True or False. Management’s evaluation of internal controls often presents opportunities to improve both the quality of controls and the efficiency of processing.
True.