CHAPTER 9: STUDY AND EVALUATION OF INTERNAL

CONTROL

1. It is the process of evaluating design and operating effectiveness of an entity's internal control as to
material misstatements in the financial statements.
A. Assessing detection risk
B. Assessing control risk
C. Assessing inherent risk
D. Assessing business risk
2. Internal control is accomplished by people at every level of organization.

One of the inherent limitations that may affect the internal control's effectiveness is the possibi
become inadequate due to changes in conditions and compliance with procedures may deterio
A. Both are true.
B. Both are false.
C. First is false, second is true.
D. First is true, second is false.
3. These are the components of internal control, except:
A. Monitoring
B. Control Environment
C. Control Activities
D. Information Technology

4. It is the risk that the entity's business objectives will not be attained as a result of internal and exte
technological developments, changes in customers demand and other economic changes.
A. Detection Risk
B. Audit Risk
C. Business Risk
D. Inherent Risk
5. Which is true about information systems?
A. It encompasses methods and records that present properly the transactions but not the
financial statements.
B. It encompasses methods and records that identify and record some valid transactions.

C. It encompasses methods and records that determine the time period in which transactio
recording of transactions in the proper accounting period.

D. It encompasses methods and records that measure the value of transactions in a manne
their monetary value in the financial statements.

6. It involves providing an understanding of individual roles and responsibilities pertaining to internal c

reporting.
A. Communication
B. Information
C. Monitoring
D. Supervision

7. These are examples of control activities that are relevant to financial statement audit, except:
A. Reviews and analyses of actual performance versus budgets, forecasts, and prior period
B. Checking the arithmetical accuracy of records.
C. Authorization for access to computer programs and data files.
D. Recording transactions and custody of assets by same person.
8. Which is true about the internal control for a small business?
A. It is easy to have proper segregation of duties.

B. When the owner/manager actively participates in the operations of the business, weakne
can be compensated.
C. Internal control systems are effective compared to larger entities.
D. It is easy to maintain a separate internal audit department.
9. Obtaining an understanding of internal control involves the following, except:
A. Evaluating the design of a control.

B. Considering whether the control, individually or in combination with other controls, is cap
misstatements.
C. Determining whether the control has been implemented.
D. Determining whether the control exists and that they have been placed in operation.

10. This task involves tracing one or two transactions through the entire accounting systems, from the
to their final destination as a component of an account balance in the financial statements.
A. Substantive Test
B. Walk-through Test
C. Compliance Test
D. Test of transactions
11. The

the degree and effectiveness of ongoing monitoring, the

A. greater; less
B. greater; more
C. lesser; less
D. lesser; more

need for s

12. Test of controls generally consist of one or a combination of the following evidence gathering tech
A. Inquiry
B. Observation
C. Inspection
D. Performance

13. It is a deficiency or combination of deficiencies in internal control that, in the auditor's professiona
importance to merit the attention of those charged with governance.
A. Important deficiency
B. Necessary deficiency
C. Operational deficiency

D. Significant deficiency
14. An example of assertions about account balances at the period end:
A. Classification
B. Cutoff
C. Valuation and allocation
D. Accuracy

15. If the control risk assessment is high, should the auditor document the understanding of internal c
control risk assessment?
A. YES; NO
B. YES; YES
C. NO; NO
D. NO; YES

ity's internal control as to how it prevents or detects

ffectiveness is the possibility that procedures may

procedures may deteriorate.

esult of internal and external factors such as

mic changes.

transactions but not the related disclosures in the

ome valid transactions.

eriod in which transactions occurred to permit

transactions in a manner that prohibits recording

es pertaining to internal control over financial

ment audit, except:

recasts, and prior period performance.

s of the business, weaknesses in the internal control

with other controls, is capable of knowing material

n placed in operation.

unting systems, from their initial recording at source

al statements.

need for separate evaluations.

evidence gathering techniques, except:

the auditor's professional judgement, is of sufficient

derstanding of internal control and the basis for the

CHAPTER 9 ANSWER KEY

1. B
2. A
3. D
4. C
5. C
6. A
7. D
8. B
9. B
10. B
11. A
12. D
13. D
14. C
15. A