Chapter 11 Internal Control and COSO Framework

11.1 Learning Objective 11-1

1) Which of the following is not one of the three primary objectives of effective internal control?
A) reliability of financial reporting
B) efficiency and effectiveness of operations
C) compliance with laws and regulations
D) assurance of elimination of business risk

2) With which of management's assertions with respect to implementing internal controls is the
auditor primarily concerned?
A) efficiency of operations
B) reliability of financial reporting
C) effectiveness of operations
D) compliance with applicable laws and regulations

3) Internal controls
A) are implemented by and are the responsibility of the auditors.
B) consist of policies and procedures designed to provide reasonable assurance that the company
achieves its objectives and goals.
C) guarantee that the company complies with all laws and regulations.
D) only apply to SEC companies.

4) Internal controls are not designed to provide reasonable assurance that

A) all frauds will be detected.
B) transactions are executed in accordance with management's authorization.
C) the company's resources are used efficiently and effectively.
D) company personnel comply with applicable rules and regulations.

5) Describe each of the three broad objectives management typically has for internal control.
With which of these objectives is the auditor primarily concerned?

True false
6) Section 404 of the Sarbanes-Oxley Act requires that both private and public companies issue
an internal control report.

7) Management has a legal and professional responsibility to be sure that the financial statements
are prepared in accordance with reporting requirements of applicable accounting frameworks.

11.2 Learning Objective 11-2

1) Who is responsible for establishing a private company's internal control?

A) senior management
B) internal auditors
C) FASB
D) audit committee

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2) Two key concepts that underlie management's design and implementation of internal control
are
A) costs and materiality.
B) absolute assurance and costs.
C) inherent limitations and reasonable assurance.
D) collusion and materiality.

3) The PCAOB places responsibility for the reliability of internal controls over the financial
reporting process on
A) the company's board of directors.
B) the audit committee of the board of directors.
C) management.
D) the CFO and the independent auditors.

4) Which of the following parties provides an assessment of the effectiveness of internal control
over financial reporting for public companies?
A)
Management Financial statement auditors
Yes Yes

B)
Management Financial statement auditors
No No

C)
Management Financial statement auditors
Yes No

D)
Management Financial statement auditors
No Yes

5) An act of two or more employees to steal assets and cover their theft by misstating the
accounting records would be referred to as
A) collusion.
B) a material weakness.
C) a control deficiency.
D) a significant deficiency.

6) Sarbanes-Oxley requires management to issue an internal control report that includes two
specific items. Which of the following is one of these two requirements?
A) a statement that management is responsible for establishing and maintaining an adequate
internal control structure and procedures for financial reporting
B) a statement that management and the board of directors are jointly responsible for establishing
and maintaining an adequate internal control structure and procedures for financial reporting
C) a statement that management, the board of directors, and the external auditors are jointly
responsible for establishing and maintaining an adequate internal control structure and
procedures for financial reporting
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D) a statement that the external auditors are solely responsible for establishing and maintaining
an adequate system of internal control

7) When management is evaluating the design of internal control, management evaluates

whether the control can do which of the following?
A)
Detect material Correct material
misstatements misstatements
Yes Yes

B)
Detect material Correct material
misstatements misstatements
No No

C)
Detect material Correct material
misstatements misstatements
Yes No

D)
Detect material Correct material
misstatements misstatements
No Yes

8) When one material weakness is present at the end of the year, management of a public
company must conclude that internal control over financial reporting is
A) insufficient.
B) inadequate.
C) ineffective.
D) inefficient.

9) The auditors primary purpose in auditing the client's system of internal control over financial
reporting is
A) to prevent fraudulent financial statements from being issued to the public.
B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in
the financial statements.
C) to report to management that the internal controls are effective in preventing misstatements
from appearing on the financial statements.
D) to efficiently conduct the Audit of Financial Statements.

10) The internal control framework used by most U.S. companies is the ________ framework.
A) FASB
B) PCAOB
C) COSO
D) SEC

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11) In performing the audit of internal control over financial reporting, the auditor emphasizes
internal control over classes of transactions because
A) the accuracy of accounting system outputs depends heavily on the accuracy of inputs and
processing.
B) the class of transaction is where most fraud schemes occur.
C) account balances are less important to the auditor then the changes in the account balances.
D) classes of transactions tests are the most efficient manner to compensate for inherent risk.

12) Internal controls can never be regarded as completely effective. Even if company personnel
could design an ideal system, its effectiveness depends on the
A) adequacy of the computer system.
B) proper implementation by management.
C) ability of the internal audit staff to maintain it.
D) competency and dependability of the people using it.

13) When considering internal controls,

A) auditors can ignore controls affecting internal management information.
B) auditors are concerned with the client's internal controls over the safeguarding of assets if
they affect the financial statements.
C) management is responsible for understanding and testing internal control over financial
reporting.
D) companies must use the COSO framework to establish internal controls.

14) Of the following statements about internal controls, which one is least likely to be correct?
A) No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
B) Transactions must be properly authorized before such transactions are processed.
C) Because of the cost-benefit relationship, a client may apply controls on a test basis.
D) Control procedures reasonably ensure that collusion among employees cannot occur.

15) The Sarbanes-Oxley Act requires

A) all public companies to issue reports on internal controls.
B) all public companies to define adequate internal controls.
C) the auditor of public companies to design effective internal controls.
D) the auditor of public companies to withdraw from an engagement if internal controls are
weak.

16) Which of the following is an accurate statement regarding the auditor's responsibility for
understanding internal control?
A) Transaction-related audit objectives typically have no impact on the rights and obligations
objectives.
B) Transaction-related audit objectives typically have a significant impact on the balance-related
audit objective of realizable value.
C) Auditors generally emphasize internal control over account balances rather than classes of
transactions.
D) Auditors and management are both equally concerned about controls that affect the efficiency
and effectiveness of company operations.

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17) The primary emphasis by auditors is on controls over
A) classes of transactions.
B) account balances.
C) both A and B, because they are equally important.
D) both A and B, because they vary from client to client.

18) An auditor should consider two key issues when obtaining an understanding of a client's
internal controls. These issues are
A) the effectiveness and efficiency of the controls.
B) the frequency and effectiveness of the controls.
C) the design and operating effectiveness of the controls.
D) the implementation and operating effectiveness of the controls.

19) Reasonable assurance allows for

A) low likelihood that material misstatements will not be prevented or detected by internal
controls.
B) no likelihood that material misstatements will not be prevented or detected by internal
control.
C) moderate likelihood that material misstatements will not be prevented or detected by internal
control.
D) high likelihood that material misstatements will not be prevented or detected by internal
control.

20) Which of the following is most correct regarding the requirements under Section 404 of the
Sarbanes-Oxley Act?
A) The audits of internal control and the financial statements provide reasonable assurance as to
misstatements.
B) The audit of internal control provides absolute assurance of misstatement.
C) The audit of financial statements provides absolute assurance of misstatement.
D) The audits of internal control and the financial statements provide absolute assurance as to
misstatements.

True false
21) Under the Dodd-Frank federal financial reform legislation, all public companies are required
to obtain an audit report on internal control over financial reporting.

22) When a company designs and implements internal controls, cost of the controls is not a valid
consideration.

11.3 Learning Objective 11-3

1) Which of the following activities would be least likely to strengthen a company's internal
control?
A) separating accounting from other financial operations
B) maintaining insurance for fire and theft
C) fixing responsibility for the performance of employee duties
D) carefully selecting and training employees

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2) Which of the following components of the control environment define the existing lines of
responsibility and authority?
A) organizational structure
B) management philosophy and operating style
C) human resource policies and practices
D) management integrity and ethical values

3) Which of the following factors may increase risks to an organization?

A)
Geographic dispersion of Presence of new information
company operations technologies
Yes Yes

B)
Geographic dispersion of Presence of new information
company operations technologies
No No

C)
Geographic dispersion of Presence of new information
company operations technologies
Yes No

D)
Geographic dispersion of Presence of new information
company operations technologies
No Yes

4) Which of the following statements is most correct with respect to separation of duties?
A) A person who has temporary or permanent custody of an asset should account for that asset.
B) Employees who authorize transactions should not have custody of related assets.
C) Employees who open cash receipts should record the amounts in the subsidiary ledgers.
D) Employees who authorize transactions should have recording responsibility for these
transactions.

5) Authorizations can be either general or specific. Which of the following is not an example of
a general authorization?
A) automatic reorder points for raw materials inventory
B) a sales manager's authorization for a sales return
C) credit limits for various classes of customers
D) a sales price list for merchandise

6) Which of the following is correct with respect to the design and use of business documents?
A) The documents should be in paper format.
B) Documents should be designed for a single purpose to avoid confusion in their use.
C) Documents should be designed to be understandable only by those who use them.
D) Documents should be prenumbered consecutively to facilitate control over missing
documents.
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7) Which of the following best describes the purpose of control activities?
A) the actions, policies and procedures that reflect the overall attitudes of management
B) the identification and analysis of risks relevant to the preparation of financial statements
C) the policies and procedures that help ensure that necessary actions are taken to address risks
to the achievement of the entity's objectives
D) activities that deal with the ongoing assessment of the quality of internal control by
management
8) Which of the following deals with ongoing or periodic assessment of the quality of internal
control by management?
A) verifying activities
B) monitoring activities
C) oversight activities
D) management activities

9) Which of the following best describes an entity's accounting information and communication
system?
A)
Record and
Monitor process
transactions transactions Initiate transactions
Yes Yes Yes

B)
Record and
Monitor process
transactions transactions Initiate transactions
No No No

C)
Record and
Monitor process
transactions transactions Initiate transactions
Yes No No

D)
Record and
Monitor process
transactions transactions Initiate transactions
No Yes Yes

10) Which of the following is a risk assessment principle?

A) accountability
B) use relevant, quality information to support the functioning of internal controls
C) consider the potential for fraud
D) develop general controls over technology

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11) Which of the following is not an underlying principle related to risk assessment?
A) The organization should have clear objectives in order to be able to identify and assess the
risks relating to the objectives.
B) The auditors should determine how the company's risks should be managed.
C) The organization should consider the potential for fraudulent behavior.
D) The organization should monitor changes that could impact internal controls.

12) Which of the following is not one of the subcomponents of the control environment?
A) management's philosophy and operating style
B) organizational structure
C) adequate separation of duties
D) commitment to competence

13) It is important for the CPA to consider the competence of the clients' personnel because their
competence has a direct impact upon the
A) cost/benefit relationship of the system of internal control.
B) achievement of the objectives of internal control.
C) comparison of recorded accountability with assets.
D) timing of the tests to be performed.

14) Proper segregation of functional responsibilities calls for separation of

A) authorization, execution, and payment.
B) authorization, recording, and custody.
C) custody, execution, and reporting.
D) authorization, payment, and recording.

15) Without an effective ________, the other components of the COSO framework are unlikely
to result in effective internal control, regardless of their quality.
A) risk assessment policy
B) monitoring policy
C) control environment
D) system of control activities

16) Which of the following is an accurate statement regarding control activities?

A) As the level of complexity of IT systems increases, the separation of duties often becomes
blurred.
B) Segregation of duties would be violated if the same person authorizes the payment of a
vendor's invoice and also approves the disbursement of funds to pay the bill.
C) The most important type of protective measure for safeguarding assets and records is the us of
physical precautions.
D) all of the above

17) If a company has an effective internal audit department,

A) the internal auditors can express an opinion on the fairness of the financial statements.
B) their work cannot be used by the external auditors per PCAOB Standard 5.
C) it can reduce external audit costs by providing direct assistance to the external auditors.
D) the internal auditors must be CPAs in order for the external auditors to rely on their work.

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18) To promote operational efficiency, the internal audit department would ideally report to
A) line management.
B) the PCAOB.
C) the Chief Accounting Officer.
D) the audit committee.

19) Hanlon Corp. maintains a large internal audit staff that reports directly to the accounting
department. Audit reports prepared by the internal auditors indicate that the system is functioning
as it should and that the accounting records are reliable. An independent auditor will probably
A) eliminate tests of controls.
B) increase the depth of the study and evaluation of administrative controls.
C) avoid duplicating the work performed by the internal audit staff.
D) place limited reliance on the work performed by the internal audit staff.

20) External financial statement auditors must obtain evidence regarding what attributes of an
internal audit (IA) department if the external auditors intend to rely on IA's work?
A) integrity
B) objectivity
C) competence
D) all of the above

21) To obtain an understanding of an entity's control environment, an auditor should concentrate

on the substance of management's policies and procedures rather than their form because
A) management may establish appropriate policies and procedures but not act on them.
B) the board of directors may not be aware of management's attitude toward the control
environment.
C) the auditor may believe that the policies and procedures are inappropriate for that particular
entity.
D) the policies and procedures may be so weak that no reliance is contemplated by the auditor.

22) The ________ is helpful in preventing classification errors if it accurately describes which
type of transaction should be in each account.
A) general ledger
B) general journal
C) trial balance
D) chart of accounts

23) Control activities help assure that the necessary actions are taken to address risks to the
achievement of the company's objectives. List the five types of control activities.

24) Certain principles dictate the proper design and use of documents and records. Briefly
describe several of these principles.

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25) Management's identification and analysis of risk is an ongoing process and is a critical
component of effective internal control. An important first step is for management to identify
factors that may increase risk. Identify at least five factors, observable by management, which
may lead to increased risk in a typical business organization.

26) Separation of duties is essential in preventing errors and intentional misstatements on the
financial statements. List below the four general guidelines.

27) The internal control framework developed by COSO includes five so-called "components" of
internal control. Discuss each of these five components.

28) Discuss what is meant by the term "control environment" and identify four control
environment subcomponents that the auditor should consider.

29) List the four underlying principles of risk assessment per the COSO framework

True false
30) Control activities are a subcomponent of the information and communication component of
internal control.

31) Adequate documents and records is a subcomponent of the control environment.

32) The chart of accounts is helpful in preventing classification errors if it accurately describes
which type of transaction should be in each account.

33) Auditing standards prohibit reliance on the work of internal auditors due to the lack of
independence of the internal auditors.

34) If an auditor wishes to rely on the work of internal auditors (IA), the auditor must obtain
satisfactory evidence related to the IA's competence, integrity, and objectivity.
35) An example of a specific authorization is management setting a policy authorizing the
ordering of inventory when less than a one-week supply is on hand.

36) Personnel responsible for performing internal verification procedures must be independent of
those originally responsible for preparing the data.

11.4 Learning Objective 11-4

1) Old and new systems operating simultaneously in all locations is a test approach known as
A) pilot testing.
B) horizontal testing.
C) integrative testing.
D) parallel testing.

2) Which of the following is a component of general controls?

A) processing controls
B) output controls
C) back-up and contingency planning
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D) input controls(

3) Which of the following statements related to application controls (kiểm soát ứng dụng) is
correct?
A) Application controls relate to various aspects of the IT function including software
acquisition and the processing of transactions.
B) Application controls relate to various aspects of the IT function including physical security
and the processing of transactions in various cycles.
C) Application controls relate to all aspects of the IT function.
D) Application controls relate to the processing of individual transactions.

4) General controls include all of the following except

A) systems development.
B) online security.
C) processing controls.
D) hardware controls.

5) Which of the following describes the process of implementing a new system in one part of the
organization, while other locations continue to use the current system?
A) parallel testing
B) online testing
C) pilot testing
D) control testing

6) A ________ is responsible for controlling the use of computer programs, transaction files and
other computer records and documentation and releases them to the operators only when
authorized.
A) software engineer
B) chief computer operator
C) librarian
D) data control operator

7) Security controls should require that users enter a(n) ________ before being allowed access to
software and other related data files.
A) echo check
B) parity check
C) self-diagnosis test
D) authorized password

8) Typical controls developed for manual systems which are still important in IT systems include
A) management's authorization of transactions.
B) competent personnel.
C) adequate preparation of input source documents.
D) all of the above.

9) Which of the following controls prevent and detect errors while transaction data are
processed?
A) software
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B) application
C) processing
D) transaction

10) When purchasing software or developing in-house software,

A) cost should be the only factor.
B) extensive testing of the software is generally not required.
C) a team of both IT and non-IT personnel should be involved in the decision process.
D) the librarian and the IT manager should be the only ones involved in the decision process.

11) Output controls need to be designed for which of the following data integrity objectives?
A) detecting errors after the processing is completed
B) preventing errors before the processing is completed
C) detecting errors in the general ledger adjustment process
D) preventing errors in separation of duties for IT personnel

12) A control that relates to all parts of the IT system is called a(n)
A) general control.
B) systems control.
C) universal control.
D) applications control.

13) Controls that are designed for each software application and are intended to help a company
satisfy the transaction-related audit objectives are
A) user controls.
B) general controls.
C) audit controls.
D) application controls.

14) Which of the following is not an example of an applications control?

A) Back-up of data is made to a remote site for data security.
B) There is a preprocessing authorization of the sales transactions.
C) There are reasonableness tests for the unit selling price of a sale.
D) After processing, all sales transactions are reviewed by the sales department.

15) Which of the following is not a general control?

A) Computer performed validation tests of input accuracy.
B) Equipment failure causes error messages on monitor.
C) There is a separation of duties between programmer and operators.
D) There are adequate program run instructions for operating the computer.

16) Controls which are built in by the manufacturer to detect equipment failure are called
A) input controls.
B) data integrity controls.
C) hardware controls.
D) manufacturer's controls.

17) Controls which are designed to assure that the information entered into the computer is
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authorized, complete, and accurate are called
A) input controls.
B) processing controls.
C) output controls.
D) general controls.

18) When dealing with the administration of the IT function and the segregation of IT duties
A) in large organizations, management should assign technology issues to outside consultants.
B) programmers should investigate all security breaches.
C) the board of directors should not get involved in IT decisions since it is a routine function
handled by middle management.
D) in complex environments, management may establish IT steering committees.

19) Which of the following tests determines that every field in a record has been completed?
A) validation
B) sequence
C) completeness
D) programming

20) An example of a physical control is

A) a hash total.
B) a parallel test.
C) the matching of employee fingerprints to a database before access to the system is allowed.
D) the use of backup generators to prevent data loss during power outages.

21) Controls specific to IT include all of the following except for

A) adequately designed input screens.
B) pull-down menu lists.
C) validation tests of input accuracy.
D) separation of duties.

22) An internal control deficiency occurs when computer personnel

A) participate in computer software acquisition decisions.
B) design flowcharts and narratives for computerized systems.
C) originate changes in customer master files.
D) provide physical security over program files.

23) Which of the following best explains the relationship between general controls and
application controls?
A) Application controls are effective even if general controls are extremely weak.
B) Application controls are likely to be effective only when general controls are effective.
C) General controls have no impact on application controls.
D) None of the above

24) A(n) ________ total represents the summary total of codes from all records in a batch that do
not represent a meaningful total.
A) record
B) hash
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C) output
D) financial

25) In an IT system, automated equipment controls or hardware controls are designed to

A) correct errors in the computer programs.
B) monitor and detect errors in source documents.
C) detect and control errors arising from the use of equipment.
D) arrange data in a logical sequential manner for processing purposes.

26) If a control total were to be computed on each of the following data items, which would best
be identified as a hash total for a payroll IT application?
A) gross wages earned
B) employee numbers
C) total hours worked
D) total debit amounts and total credit amounts

27) Which of the following is not an application control?

A) reprocessing authorization of sales transactions
B) reasonableness test for unit selling price of sale
C) post-processing review of sales transactions by the sales department
D) logging in to the company's information systems via a password

28) Which of the following is not a general control?

A) separation of IT duties
B) systems development
C) processing controls
D) hardware controls

29) ________ is the information technology and internal control processes an organization has in
place to protect computers, networks, programs, and data from unauthorized access (truy cập trái
phép).
A) Encryption
B) A firewall
C) Cybersecurity
D) A processing control

30) The most important output control is

A) distribution control, which assures that only authorized personnel receive the reports
generated by the system.
B) review of data for reasonableness by someone who knows what the output should look like.
C) control totals, which are used to verify that the computer's results are correct.
D) logic tests, which verify that no mistakes were made in processing.

31) Define control for general controls and application controls. Also list the categories of
controls included under general controls and application controls.

32) Identify the three categories of application controls, and give one example of each.

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33) One category of general controls is physical and online access controls. Describe the control
and give at two examples of implementation of the control.

34) Match six of the terms (a-j) with the definitions provided below (1-6):

a. Application controls
b. Error listing
c. General controls
d. Hardware controls
e. Input controls
f. Output controls
g Parallel simulation
h. Parallel testing
i Pilot testing
j. Processing controls

________ 1. The new and old systems operate simultaneously in all locations.

________ 2. Controls that relate to all aspects of the IT system.

________ 3. Controls such as review of data for reasonableness, designed to assure that data
generated by the computer is valid, accurate, complete, and distributed only to authorized people.

________ 4. Controls that apply to processing of transactions.

________ 5. A new system is implemented in one part of the organization while other locations
continue to rely on the old system.

________ 6. Controls such as proper authorization of documents, check digits, and adequate
documentation, designed to assure that the information to be entered into the computer is
authorized, complete, and accurate.

35) Processing controls include the following tests:

Validation
Sequence
Data Reasonableness
Completeness

Describe what each control is designed to do:

36) What are the two software testing strategies that companies typically use? Which strategy is
more expensive?

37) Discuss the four areas of responsibility under the IT function that should be segregated in
large companies.

38) Identify the six categories of general controls and give one example of each.

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True false
39) Parallel testing is used when old and new systems are operated simultaneously in all
locations.

40) Programmers should only be allowed to work with test copies of programs and data.

41) In IT systems, if general controls are effective, it increases the auditor's ability to rely on
application controls to reduce control risk.

42) Parallel testing can be used in combination with pilot testing to test new systems.

43) The effectiveness of automated controls depends solely on the competence of the personnel
performing the controls.

44) Backup and contingency plans should also identify alternative hardware that can be used to
process company data.

45) A large portion of errors in IT systems result from data entry errors.

46) Output controls focus on preventing errors during processing.

47) Processing controls are a category of application controls.

48) Controls that relate to a specific use of the IT system, such as the processing of sales or cash
receipts, are called application controls.

49) IT controls are classified as either input controls or output controls.

11.5 Learning Objective 11-5

1) A database management system

A) allows clients to create databases that include information that can be shared across multiple
applications.
B) stores data on different files for different purposes, but always knows where they are and how
to retrieve them.
C) allows quick retrieval of data, but at a cost of inefficient use of file space.
D) allows quick retrieval of data, but it needs to update files continually.

2) When auditing a client who uses a database management system, the auditor is principally
aware of elevated risk due to the fact that
A) multiple users can access and update data files.
B) the accounting information is only in one place.
C) the database administrator may lack appropriate accounting knowledge.
D) multiple users could all access the data simultaneously causing a system shutdown.

3) Firewalls are used to protect from

A) erroneous internal handling of data.
B) insufficient documentation of transactions.
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C) illogical programming commands.
D) unauthorized external users.

4) What tools do companies use to limit access to sensitive company data?

A)
Encryption techniques Digital signatures Firewall
Yes Yes Yes

B)
Encryption techniques Digital signatures Firewall
Yes No No

C)
Encryption techniques Digital signatures Firewall
No Yes Yes

D)
Encryption techniques Digital signatures Firewall
Yes Yes No

5) Rather than maintain an internal IT center, many companies outsource their basic IT functions
such as payroll to an
A) external general service provider.
B) independent computer service center.
C) internal control service provider.
D) internal auditor.

6) When the auditor is obtaining an understanding of the independent computer service center's
internal controls, the auditor should
A) use the same criteria used to evaluate the client's internal controls.
B) use different criteria because the service center resides outside the company.
C) use the same criteria used to evaluate the client's internal controls but omit tests of
transactions.
D) use different criteria for the service center by including substantive tests of balances.

7) ________ protect(s) the security of electronic communication when information is transmitted

and when it is stored.
A) Firewalls
B) Digital signatures
C) Encryption
D) A database

8) A(n) ________ is a computer resource deployment and procurement model that enables an
organization to obtain IT resources and applications from any location via an Internet
connection.
A) application service provider
B) firewall
C) cloud computing environment
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D) local area network

9) From an internal control perspective, what challenges arise when a company outsources
computer functions?

True false
10) Firewalls can protect company data and software programs.

11) LANs link equipment within a single or small cluster of buildings and are used within a
company.

12) Companies using e-commerce systems to transact business electronically do not need to be
concerned about how their e-commerce partners manage IT systems risks.

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