One of the financial statement auditor’s major concerns is to ascertain whether internal
control is designed to provide reasonable assurance that
Answer (D) is correct.
Internal control is designed to provide reasonable assurance of the
achievement of objectives in the categories of (1) reliability of financial
reporting, (2) effectiveness and efficiency of operations, and (3)
compliance with laws and regulations. Controls relevant to a financial
statement audit ordinarily pertain to the objective of preparing external
financial statements that are fairly presented in conformity with GAAP
or another comprehensive basis of accounting.
The primary responsibility for establishing and maintaining internal control rests with
Answer (B) is correct.
Establishing and maintaining internal control is the responsibility of
management. Internal control is intended to provide reasonable assurance
that the entity’s objectives are achieved. Achievement of these objectives
is the basic function of management.
Internal controls are designed to provide reasonable assurance that
Answer (A) is correct.
Reasonable assurance is provided when cost-effective actions are taken
to restrict deviations to a tolerable level. This implies, for example, that
material errors and improper or illegal acts will be prevented or detected
and corrected within a timely period by employees in the normal course
of performing their assigned duties. The cost-benefit relationship is
considered by management during the design of systems. The potential
loss associated with any exposure or risk is weighed against the cost to
Which of the following are considered control environment factors? Detection Risk Personnel Policies and Practices
Answer (C) is correct. Human resource policies and practices are part of the control environment. They relate to hiring, orientation, training, evaluating, counseling, promoting, compensating, and remedial actions. The control environment is the component that sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for the other components. Detection risk is not part of the control environment. It is the risk that the audit procedures will fail to detect material misstatements. Thus, detection risk is a function of the effectiveness of the procedures used by the auditor.
Basic to a proper control environment are the quality and integrity of personnel who must perform the prescribed procedures. Which is not a factor in providing for competent personnel?
Answer (A) is correct. Human resource policies and practices are a factor in the control environment component of internal control. They affect the entity’s ability to employ sufficient competent personnel to accomplish its objectives. Policies and practices include those for hiring, orientation, training, evaluating, promoting, compensating, and remedial actions. Although control activities based on the segregation of duties are important to internal control, they do not in themselves promote employee competence.
A director of a corporation is best characterized as a(n)
Answer (C) is correct. Officers and employees as well as directors are fiduciaries with regard to the corporation. They owe a duty of loyalty, good faith, and fair dealing requires full disclosure of any personal interest in transactions with the corporation, avoidance of conflicts of interest and the making of secret profits, and placing the corporate interest ahead of personal gain.
Seymore was recently invited to become a director of Buckley Industries, Inc. If Seymore accepts and becomes a director, he along with the other directors will not be personally liable for
Answer (B) is correct. The directors of a corporation owe a fiduciary duty to the corporation and the shareholders. They are also expected to exercise reasonable business judgment. The law does recognize human fallibility and allows for directors to be safe from liability for honest mistakes of judgment.
A corporate director commits a breach of duty if
Answer (D) is correct. Corporate directors have a fiduciary duty to provide the corporation with business opportunities that come to them in their positions as directors of the corporation. A director who personally takes such a business opportunity has breached his or her duty.
Audit committees have been identified as a major factor in promoting the independence of both internal and external auditors. Which of the following is the most important limitation on the effectiveness of audit committees?
Answer (A) is correct. The audit committee is a subcommittee made up of outside directors who are independent of management. Its purpose is to help keep external and internal auditors independent of management and to ensure that the directors are exercising due care. However, if independence is impaired by personal and professional friendships, the effectiveness of the audit committee may be limited.
The audit committee may serve several important purposes, some of which directly benefit the internal audit activity. The most significant benefit provided by the audit committee to the internal audit activity is
Answer (A) is correct. The audit committee is a subcommittee of outside directors who are independent of corporate management. Its purpose is to help keep external and internal auditors independent of management and to ensure that the directors are exercising due care. This committee often selects the external auditors, reviews their overall audit plan, and examines the results of external and internal audits.