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Chapter 18 - Integrated Audits of Public Companies

Chapter 18
Integrated Audits of Public Companies
True / False Questions

1. Section 404 of the Sarbanes-Oxley Act of 2002 includes internal control reporting
requirements for both management and auditors.
True False

2. The Sarbanes-Oxley Act changed auditor association with a client's internal control from
the review to the audit form of association.
True False

3. The amount involved with a significant deficiency is at least a material amount.


True False

4. The "as of date" for internal control reporting is ordinarily the last day of the fiscal year.
True False

5. The lack of effective antifraud programs is always considered a material weakness.


True False

6. PCAOB standards suggest that auditors emphasize nonroutine transactions as contrasted to


routine transactions in their consideration of internal control.
True False

7. An auditor's report on internal control ordinarily includes negative assurance on the


effectiveness of internal control.
True False

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Chapter 18 - Integrated Audits of Public Companies

8. Tests of operating effectiveness ordinarily include reperformance of the application of


controls.
True False

9. A client imposed scope limitation relating to the audit of internal control ordinarily results
in a qualified report.
True False

10. If management's report on internal control discloses a material weakness, the auditors
(who agree that it is a material weakness) will issue a report that includes a qualified opinion.
True False

Multiple Choice Questions

11. Which of the following is most likely to be considered a material weakness in internal
control?
A. An ineffective control environment.
B. Restatement of previously issued financial statements due to a change in accounting
principles.
C. Inadequate controls over non-systematic transactions.
D. Weaknesses in risk assessment.

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Chapter 18 - Integrated Audits of Public Companies

12. Which must management communicate to the audit committee?

A. Option A
B. Option B
C. Option C
D. Option D

13. Which must the auditor communicate to management?

A. Option A
B. Option B
C. Option C
D. Option D

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Chapter 18 - Integrated Audits of Public Companies

14. Walkthroughs provide the auditors with evidence to:

A. Option A
B. Option B
C. Option C
D. Option D

15. Walkthroughs provide evidence that helps the auditor to:

A. Option A
B. Option B
C. Option C
D. Option D

16. According to PCAOB standards, determining the allowance for doubtful accounts is
referred to as a(n):
A. Substantive transaction.
B. Routine transaction.
C. Nonroutine transaction.
D. Accounting estimate transaction.

18-4

Chapter 18 - Integrated Audits of Public Companies

17. The framework most likely to be used by the client in its internal control assessment is
the:
A. COSO internal control framework.
B. COSO enterprise risk management framework.
C. FASB 37 internal control definitional framework.
D. AICPA internal control analysis manager.

18. A material weakness that exists at year end will result in what type of audit report on
internal control?
A. Adverse.
B. Qualified.
C. Unqualified.
D. Unqualified with explanatory language.

19. Assume that an auditor is focusing on two weaknesses in internal control. Although
neither is by itself a material weakness, the two significant deficiencies in combination
represent a material weakness. The client effectively remediates one of them prior to year-end
but does not have time to remediate the other prior to year-end. What type of audit report on
internal control is appropriate?
A. Adverse.
B. Qualified.
C. Unqualified.
D. Unqualified with explanatory language.

20. Which of the following is a weakness in internal control that allows a reasonable
possibility that a significant (but less than material) misstatement may occur and not be
detected?
A. Control deficiency.
B. Material weakness.
C. Reportable material item.
D. Significant deficiency.

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Chapter 18 - Integrated Audits of Public Companies

21. Which of the following would most likely be included in a SEC 10K filing in which a
material weakness in internal control exists?

A. Option A
B. Option B
C. Option C
D. Option D

22. An auditor identified a material weakness in internal control in August. The client was
informed and the client corrected the material weakness prior to year-end (December 31); the
auditor agrees that the correction eliminates the material weakness prior to year-end. The
appropriate audit report on internal control under PCAOB standards on reporting on internal
control is:
A. Adverse.
B. Unqualified.
C. Disclaimer.
D. Qualified.

23. An auditor identified a material weakness in internal control in December. The client was
informed and the client corrected the material weakness shortly after year-end (December 31);
the auditor agrees that the correction eliminates the material weakness as of January 31. The
appropriate audit report on internal control under PCAOB standards on reporting on internal
control is:
A. Adverse.
B. Unqualified.
C. Unqualified with explanatory language relating to the material weakness.
D. Qualified.

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Chapter 18 - Integrated Audits of Public Companies

24. An auditor identified a significant deficiency in internal control in December. The client
was informed and the client corrected the significant deficiency shortly before year-end
(December 31); the auditor agrees that the correction eliminates the significant deficiency as
of December 31. The appropriate audit report on internal control under a PCAOB Standard
No. 2 audit of internal control is:
A. Adverse.
B. Unqualified.
C. Unqualified with explanatory language relating to the significant deficiency.
D. Qualified.

25. Which of the following must be included in management's report internal control under
section 404 of the Sarbanes/Oxley Act of 2002?
A. It is management's responsibility to eliminate or publicly report on significant deficiencies
in internal control.
B. A detailed description of the COSO criteria.
C. Management's assessment of the operating effectiveness for the period from the beginning
to the end of the fiscal year under audit.
D. Identification of the framework used for evaluating internal control.

26. Which of the following is a strong indicator that a material weakness in internal control
exists?
A. Restatement of previously issued financial statements to reflect a correction.
B. Inadequate controls over non-routine transactions.
C. Inadequate controls over the period-end financial reporting process.
D. Weaknesses in a control activity.

27. A circumstance caused scope limitation in a Sarbanes/Oxley 404 internal control audit is
most likely to result in a(n):
A. Withdrawal from the engagement.
B. Disclaimer of opinion.
C. Unqualified opinion with explanatory language.
D. All of the above are equally likely.

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Chapter 18 - Integrated Audits of Public Companies

28. Under PCAOB internal control reporting standards, what are the auditor's communication
requirements to the audit committee with respect to material weaknesses?
A. All must be communicated in written form.
B. All must be communicated in written form or orally.
C. Only those that violate the Foreign Corrupt Practices Act need be communicated, but in
written form.
D. Only those that violate the Foreign Corrupt Practices Act need be communicated, in
written form or orally.

29. A material weakness because the oversight of the external financial reporting function by
the audit committee is ineffective will ordinarily result in communication to:

A. Option A
B. Option B
C. Option C
D. Option D

30. Deficiencies in internal control identified by the auditor that are lesser than significant
deficiencies:
A. Must be communicated to the board of directors, the audit committee, and management.
B. Must be reported to the audit committee and management.
C. Must be communicated to management, with the audit committee only informed of the
communication to management.
D. Need not be disclosed unless they in aggregate equal (at least) a significant deficiency.

18-8

Chapter 18 - Integrated Audits of Public Companies

31. Which is least likely to be a question asked of employee personnel during a walkthrough?
A. Have you ever been asked to override the process?
B. Have you assessed the operating effectiveness of the system?
C. What do you do when you find an error?
D. What are you looking for to determine if there is an error?

32. Which of the following fits most directly under the control activities components of the
COSO IC framework?
A. Company-level controls dealing with tone at the top.
B. Overall methods for assigning authority and responsibility.
C. The control environment.
D. Accounting for shipping documents to ensure that all sales are recorded.

33. Consider a company whose sales are initiated by customers either through the Internet, or
in a retail store. Which of the following is correct?
A. These types of sales represent two major classes of transactions within the sales process.
B. These types of sales represent two sales processes within a major evaluation processing
cycle.
C. These sales represent a sales assertion on completeness.
D. These events represent nonroutine transactions that must be investigated in detail.

34. According to PCAOB standards for reporting on internal control, calculating depreciation
expense or adjusting for foreign currencies is referred to as:
A. Substantive transactions.
B. Routine transactions.
C. Nonroutine transactions.
D. Accounting Estimate transactions.

35. A material weakness involves a reasonable possibility that what size misstatement will not
be prevented or detected?
A. Immaterial.
B. Material.
C. More than inconsequential.
D. Substantial.

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Chapter 18 - Integrated Audits of Public Companies

36. A control deficiency that is less than a significant deficiency is most likely to result in
what form of audit opinion on internal control?
A. Adverse.
B. Qualified.
C. Unqualified.
D. Unqualified with explanatory language.

37. Under a PCAOB standards for an internal control audit, which of the following is least
likely to indicate a significant deficiency relating to a client's antifraud programs?
A. No program for anonymous submissions of alleged fraud.
B. Audit committee active engagement in discussions on the topic of fraud.
C. Senior management delegates to lower levels responsibility for oversight of antifraud
programs.
D. Lack of audit committee interaction with the internal audit department.

38. The minimum likelihood of loss involved in the consideration of a control deficiency that
is less than a significant deficiency is:
A. Remote.
B. More than remote.
C. Probable.
D. Not considered.

39. The minimum likelihood of loss involved in the consideration of a possible significant
deficiency is:
A. Remote.
B. Reasonably possible.
C. Probable.
D. Not considered.

18-10

Chapter 18 - Integrated Audits of Public Companies

40. The minimum likelihood of loss involved in the consideration of a possible material
weakness is:
A. Remote.
B. Reasonably possible.
C. Probable.
D. Not considered.

41. The existence of a material weakness led to an adverse opinion in the internal control
audit report of a publicly traded company. Which of the following statements is correct if
management believes that it has remediated the weakness?
A. Management may engage the auditors to report on whether the material weakness
continues to exist prior to its next annual audit.
B. Management is required to engage the auditors to report on whether the material weakness
continues to exist prior to its next annual audit.
C. Management may not engage the auditors to report on whether the material weakness
continues to exist prior to its next annual audit.
D. Management may engage the auditors to modify the prior adverse audit report be modified
to an unqualified report.

42. An audit firm has been engaged to report on whether a material weakness that previously
resulted in an adverse opinion on internal control has been remediated. Which of the
following statements is correct?
A. A significant scope limitation on the auditor's procedures results in a qualified opinion or
an adverse opinion.
B. If there has been an auditor change, the successor auditor may issue such a report.
C. If while performing the engagement another material weakness is identified, it will result
in an adverse opinion relating to the current engagement to report upon the other material
weakness.
D. The engagement may only take place at year-end during the next year's audit of internal
control.

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Chapter 18 - Integrated Audits of Public Companies


Essay Questions

43. The PCAOB has outlined a number of circumstances that are indicators of a material
weakness. In addition, other control deficiencies may or may not be a material weakness
depending upon details of the circumstances involved. Categorize the following:

*May be material weakness, significant deficiency, or lesser deficiency, but is not ordinarily
considered a strong indicator of a material weakness in internal control.

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Chapter 18 - Integrated Audits of Public Companies

Chapter 18 Integrated Audits of Public Companies Answer Key

True / False Questions

1. Section 404 of the Sarbanes-Oxley Act of 2002 includes internal control reporting
requirements for both management and auditors.
TRUE

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 18-01 Describe the nature of an integrated audit.
Topic: Overview

2. The Sarbanes-Oxley Act changed auditor association with a client's internal control from
the review to the audit form of association.
FALSE

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

18-13

Chapter 18 - Integrated Audits of Public Companies

3. The amount involved with a significant deficiency is at least a material amount.


FALSE

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

4. The "as of date" for internal control reporting is ordinarily the last day of the fiscal year.
TRUE

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 18-04 Present the auditors' approach to analyzing internal control when performing an integrated audit.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

5. The lack of effective antifraud programs is always considered a material weakness.


FALSE

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-14

Chapter 18 - Integrated Audits of Public Companies

6. PCAOB standards suggest that auditors emphasize nonroutine transactions as contrasted to


routine transactions in their consideration of internal control.
FALSE

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-04 Present the auditors' approach to analyzing internal control when performing an integrated audit.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

7. An auditor's report on internal control ordinarily includes negative assurance on the


effectiveness of internal control.
FALSE

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-05 Explain how findings relating to the audits of internal control and the financial statements may affect one
another.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

8. Tests of operating effectiveness ordinarily include reperformance of the application of


controls.
TRUE

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Remember
Difficulty: Easy
Learning Objective: 18-05 Explain how findings relating to the audits of internal control and the financial statements may affect one
another.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-15

Chapter 18 - Integrated Audits of Public Companies

9. A client imposed scope limitation relating to the audit of internal control ordinarily results
in a qualified report.
FALSE

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

10. If management's report on internal control discloses a material weakness, the auditors
(who agree that it is a material weakness) will issue a report that includes a qualified opinion.
TRUE

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-16

Chapter 18 - Integrated Audits of Public Companies


Multiple Choice Questions

11. Which of the following is most likely to be considered a material weakness in internal
control?
A. An ineffective control environment.
B. Restatement of previously issued financial statements due to a change in accounting
principles.
C. Inadequate controls over non-systematic transactions.
D. Weaknesses in risk assessment.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

12. Which must management communicate to the audit committee?

A. Option A
B. Option B
C. Option C
D. Option D

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

18-17

Chapter 18 - Integrated Audits of Public Companies

13. Which must the auditor communicate to management?

A. Option A
B. Option B
C. Option C
D. Option D

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-05 Explain how findings relating to the audits of internal control and the financial statements may affect one
another.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-18

Chapter 18 - Integrated Audits of Public Companies

14. Walkthroughs provide the auditors with evidence to:

A. Option A
B. Option B
C. Option C
D. Option D

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-04 Present the auditors' approach to analyzing internal control when performing an integrated audit.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-19

Chapter 18 - Integrated Audits of Public Companies

15. Walkthroughs provide evidence that helps the auditor to:

A. Option A
B. Option B
C. Option C
D. Option D

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 18-04 Present the auditors' approach to analyzing internal control when performing an integrated audit.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

16. According to PCAOB standards, determining the allowance for doubtful accounts is
referred to as a(n):
A. Substantive transaction.
B. Routine transaction.
C. Nonroutine transaction.
D. Accounting estimate transaction.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-04 Present the auditors' approach to analyzing internal control when performing an integrated audit.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-20

Chapter 18 - Integrated Audits of Public Companies

17. The framework most likely to be used by the client in its internal control assessment is
the:
A. COSO internal control framework.
B. COSO enterprise risk management framework.
C. FASB 37 internal control definitional framework.
D. AICPA internal control analysis manager.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Remember
Difficulty: Easy
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

18. A material weakness that exists at year end will result in what type of audit report on
internal control?
A. Adverse.
B. Qualified.
C. Unqualified.
D. Unqualified with explanatory language.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-21

Chapter 18 - Integrated Audits of Public Companies

19. Assume that an auditor is focusing on two weaknesses in internal control. Although
neither is by itself a material weakness, the two significant deficiencies in combination
represent a material weakness. The client effectively remediates one of them prior to year-end
but does not have time to remediate the other prior to year-end. What type of audit report on
internal control is appropriate?
A. Adverse.
B. Qualified.
C. Unqualified.
D. Unqualified with explanatory language.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

20. Which of the following is a weakness in internal control that allows a reasonable
possibility that a significant (but less than material) misstatement may occur and not be
detected?
A. Control deficiency.
B. Material weakness.
C. Reportable material item.
D. Significant deficiency.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Remember
Difficulty: Easy
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

18-22

Chapter 18 - Integrated Audits of Public Companies

21. Which of the following would most likely be included in a SEC 10K filing in which a
material weakness in internal control exists?

A. Option A
B. Option B
C. Option C
D. Option D

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

22. An auditor identified a material weakness in internal control in August. The client was
informed and the client corrected the material weakness prior to year-end (December 31); the
auditor agrees that the correction eliminates the material weakness prior to year-end. The
appropriate audit report on internal control under PCAOB standards on reporting on internal
control is:
A. Adverse.
B. Unqualified.
C. Disclaimer.
D. Qualified.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-23

Chapter 18 - Integrated Audits of Public Companies

23. An auditor identified a material weakness in internal control in December. The client was
informed and the client corrected the material weakness shortly after year-end (December 31);
the auditor agrees that the correction eliminates the material weakness as of January 31. The
appropriate audit report on internal control under PCAOB standards on reporting on internal
control is:
A. Adverse.
B. Unqualified.
C. Unqualified with explanatory language relating to the material weakness.
D. Qualified.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

24. An auditor identified a significant deficiency in internal control in December. The client
was informed and the client corrected the significant deficiency shortly before year-end
(December 31); the auditor agrees that the correction eliminates the significant deficiency as
of December 31. The appropriate audit report on internal control under a PCAOB Standard
No. 2 audit of internal control is:
A. Adverse.
B. Unqualified.
C. Unqualified with explanatory language relating to the significant deficiency.
D. Qualified.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-24

Chapter 18 - Integrated Audits of Public Companies

25. Which of the following must be included in management's report internal control under
section 404 of the Sarbanes/Oxley Act of 2002?
A. It is management's responsibility to eliminate or publicly report on significant deficiencies
in internal control.
B. A detailed description of the COSO criteria.
C. Management's assessment of the operating effectiveness for the period from the beginning
to the end of the fiscal year under audit.
D. Identification of the framework used for evaluating internal control.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

26. Which of the following is a strong indicator that a material weakness in internal control
exists?
A. Restatement of previously issued financial statements to reflect a correction.
B. Inadequate controls over non-routine transactions.
C. Inadequate controls over the period-end financial reporting process.
D. Weaknesses in a control activity.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-25

Chapter 18 - Integrated Audits of Public Companies

27. A circumstance caused scope limitation in a Sarbanes/Oxley 404 internal control audit is
most likely to result in a(n):
A. Withdrawal from the engagement.
B. Disclaimer of opinion.
C. Unqualified opinion with explanatory language.
D. All of the above are equally likely.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

28. Under PCAOB internal control reporting standards, what are the auditor's communication
requirements to the audit committee with respect to material weaknesses?
A. All must be communicated in written form.
B. All must be communicated in written form or orally.
C. Only those that violate the Foreign Corrupt Practices Act need be communicated, but in
written form.
D. Only those that violate the Foreign Corrupt Practices Act need be communicated, in
written form or orally.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-26

Chapter 18 - Integrated Audits of Public Companies

29. A material weakness because the oversight of the external financial reporting function by
the audit committee is ineffective will ordinarily result in communication to:

A. Option A
B. Option B
C. Option C
D. Option D

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

30. Deficiencies in internal control identified by the auditor that are lesser than significant
deficiencies:
A. Must be communicated to the board of directors, the audit committee, and management.
B. Must be reported to the audit committee and management.
C. Must be communicated to management, with the audit committee only informed of the
communication to management.
D. Need not be disclosed unless they in aggregate equal (at least) a significant deficiency.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-27

Chapter 18 - Integrated Audits of Public Companies

31. Which is least likely to be a question asked of employee personnel during a walkthrough?
A. Have you ever been asked to override the process?
B. Have you assessed the operating effectiveness of the system?
C. What do you do when you find an error?
D. What are you looking for to determine if there is an error?

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-04 Present the auditors' approach to analyzing internal control when performing an integrated audit.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

32. Which of the following fits most directly under the control activities components of the
COSO IC framework?
A. Company-level controls dealing with tone at the top.
B. Overall methods for assigning authority and responsibility.
C. The control environment.
D. Accounting for shipping documents to ensure that all sales are recorded.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

18-28

Chapter 18 - Integrated Audits of Public Companies

33. Consider a company whose sales are initiated by customers either through the Internet, or
in a retail store. Which of the following is correct?
A. These types of sales represent two major classes of transactions within the sales process.
B. These types of sales represent two sales processes within a major evaluation processing
cycle.
C. These sales represent a sales assertion on completeness.
D. These events represent nonroutine transactions that must be investigated in detail.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

34. According to PCAOB standards for reporting on internal control, calculating depreciation
expense or adjusting for foreign currencies is referred to as:
A. Substantive transactions.
B. Routine transactions.
C. Nonroutine transactions.
D. Accounting Estimate transactions.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-04 Present the auditors' approach to analyzing internal control when performing an integrated audit.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-29

Chapter 18 - Integrated Audits of Public Companies

35. A material weakness involves a reasonable possibility that what size misstatement will not
be prevented or detected?
A. Immaterial.
B. Material.
C. More than inconsequential.
D. Substantial.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

36. A control deficiency that is less than a significant deficiency is most likely to result in
what form of audit opinion on internal control?
A. Adverse.
B. Qualified.
C. Unqualified.
D. Unqualified with explanatory language.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Remember
Difficulty: Easy
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

18-30

Chapter 18 - Integrated Audits of Public Companies

37. Under a PCAOB standards for an internal control audit, which of the following is least
likely to indicate a significant deficiency relating to a client's antifraud programs?
A. No program for anonymous submissions of alleged fraud.
B. Audit committee active engagement in discussions on the topic of fraud.
C. Senior management delegates to lower levels responsibility for oversight of antifraud
programs.
D. Lack of audit committee interaction with the internal audit department.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

38. The minimum likelihood of loss involved in the consideration of a control deficiency that
is less than a significant deficiency is:
A. Remote.
B. More than remote.
C. Probable.
D. Not considered.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

18-31

Chapter 18 - Integrated Audits of Public Companies

39. The minimum likelihood of loss involved in the consideration of a possible significant
deficiency is:
A. Remote.
B. Reasonably possible.
C. Probable.
D. Not considered.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Remember
Difficulty: Easy
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

40. The minimum likelihood of loss involved in the consideration of a possible material
weakness is:
A. Remote.
B. Reasonably possible.
C. Probable.
D. Not considered.

AACSB: Analytic
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Risk Analysis
Bloom's: Remember
Difficulty: Easy
Learning Objective: 18-02 Discuss management's responsibility for reporting on internal control as required by the Sarbanes-Oxley Act of
2002.
Topic: Management's Responsibility for Internal Control

18-32

Chapter 18 - Integrated Audits of Public Companies

41. The existence of a material weakness led to an adverse opinion in the internal control
audit report of a publicly traded company. Which of the following statements is correct if
management believes that it has remediated the weakness?
A. Management may engage the auditors to report on whether the material weakness
continues to exist prior to its next annual audit.
B. Management is required to engage the auditors to report on whether the material weakness
continues to exist prior to its next annual audit.
C. Management may not engage the auditors to report on whether the material weakness
continues to exist prior to its next annual audit.
D. Management may engage the auditors to modify the prior adverse audit report be modified
to an unqualified report.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

42. An audit firm has been engaged to report on whether a material weakness that previously
resulted in an adverse opinion on internal control has been remediated. Which of the
following statements is correct?
A. A significant scope limitation on the auditor's procedures results in a qualified opinion or
an adverse opinion.
B. If there has been an auditor change, the successor auditor may issue such a report.
C. If while performing the engagement another material weakness is identified, it will result
in an adverse opinion relating to the current engagement to report upon the other material
weakness.
D. The engagement may only take place at year-end during the next year's audit of internal
control.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-33

Chapter 18 - Integrated Audits of Public Companies


Essay Questions

43. The PCAOB has outlined a number of circumstances that are indicators of a material
weakness. In addition, other control deficiencies may or may not be a material weakness
depending upon details of the circumstances involved. Categorize the following:

*May be material weakness, significant deficiency, or lesser deficiency, but is not ordinarily
considered a strong indicator of a material weakness in internal control.

18-34

Chapter 18 - Integrated Audits of Public Companies

*May be material weakness, significant deficiency, or lesser deficiency, but is not ordinarily
considered a strong indicator of a material weakness in internal control.

AACSB: Analytic
AACSB: Communication
AICPA BB: Industry
AICPA BB: Legal
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Hard
Learning Objective: 18-06 Discuss circumstances that require auditors to modify their report on internal control.
Topic: AuditorsReporting on Internal Control in PCAOB Audits

18-35