Accounting Online Program Auditing and Internal Controls 1 — Questions and Answers
Question 1: The primary purpose of an external audit is to:
- Detect all fraud within an organization
- Express an opinion on whether financial statements are fairly presented (Correct answer)
- Prepare the financial statements for management
- Ensure the company pays the correct amount of taxes
Correct answer: Express an opinion on whether financial statements are fairly presented
External auditors issue an independent opinion on whether financial statements are presented fairly in accordance with GAAP, providing assurance to investors and creditors.
Question 2: Which organization sets auditing standards for public company auditors in the US?
- FASB
- AICPA
- PCAOB (Correct answer)
- SEC
Correct answer: PCAOB
The Public Company Accounting Oversight Board (PCAOB) was established by the Sarbanes-Oxley Act to set auditing standards for auditors of US public companies.
Question 3: What is the concept of 'audit risk'?
- The risk that auditors will charge too high a fee
- The risk that auditors will issue an incorrect opinion on materially misstated statements (Correct answer)
- The risk that the audit takes longer than planned
- The risk that the client will switch to a different auditor
Correct answer: The risk that auditors will issue an incorrect opinion on materially misstated statements
Audit risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
Question 4: Internal controls are designed primarily to:
- Replace the need for external audits
- Safeguard assets, ensure accurate reporting, and promote operational efficiency (Correct answer)
- Set accounting standards for financial reporting
- Prepare tax returns on time
Correct answer: Safeguard assets, ensure accurate reporting, and promote operational efficiency
Internal controls are policies and procedures designed to safeguard company assets, ensure reliable financial reporting, and promote compliance with laws and regulations.
Question 5: Which Sarbanes-Oxley Act section requires management to assess and report on internal control over financial reporting?
- Section 201
- Section 301
- Section 404 (Correct answer)
- Section 802
Correct answer: Section 404
SOX Section 404 requires management of public companies to assess the effectiveness of internal controls over financial reporting and requires auditors to attest to that assessment.
Question 6: Segregation of duties is an internal control that prevents fraud by:
- Rotating employees between all departments monthly
- Ensuring no single person controls all phases of a transaction (Correct answer)
- Requiring dual signatures on all checks over $500
- Automating all accounting processes
Correct answer: Ensuring no single person controls all phases of a transaction
Segregation of duties separates the authorization, custody, and recording of transactions among different employees so that errors or fraud require collusion.
Accounting Online Program Auditing and Internal Controls 1
The primary purpose of an external audit is to: