Assurance Systems | Test Bank – Edition 1st

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Chapter 13

Assurance Systems

True/False Questions

1. Management decision-making is one of the five assurance systems.

Page: p703

1. Boards of directors generally have three responsibilities: 1) shaping the business’s strategy, 2) monitoring management and 3) ensuring accountability.

Page: p704

1. A fiduciary represents the principals or owners of the business.

Page: p704

1. All boards are two-tier with one board representing shareholders and employees and the second focusing on management concerns.

Page: p706

1. Boards typically have four committees: 1) stockholder rights committee, 2) audit committee, 3) remuneration committee, and 4) risk management committee.

Page: p711

1. Key duties of the audit committee include monitoring the company’s financial statements and auditing the amount of compensation received by executives.

Page: p712

1. The nominations committee identifies candidates to serve on the board and advises the board about directors who may need to be removed.

Page: p713

1. The remunerations committee concerns itself with compensation for the board and top management.

Page: p713

1. If the board of directors has no autonomous risk committee, risk management duties are often assigned to the remuneration committee.

Page: p713

1. The audit committee usually focuses on financial risk while the risk management committee is broader to include nonfinancial considerations.

Page: p714

1. Risks can be financial, operational or political.

Page: p716

1. Risk refers to the level of tolerance for mistakes within an entity.

Page: p718

1. Risk means that there is reasonable assurance that the business’s risk is being managed effectively, and that the business’s goals and objectives are achieved efficiently and effectively.

Page: p718

1. Internal control refers to the actions that have been taken to reduce the likelihood of adverse risk.

Page: p720

1. The principles of internal control include assignment of responsibility, effective risk management, segregation of duties, documentation, and physical controls.

Page: p720

1. If an employee were responsible for both ordering supplies and paying invoices, then duties have not been segregated appropriately.

Page: p721

1. Documentation serves two major purposes: 1) to document the business’s policies and procedures and 2) to provide evidence of transactions’ validity.

Page: p721

1. An example of independent verification is when an employee in one department prepares a document that is then reviewed and approved by an employee in another department.

Page: p722

1. The Enterprise Risk Management – Integrated Framework was created in the Turnbull Guidance.

Page: p722

1. Embedded risk management is one of the eight interrelated components for describing and analyzing internal control system which are part of the Enterprise Risk Management Integrated Framework.

Page: p723

1. Monitoring, risk response, objective setting and event identification are all included in the eight interrelated components for describing and analyzing internal control system which are part of the Enterprise Risk Management Integrated Framework.

Page: p723

1. A sound system of internal control therefore provides absolute, not just reasonable, assurance that a company will not be hindered in achieving its business objectives.

Page: p724

1. Limitations of internal control include: cost versus benefit, errors in judgment, management interference, employee collusion and malfunctions.

Page: p728

1. Management interference refers to situations when managers work together to circumvent the system in order to commit fraud or other irregularities.

Page: p728

1. Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.

Page: p729

1. Internal audit activities are organized as engagements which may include an internal audit, fraud examination or consultancy.

Page: p729

1. Independent audits are conducted by qualified individuals in the business’s internal audit function.

Page: p731

1. An independent auditor’s qualifications typically include having attained a certain level of education, passing a qualifying paper or examination and being employed for a specified period by the company being audited.

Page: p732

1. An independent audit engagement consists of four phases: 1) planning the audit, 2) evaluating the system of internal control, 3) performing substantive tests, and 4) preparing the audit report and presenting it to the client.

Page: p735

1. An independent audit that results in an unqualified opinion provides reasonable assurance that no material misstatement of financial results has occurred.

Page: p736

1. A qualified opinion is given when the independent auditor concludes that the financial statements do not present a true and fair view.

Page: p736

1. An unqualified opinion is given when the independent auditor concludes that the financial statements provide a true and fair view of financial results in all material respects.

Page: p736

1. Fraud is a false representation intentionally made in order to gain a material advantage.

Page: p740

1. A perpetrator is the party injured in a fraud.

Page: p740

1. Three conditions are usually present when a fraud is committed: 1) the perpetrator is under some pressure or has some incentive to commit fraud, 2) the opportunity must be present and 3) the individual is able to rationalize the fraud.

Page: p740

1. Auditors are concerned with two types of misstatements in the financial statements: 1) fraudulent financial reporting and 2) misappropriation of assets.

Page: p741

1. In recent years, efforts to prevent fraud have been in three areas: 1) creating and maintaining a culture of honesty and high ethics, 2) prosecuting perpetrators in judicial courts, and 3) developing an appropriate oversight process.

Page: p741

Multiple Choice Questions

1. Which of the following is not one of the five assurance systems?
   1. Effective management decision-making
   2. Internal control
   3. Independent audit
   4. Internal audit

Page: p703

1. Corporate governance does not include which of the following items?
   1. Policies and procedures to determine how the entity is directed, administered and controlled
   2. Organizational culture
   3. Oversight by the board of directors
   4. A systematic and disciplined approach to evaluating and reviewing the effectiveness of risk management

Page: p703

1. Internal control does not include which of the systems of policies and procedures?
   1. To facilitate efficient and effective operations
   2. To monitor compliance with the law
   3. To express an opinion on the financial statements
   4. To safeguard assets

Page: p703

1. Which of the following is not generally a responsibility of the board of directors?
   1. Making operational decisions
   2. Monitoring management
   3. Shaping the strategy of the business
   4. Ensuring accountability

Page: p704

1. Advantages of nonexecutive directors include all except which of the following items?
   1. Their independence from management
   2. Their willingness to vice dissenting opinions
   3. Their extensive experience in the business’s management
   4. They often bring skills that otherwise would be absent from the board

Page: p705

1. Which of the following is not a main principle of the Combined Code on Corporate Governance?
   1. Appointments to the board should be in secret so as to avoid selection bias
   2. Boards should include a balance of executive and nonexecutive directors
   3. There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business
   4. The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties

Page: p706

1. A board typically has all except which of the following committees?
   1. Investor relations committee
   2. Nominations committee
   3. Remuneration committee
   4. Risk management committee

Page: p711

1. The committee responsible for identifying candidates to serve on the board and advising the board about directors who may need to be removed is which of the following?
   1. Audit committee
   2. Nominations committee
   3. Remuneration committee
   4. Risk management committee

Page: p713

1. The committee that concerns itself with compensation for the board and top management is which of the following?
   1. Audit committee
   2. Nominations committee
   3. Remuneration committee
   4. Risk management committee

Page: p713

1. The committee which oversees financial reporting and the external and internal auditors is which of the following?
   1. Audit committee
   2. Nominations committee
   3. Remuneration committee
   4. Risk management committee

Page: p711

1. The risk management committee’s responsibilities could include which of the following?
   1. Identifying emerging risks and providing early warning on significant new risks to the full board
   2. Recommending to the full board any changes in risk management strategy and policy
   3. Reviewing internal control and internal audit function effectiveness in relation to the entity’s risk profile
   4. Providing leadership in risk management and monitoring

Page: p714

1. Which of the following terms describes the possibility of an event that will have an impact on the achievement of objectives?
   1. Adequate control over risks
   2. Residual risk
   3. Risk
   4. Risk tolerance

Page: p716

1. Which of the following terms means that there is reasonable assurance that the business’s risk is managed effectively?
   1. Adequate control over risk
   2. Residual risk
   3. Risk tolerance
   4. Risk appetite

Page: p718

1. Which of the following terms refers to any risk that remains once actions have been taken to reduce the likelihood of an adverse event?
   1. Adequate control over risk
   2. Residual risk
   3. Risk tolerance
   4. Risk appetite

Page: p718

1. Which of the following terms refers to a broader statement about the level of tolerance for risk within an entity?
   1. Adequate control over risk
   2. Residual risk
   3. Risk tolerance
   4. Risk appetite

Page: p718

1. Which of the following is not a principle of internal control?
   1. Physical controls
   2. Assignment of responsibility
   3. Risk management
   4. Documentation

Page: p720

1. Which internal control principle requires that the responsibility for executing a transaction be assigned to an individual other than the person who will have physical custody of the asset?
   1. Documentation
   2. Independent verification
   3. Assignment of responsibility
   4. Segregation of duties

Page: p721

1. Which internal control principle requires that accountability for responsibilities be assigned to specific individuals?
   1. Documentation
   2. Independent verification
   3. Assignment of responsibility
   4. Segregation of duties

Page: p720

1. Which internal control principle requires that information processed by one employee be reviewed by an employee to ensure its accuracy?
   1. Documentation
   2. Independent verification
   3. Assignment of responsibility
   4. Segregation of duties

Page: p720

1. Which of the following is not one of the eight components in the COSO Enterprise Risk Management – Integrated Framework for describing and analyzing internal control systems?
   1. Risk assessment
   2. Risk management
   3. Risk response
   4. Event identification

Page: p723

1. Which of the following is not a limitation of internal control?
   1. Errors in judgment
   2. Employee collusion
   3. Management interference
   4. Management cooperation

Page: p728

1. Which of the following is not an example of an internal audit engagement?
   1. Consulting with business units on adding value and improving governance, risk management and control processes
   2. Management of the business during crises created by periods of high management turnover
   3. Internal audit
   4. Fraud examination

Page: p729

1. Independent auditors are typically required to have all of the following except which qualification or credential?
   1. Papers or examinations
   2. Experience in internal auditing
   3. Education
   4. Evidence of social and ethical responsibility

Page: p732

1. Audit engagements include all of the following except which major phase?
   1. Evaluating the system of internal controls
   2. Planning the audit
   3. Performing substantive tests
   4. Surveying employee opinion

Page: p735

1. Which of the following audit opinions is given when the client’s financial statements provide a true and fair view in all material respects?
   1. Adverse opinion
   2. Disclaimer of opinion
   3. Unqualified opinion
   4. Qualified opinion

Page: p736

1. Which of the following audit opinions is given when the financial statements provide a true and fair view of the financial results of the business ‘except for’ one or more qualifications?
   1. Adverse opinion
   2. Disclaimer of opinion
   3. Unqualified opinion
   4. Qualified opinion

Page: p736

1. Which of the following audit opinions is given when the auditor concludes that the financial statements do not present a true and fair view?
   1. Adverse opinion
   2. Disclaimer of opinion
   3. Unqualified opinion
   4. Qualified opinion

Page: p736

1. Which of the following is appropriate when the auditor is unable to provide an opinion because the audit engagement could not be completed?
   1. Adverse opinion
   2. Disclaimer of opinion
   3. Unqualified opinion
   4. Qualified opinion

Page: p736

1. Which of the following is not true of fraud?
   1. Fraud includes errors that cause one party to have a material advantage at the expense of another
   2. Frauds include a false representation
   3. Frauds are intentional
   4. Frauds involve a perpetrator

Page: p740

1. Which of the following items is not a category of fraud prevention measures?
   1. Developing an appropriate oversight process
   2. Creating and maintaining a culture of honesty and high ethics
   3. Evaluating the risk of fraud and evaluating the processes, procedures and controls needed to mitigate risk and reduce the opportunities for fraud
   4. Increasing public awareness of the need for improvements in law enforcement against perpetrators of fraud

Page: p741

Essay Questions

1. List and describe the five assurance systems.
2. What are the three primary responsibilities of boards of directors?

1. What is the difference between inside and nonexecutive directors? Why are nonexecutive directors thought to add strength to boards of directors?
2. Describe the differences between unitary and multi-level boards.
3. List the typical committees that boards have and briefly describe the responsibilities of each.
4. Describe the policies and procedures that comprise a system of internal control.
5. List the five principles of internal control.
6. List and the eight interrelated components for describing and analyzing internal control systems in the COSO Enterprise Risk Management – Integrated Framework.
7. List and briefly describe the limitations of internal control.
8. List and briefly describe the four major phases of an audit engagement.
9. List and briefly describe the four audit opinions that could be given by an independent auditor.
10. What are the two types of material misstatements that would be considered fraud in the financial statements?
11. Fraud prevention measures can be grouped into what three categories?