CCS Internal Controls & Auditing 3 — Questions and Answers
Question 1: Which of the following BEST describes a 'walkthrough' in the context of internal controls?
- A physical inspection of the company's facilities
- Tracing a transaction from initiation through completion to verify controls operate as described (Correct answer)
- A management review of audit findings
- An IT scan of system access logs
Correct answer: Tracing a transaction from initiation through completion to verify controls operate as described
A walkthrough involves following a single transaction end-to-end to confirm that documented controls are actually in place and functioning as described.
Question 2: The Institute of Internal Auditors (IIA) Standards require that internal audit activities maintain independence from:
- External regulatory bodies
- Activities they audit (Correct answer)
- The audit committee
- Industry peer groups
Correct answer: Activities they audit
IIA Standards require organizational independence so that internal auditors are not auditing activities for which they have operational responsibility.
Question 3: A 'material weakness' in internal controls is defined as:
- Any control deficiency identified by management
- A significant deficiency where a reasonable possibility exists that a material misstatement will not be prevented or detected (Correct answer)
- A minor deviation from established procedures
- A control gap identified only by external auditors
Correct answer: A significant deficiency where a reasonable possibility exists that a material misstatement will not be prevented or detected
A material weakness is a deficiency or combination of deficiencies creating a reasonable possibility that a material financial misstatement will not be prevented, detected, or corrected.
Question 4: Which control activity is MOST effective in deterring collusion among employees?
- Mandatory vacation and job rotation policies (Correct answer)
- Stronger password requirements
- Increased management approvals
- More frequent internal meetings
Correct answer: Mandatory vacation and job rotation policies
Mandatory vacations and job rotations expose schemes that require continuous oversight by the perpetrator, making collusion and long-running fraud harder to conceal.
Question 5: In a risk-based audit approach, audit resources are allocated based on:
- The size of each department's budget
- Areas with the highest likelihood and impact of risk materialization (Correct answer)
- The preferences of the audit committee
- Alphabetical order of business units
Correct answer: Areas with the highest likelihood and impact of risk materialization
Risk-based auditing directs resources toward areas where the combination of likelihood and potential impact of risk is greatest.
Question 6: Which COSO principle supports the idea that management should select and develop monitoring activities?
- Control Environment Principle 5
- Risk Assessment Principle 9
- Monitoring Activities Principle 16 (Correct answer)
- Control Activities Principle 12
Correct answer: Monitoring Activities Principle 16
COSO's Monitoring Activities Principle 16 states that an organization selects, develops, and performs ongoing and/or separate evaluations to determine the presence and functioning of internal control.
Question 7: Which best describes the purpose of an audit's 'planning phase'?
- Issuing the final audit report to stakeholders
- Identifying audit objectives, scope, and methodology before fieldwork begins (Correct answer)
- Communicating control deficiencies to management
- Testing controls and gathering evidence
Correct answer: Identifying audit objectives, scope, and methodology before fieldwork begins
The planning phase establishes audit objectives, scope, risk assessment, and procedures that will guide fieldwork before testing begins.
CCS Internal Controls & Auditing 3
Which of the following BEST describes a 'walkthrough' in the context of internal controls?