Appendix 7: Answers to Reinforcement Quizzes
Answers to Reinforcement Quiz ñ Section III, Chapter 2
1. Internal controls should help prevent goods from being stolen. True or
false?
Answer: True. One of the primary functions of internal control systems
is to prevent loss, misuse or misappropriation of assets.
2. You consider management philosophy and operating style in connection
with a review of:
a. risk assessment.
b. monitoring.
c. control environment.
d. information and communication.
Answer: (c). The control environment is the basis of the entire internal
control framework. It encompasses:
.
integrity and ethical values;
.
commitment to competence;
.
management philosophy and operating style; and
.
human resource policies and practices.
3. A poor control environment can be overcome by a strong risk assessment.
True or false?
Answer: False. A poor control environment undermines the entire
internal control structure. If you cannot trust management to act
ethically or to take internal controls seriously, you cannot rely on the
system. A strong risk assessment will mitigate against a poor control
environment, but it cannot overcome it.
4. Management monitors the internal control system to ensure:
a. employees read the procedures handbooks.
b. the auditors do their work correctly.
c. the control mechanisms work effectively.
d. employees do not make an unreasonable number of errors.
Answer: (c). Managers need to be sure that the control activities they
have designed are both being implemented and are accomplishing their
intentions. As a result, they monitor the mechanisms on an ongoing
basis.
5. A secure area for expensive electronic components is an example of:
a. risk assessment.
b. control environment.
c. control activity.
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Appendix 7: Answers to Reinforcement Quizzes
d. monitoring.
Answer: (c). Management wants to be sure that expensive items are
not misused or stolen. As a result, they frequently secure such items in
a controlled area. This is a control activity that is designed to deal with
the increased risk of inherently risky assets.
6. Give four reasons for initiating and maintaining internal controls.
Answer:
1. to achieve program objectives
2. to produce reliable financial reports
3. to comply with laws and regulations
4. to safeguard assets
Managers design and implement internal controls to accomplish their
organizational objectives. These are four objectives that all managers
should try to achieve.
7. Internal controls provide what level of assurance that fraud, waste and
mismanagement have been eliminated?
a. absolute assurance
b. reasonable assurance
c. minimal assurance
d. unqualified assurance
e. qualified assurance
Answer: (b). Internal controls cannot guarantee either the success of
an organization's programs or the absence of waste, fraud and
mismanagement. Internal controls are intended to provide a reasonable
level of confidence that the organization will achieve its programmatic
goals and minimize fraud, waste and abuse. No matter how well-
designed and operated, internal controls cannot provide absolute
assurance that all of an organization's objectives will be met.
8. What is not a purpose of internal controls?
a. achieve program objectives
b. ensure timely budget passage
c. comply with laws and regulations
d. safeguard assets
Answer: (b). Internal controls can deal only with issues under the
organization's control. The organization probably has no control over
the legislature's ability or willingness to pass budgets on a timely basis.
Accordingly, it cannot be one of the organization's internal control
objectives.
Online version, for personal use only AGA Study Guide 3, 2016 Edition

Appendix 7: Answers to Reinforcement Quizzes
9. List the five components of internal control as set forth by COSO.
Answers: Control environment, risk assessment, control activities,
information and communication, and monitoring.
10.
Which factor makes it very difficult for management to prevent fraud?
a. multiple bank accounts
b. collusion
c. employee error
d. annual audits by an external auditor
Answer: (b). Multiple bank accounts are a risk factor that management
must deal with, but do not necessarily make it very difficult to prevent
fraud. External audits can help management to prevent fraud.
Employee error is always a possibility, but not an issue particularly
related to fraud. Collusion, however, involves two or more employees
plotting to evade the organization's control mechanisms. Techniques,
such as separation of duties, can fail if a number of employees work
together to commit fraud.
11.Using an alarm clock to make sure we wake up at the right time is an
example of:
a. control environment.
b. risk assessment.
c. control activity.
d. time management.
Answer: (c). An alarm clock is a clear example of a control activity. The
risk is that we will oversleep. The technique we adopt is to set the alarm
clock.
12. Which statement ...















































































































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