3.02 - 5 COMPONENTS OF INTERNAL CONTROL (CRIME) Flashcards
3.02 - 5 COMPONENTS OF INTERNAL CONTROL (CRIME)
Which of the following are considered control environment factors?
I. Detection Risk
II. Personnel Policies and Practices
A) II only.
B) Both I and II.
C) Neither I nor II.
D I only.
A) II only
Detection risk is the risk that the auditor will not detect a material misstatement.
Detection risk exists only within the context of the audit so it is not part of the client’s control environment.
The control environment includes CHOPPER):
- Commitment to competence,
- Human resource policies and practices,
- Organizational structure,
- Participation by those charged with governance,
- Philosophy of management,
- Ethical values, and
- Responsibility assignment
3.02 - 5 COMPONENTS OF INTERNAL CONTROL (CRIME)
Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?
A) Allowing for greater management oversight of incompatible activities.
B) Disclosing lack of segregation of duties to the external auditors during the annual review.
C) Requiring accountants to pass a yearly background check.
D) Replacing personnel every three or four years.
A) Allowing for greater management oversight of incompatible activities.
A lack of segregation of duties allows an individual to both perpetrate a fraud and conceal that fraud.
Greater management oversight of incompatible activities could prevent this from occurring.
Disclosing a lack of segregation of duties may incite users of the financial statements to encourage the entity to solve the issue but it does not compensate for the weakness.
Replacing personnel every three to four years periodically allows new people to perpetrate and conceal errors or fraud but does not eliminate the opportunity created by a lack of segregation of duties.
Requiring a yearly background check
may provide assurance about the integrity of employees but it does not prevent them from taking advantage of an opportunity created by a lack of segregation of duties.
3.02 - 5 COMPONENTS OF INTERNAL CONTROL (CRIME)
Which of the following is not a component of internal control?
A) Inherent risk.
B) Control environment.
C) Monitoring.
D) Control activities.
A) Inherent risk.
Inherent risk is the risk that a financial statement element will be materially misstated if there are no controls to
prevent it.
It is not a component of internal control but is mitigated by internal control to reduce the risk of material
misstatement.
The five components of internal control are…CRIME:
- control environment,
- risk assessment,
- control activities,
- information and communication
- monitoring.
