7 Internal Control Flashcards
The control environment
reflects the overall attitude, awareness and actions of those charged with governance concerning the importance of control and its emphasis in the entity
Proper segregation of duties reduces
the opportunities for any individual to both perpetrate and conceal errors or fraud.
Management’s emphasis on meeting projected profit goals would significantly influence an entity’s control environment when
a significant portion of management compensation is represented by stock options, because management would then have a personal interest that might be at odds with accurate financial reporting
he control environment element of an entity’s internal control relates to
the tone of the organization, which includes human resource policies and practices.
An auditor uses the knowledge provided by the understanding of internal control and the final assessed risk of material misstatement primarily to determine the nature, timing, and extent of
the substantive tests to be performed.
The ultimate purpose of assessing control risk
to contribute to the auditor’s evaluation of the risk that material misstatements exist in the financial statements
In obtaining an understanding of an entity’s internal control, an auditor is required to obtain knowledge about the:
Operating effectiveness of controls
Design of controls
No - Yes.
In obtaining an understanding of an entity’s internal control, an auditor is required to obtain knowledge about the design of controls and whether they have been implemented.
The auditor is not required to obtain knowledge about the “operating effectiveness of controls” as part of obtaining an understanding of internal control.
Internal control includes
Control Environment
Risk Assessment
Information and Communication Systems
Monitoring
Existing Control Activities
The entity’s management is responsible for
establishing, maintaining, and monitoring the entity’s internal controls, considering whether those controls are operating as intended, and modifying controls as conditions change.
Internal control is relevant to
the entity, its operating units, and its business functions
An understanding of internal control relevant to
An understanding of internal control relevant to an entity’s financial reporting objective
An auditor’s primary consideration in evaluating controls
specific controls affect financial statement assertions, since ultimately the auditor must render an opinion on whether those assertions are fairly stated.
In obtaining an understanding of a manufacturing entity’s internal control concerning inventory balances, an auditor would most likely
review the entity’s descriptions of inventory controls.
Inherent limitations in internal controls are
limitations that exist despite implementation of appropriate controls
faulty human judgment
The auditor’s ultimate purpose of assessing control risk is
evaluate the risk of financial statement misstatement
herent limitations of internal control include
collusion, human error, and management override
In every audit, the auditor should obtain a sufficient understanding of the
design of relevant internal controls pertaining to financial reporting in each of the five internal control components.
Knowledge about the design and implementation of relevant internal controls should be used to
identify types of misstatements that could occur
An advantage of using systems flowcharts
internal information is that flowcharts provide a visual depiction of clients’ activities
Automated controls are more suitable than manual controls where
transactions are high-volume and recurring.
hen a service organization provides services that affect the initiation, execution, processing, or reporting of a user company’s transactions, those services are considered to be part of the
Considered to be part of the user company’s information system.
When evaluating a client’s internal controls, the auditor must first obtain an understanding of the design of the controls and then determine if the controls have been
Implemented
The best compensating control for the lack of segregation of duties in smaller organizations
more mgt oversight
The COSO framework for internal control consists of five interrelated components
C R I M E
an auditor would most likely perform
risk-assessment procedures to evaluate the design of relevant controls when obtaining an initial understanding of internal control sufficient to assess the risk of material misstatement of the financial statements.
e classes of transactions in the issuer’s operations that are significant to the issuer’s financial statements are typically assessed when
the auditor is obtaining an understanding of the information and communication component of internal control.
