assessing control risk under AICPA standards

Question 1

What is meant by the term “monitoring” (as it relates to internal controls)?

Answer 1

The policies and procedures involving the ongoing assessment of the effectiveness of internal controls over time

Question 2

What is meant by the term “control activities”?

Answer 2

The policies and procedures that help ensure that management directives are carried out, especially those related to (1) segregation of duties, (2) physical controls, (3) authorization of transactions, (4) performance reviews, and (5) information processing

Question 3

Identify three risk assessment procedures that an auditor might used to obtain an understanding of the entity and its environment, including its internal control.

Answer 3

1. )Inquiries of management and others
2. )Observation and inspection
3. )Analytical procedures

Question 4

Define “internal control.”

Answer 4

A process—effected by those charged with governance, by management, and by other personnel—designed to provide reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.

Question 5

Identify the five interrelated components of internal controls.

Answer 5

1. )Control environment
2. )Risk assessment
3. )Control activities
4. )Information and communication systems
5. )Monitoring

Question 6

What is meant by the term “control environment”?

Answer 6

The policies and procedures that determine the overall control consciousness of the entity, sometimes called “the tone at the top”

Question 7

What is meant by the term “information and communication systems”?

Answer 7

The policies and procedures related to the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities

Question 8

Define the term “risk assessment procedures.”

Answer 8

Procedures performed to obtain an understanding of the entity and its environment, including its internal control

Question 9

What is meant by the term “risk assessment”?

Answer 9

The policies and procedures involving the identification, prioritization, and analysis of relevant risks as a basis for managing those risks

Question 10

What are the three objectives of internal control as identified in the definition of internal control?

Answer 10

1. )Reliability of financial reporting
2. )Effectiveness and efficiency of operations
3. )Compliance with applicable laws and regulations