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Audit > Audit #3 > Flashcards

Audit #3 Flashcards

1
Q

What are the three primary objectives of a system of internal controls?

A
  • Accurate & reliable financial reporting (attest audit)
  • Compliance with applicable laws and regulations (compliance audit)
  • Efficient and effective operations (operational audit)
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2
Q

True or False

Internal Controls are evaluated at the entity level?

A

True

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3
Q

True or False

Internal Controls are evaluated at the assertion level?

A

True

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4
Q

Financial Statement assertions can be broken down into 3 categories, what are they?

A

Events & Transactions (Income Statement)

Account Balances (Balance Sheet)

Presentation & Disclosure

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5
Q

What are the relevant assertions that management makes on the financial statements?

A

Events & Transactions - Completeness, Cut-off, Accuracy, Classification, Occurrence.

Accounts Balances - Rights & Obligations, Allocations & Valuation, Completeness, Existence. (RACE)

Presentation of the F/S & Disclosures - Rights & Obligations, Accuracy & Valuation, Completeness, Occurrence, Understandability & Classification.

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6
Q

What are the 6 management assertions about the financial statements?

A
  1. Understandability & Classification
  2. Presentation & Disclosure
  3. Existence & Occurrence
  4. Rights & Obligation
  5. Completeness & Cutoff
  6. Valuation Allocation & Accuracy
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7
Q

What is COSO?

A

COSO is a framework used to benchmark internal controls

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8
Q

COSO defines 5 components of I/C (CRIME)

A
  1. Control Environment
  2. Risk Assessment
  3. Control Activities
  4. Information and Communication
  5. Monitoring
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9
Q

Who establishes the Control Environment in a company?

A

The Control Environment is established by the management of a company.

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10
Q

What factors are included as part of COSO component 1 - Control Environment (CHOPPER)

A

Commitment to Competence

Human Resource Policies & Practices

Organizational Structure

Participation of those charged with governance

Philosophy of management & management operating style

ethical values & integrity

responsibility assignment

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11
Q

COSO (CRIME)

Risk Assessment

A

Every organization faces risks, meaning that various factors, internal or external, could potentially prevent them from reaching their objectives. Organizations perform risk assessments to ensure that they only take necessary and acceptable risks.

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12
Q

What are the four principles related to COSO - Risk Assessment

A
  1. Specify Suitable Objectives
  2. Identify & Analyze Risk
  3. Assess Fraud Risk
  4. Identify & Analyze Significant Change
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13
Q

COSO (CRIME)

Control Environment

A

To ensure that all parts of the organization are adhering to standard practices, controls should be established across the enterprise environment. Management oversees and enforces a set of rules and procedures adopted from the COSO framework.

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14
Q

What are the five principles related to COSO - Control Environment

A
  1. Demonstrate commitment to integrity and ethical values
  2. Exercise their oversight responsibility
  3. Established Structure, Authority, and Responsibility
  4. Demonstrates Commitment to Competence
  5. Enforce Accountability
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15
Q

Entity Level Controls - Should provide a foundation for overall I/C structure. Entity Level Controls Should include what:

A
  1. Mission Statement
  2. Code of Conduct
  3. Organization Chart & Job Description
  4. Behavior of Management & Executives
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16
Q

COSO (CRIME)

Control Activities

A

Control activities are the steps taken to help mitigate risk across an organization. The COSO framework helps organizations make sure that all activities carried out by employees are beneficial to the company’s goals and don’t involve any unnecessary risk.

17
Q

What are some of the control activities that ensure management directives are carried out? (PIPS-ARCC)

A
  1. Performance Review
  2. Information Processing
  3. Physical Controls
  4. Segregation of Duties
  • Authorization
  • Recording
  • Custody
  • Comparing
18
Q

What are the five principles related to COSO - Control Activities

A
  1. Select & Develop Control Activities
  2. Select & Develop General Controls over Technology
  3. Deploy Controls through policies & procedures
19
Q

COSO (CRIME)

Information & Communication

A

Communication, whether internal or external, is a daily occurrence for any organization. COSO provides controls to help organizations ensure that their communications follow best practices and contribute to achieving objectives.

Controls help prevent information from being shared inappropriately. Depending on the type and purpose of communication, different controls and rules may be used.

20
Q

What are the three principles related to COSO - Information & Communication

A
  1. use relevant information
  2. communicate internally
  3. communicate externally
21
Q

COSO (CRIME)

Monitoring

A

ll internal control systems must be monitored regularly to verify that controls are functioning properly. This can be done in the form of internal audits, which gather information that regulators and management can evaluate. This ongoing evaluation yields reports that reach the board of directors. Combined with external financial reports, this helps reduce the risk of fraud and achieve investor confidence.

22
Q

What are the two principles related to COSO - Monitoring

A
  1. Conduct Ongoing and Separate Evaluation
  2. Evaluate and Communicate Deficiencies
23
Q

What are the inherent limitation of I/C

A
  1. Collusion
  2. Management Override
  3. Poor Human Judgement - Errors
24
Q

AU-C 315 - What are the steps must an auditor perform to obtain and apply an understanding of I/C?

A
  1. Obtain an understanding of the design of all 5 components of an entity I/C (CRIME) through the performance of risk assessment procedures.
  2. Document the understanding of I/C
  3. Assess RMM
  4. Develop an Audit Strategy to either:
    1. Not Rely
    2. Rely - TOC
  5. Reassess RMM and evaluate results
  6. Document conclusion and develop or revise audit program for further audit procedures
25
Q

In developing an understanding of the entity and its control environment the auditor is required to perform a Risk Assessment to understand the risk. What risk assessment procedures?

A
  1. Analytical Procedures
  2. Inquiry
  3. Inspection
  4. Observation
    5.
26
Q

What is the difference between a SOC 1 Report Type 1 vs Type 2 report?

A

Type 1 reports on the fairness of the presentation of managements description of the service organizations system and the suitability of the design

Type 2 reports on the fairness of the presentation of managements description of the service organizations system and the suitability of the design and operating effectiveness

27
Q

What are some of the techniques an auditor can take to document an understanding of I/C?

A
  1. Internal Questionnaire
  2. Flowcharts, Diagrams & Narratives
28
Q

Internal Control Questionnaire (PIPS-ARCC)

A
  1. Performance Review - Are there written department policies and procedures? Are unusual or un-complete transactions investigated?
  2. Information Technology - Are there controls that prevent the processing of IT unless certain criteria are met, such as the matching of certain documentation before recording a sale? Are there IT general controls that relate to the overall operation of the system, including the structure of the organization and access to information? Are application controls that relate to specific functions
  3. Physical Controls
  4. Segregation of Duties - Authorization, Custody, Recording, Comparison
29
Q

What are some factors that might increase the risk that the F/S are materially misstated?

A
  1. Competency of management
  2. Ability to develop estimates
  3. Managements aggressiveness
  4. economy
  5. Financing requirements by the entity
    6.
30
Q

To test the effectiveness of the design and operation of a control, the auditor must consider:

A

How the control was applied.

The consistency with which it was applied, and

By whom it was applied

31
Q

What is the difference between IT General Controls & Application Controls?

A
  1. IT General controls - These relate to the overall integrity of the system. Controls include IT governance policies, procedures, and practices (task and activities) established by management to provide reasonable assurance that specific objectives will be achieved.
  2. Application Controls - These are the policies, procedures, and activities designed to provide reasonable assurance that objectives relevant to a given automated solution (applications) are achieved. The are designed to ensure that an individual computer application program performs properly, accepting authorized input, processing it correctly, and generating appropriate output.
32
Q

Entity Level Controls Incude?

A
  • Mission Statement
  • Code of Conduct
  • Organization Structure
  • Tone at the top
33
Q

IT General Controls include?

A
  • IT Governance
  • Login Access controls
  • Change controls
  • Physical security
  • Business resilience planning
34
Q

Application Controls

A
  • Input controls
  • Processing Controls
  • Output Controls
35
Q

Business Process and its control activities are easier to recall when remembering that there is a (SACREd-MAPP) to every process and its components (previously discussed). What does (SACREd-MAPP) mnemonic stand for?

A
  1. Start (initiation) of transaction/event
  2. Authorize transaction/event
  3. Complete (execute) transaction/event in accordance with policies/procedures
  4. Record transaction/event
  5. Evaluate defence (verify)
    1. Matching Documents
    2. Authoritative Signatures
    3. Pre-numbered documents
    4. Periodic reconciliation
36
Q

The revenue cycle generally consist of 6 business processes, which can be grouped into 3 main categories what are they?

A
  1. Sales Order
    1. Credit Check
    2. Shipping
    3. Billing
  2. Sales Return
  3. Collection
37
Q

The spending cycle of a business can generally be broken down into the following 6 business processes and grouped into 3 main categories what are they?

A
  1. Purchase Order
    1. Receiving
    2. Inventory Control
    3. Accounts Payable
  2. Purchase Returns
  3. Cash Disbursements

Audit (8 decks)

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