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1 Auditing Theory 068 > C6 Internal Control > Flashcards

C6 Internal Control Flashcards

1
Q

Who is required to implement quality control?

A

Engagement Partner ( Audit Firms)

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2
Q

Components of Internal Control

A

CCRIM

✔ Control Environment
✔ Control Activities
✔ Risk Assessment
Information and Communications Systems
✔ Monitoring

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3
Q

Internal Control

A

Process designed and effected by those charged with governance, mgmt, and other personnel TO PROVIDE REASONABLE ASSURANCE about the achievement of the entity’s objectives with regard to

  1. Reliability of FR (FR Objective)
  2. Effective and efficient ops (Operational Obj)
  3. Compliance objective
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4
Q

4 essential concepts in the definition of IC

A

✔ Process
✔ Effected by those charged with governance, mgmt
✔ IC can be expected to provide REASONABLE assurance of achieving the Obj
✔ Designed to help achieve the obj

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5
Q

Examples of Inherent Limitations to IC’s effectiveness

A

✔ Cost benefit principle
✔ directed at routine transactions
✔ potential for human errors (mistakes of judgment, careless, etc)
✔ circumvention through collusion
✔ overriding of mgmt
✔ Inadequate procedures due to CHANGES IN CONDITIONS

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6
Q

Operational and compliance objectives may be relevant to the audit?

A

Yes, as long as it relates to the data the auditor evaluates

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7
Q

Responsibility of MGMT and Those charged with governance

A

MGMT - to establish a control environment and maintain policies and procedures to assist in achieving the objs.

Those charged with governance - ensure the integrity of fr systems through OVERSIGHT of mgmt.

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8
Q

Attitudes, awareness, and actions of mgmt. It sets the tone of an organization; the foundation providing discipline and structure.

A

Control Environment

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9
Q

A factor of Control Environment that discourages employees from engaging in dishonest, illegal, and unethical acts that could materially affect the FS.

A

Integrity and ethical values

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10
Q

Who is responsible for overseeing the financial reporting policies and practices of the entity?

A

The audit committee

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11
Q

A control environment factor that assesses mgmt attitude towards FR; their emphasis on meeting projected profit gosls

A

Mgmt philosophy and operating style

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12
Q

What CE factor requires an entity to have an audit committee?

A

Active participation of those charged with governance

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13
Q

A CE factor that provides a framework for planning, directing, and controlling the operations

To avoid incompatible functions

A

Organizational structure / assignment of responsibility

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14
Q

The risk that the business objectices will not be attained due to internal and external factors

A

Business risk

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15
Q

Policies and procedures that help ensure that mgmt directives are carried out

A

Control activities

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16
Q

Control activities:

A

PIPS
✔ performance reviews
✔ information processing
✔ physical controls
✔ segregation of duties

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17
Q

Assessing the quality of IC over time and on a timely basis taking corrective actions

A

Monitoring

18
Q

Monitoring activities performed on a non-routine basis (by internal auditors)

A

Separate evaluations

19
Q

Monitoring activities built into the normal recurring activities (ex. Bank recon)

A

Ongoing monitoring activities

20
Q

IC in small businesses tend to be weak compared to larger entities

A

True

21
Q

Weakness of IC in small business can be compensated by how?

A

If the owner/manager actively participates in the business operations

22
Q

Are auditors responsible for establishing and maintaining accounting and IC systems?

A

No. Only give an adequate consideration because the ICS can have a SIGNIFICANT impact on the audit

23
Q

5 steps in Considering the Internal Control

A
  1. Obtaining understanding of the internal control
  2. Documenting the understanding of accounting and internal control systems
  3. Assessimg the level of control risk
  4. Performing tests of control
  5. Documenting the assessed level of control risks
24
Q
  1. Obtaining an understanding of IC involves: (objectives)
A

✔ Evaluating the design of a control
✔ determining whether it has been implemented

25
Q

Initial understanding of the design is obtained by:

A

✔ inquiries
✔ inspection
✔ observation

26
Q

Tracing one or two transactions through the entire accounting systems, from their initial recording to their final destination as a component of account balance.

A

walk-through test

27
Q

This process confirms the auditor’s understanding of how the accounting systems and control procedures function.

A

walk-through test

28
Q

Is the auditor required to obtain knowledge about the operating effectiveness of IC when doing step 1?

A

No. Go back to the objectives/definition of Step 1:
✔ Evaluating the design of a control
✔ determining whether it has been implemented

29
Q

The auditor’s understanding of IC should be adequate to”

A

✔ Identifying types of potential misstatement
✔ Consider factors that affect ROMMS
✔ Design the nature, timing, and extent of AP

30
Q

Commonly used forms of documentation for auditor’s understanding of IC (2)

A

✔ Narrative description
✔ Flowchart
✔ Questionnaire

31
Q

What is the 3rd step in ICC?

A

Assessment of Control Risk

32
Q

Levels to be obtained in preliminary assessment of CR

A

✔ At a high level
✔ At less than high level

33
Q

What is the level of assessment when the controls are ineffective?

Thus, can the auditor perform TOC?

A

At a high level

not necessary anymore due to efficient manner obj; auditor should proceed to ST directly

34
Q

When the controls appear to be reliable, the auditor should not determine whether it is efficient to obtain evidence to justify assessing it at a less-than-high level.

A

False. not

35
Q

To exercise professional skepticism, the auditor should perform what when he assessed the assertion at a less than high level/ as a reliable control?

A

test of control (Step 4)

  • to determine the effectiveness
36
Q

The auditor should also identify specific internal control policies and procedures that are likely to prevent / detect and correct FS MMs.

A

True

37
Q

TOCs are performed to obtain evidence about the effectiveness of the :

A

✔ Design of accounting and ICS
✔ Operation of the IC throughout the period

38
Q

Will the auditor test all controls to determine their effectiveness?

A

No, only those they plan to rely upon; or likely to detect or prevent MMs.

39
Q

The greater reliance on control, the _____ substantive tests are required to support the preliminary assessment at less than high level

A

greater / more

40
Q

Evidence-gathering techniques in TOC:

A
  1. Inquiry
  2. Observation
  3. Inspection
  4. Reperformance

1 Auditing Theory 068 (1 decks)

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