CH 10

Question 1

What are management’s responsibilities for maintaining internal controls?

Answer 1

1) Reasonable Assurance
2) Inherent limitations ( prevent Collusion with effective internal controls that are consist of competency and dependability)
3) Design of internal control
4) operating effectiveness of controls

Question 2

What are auditors’ responsibilities for analyzing internal controls?

Answer 2

1) controls over classes of transactions ( classes of transactions > accounts because inputs are more important)

Question 3

What is COSO’s internal control framework?

Answer 3

1) describes five components of internal control that management designs and implements to provide reasonable assurance that its control objectives will be met

Question 4

What are the components of COSO?

Answer 4

1) Control environment ( actions, policies , and procedures of management)
2) Risk assessment ( management’s identification and analysis of risk relevant to the preparations of financial statements)
3) Control Activities ( policies and procedures)
4) Information and communication ( initiate record, process, and report the entity’s transactions)
5) Monitoring (deal with ongoing or periodic assessment of the quality of internal control by management)

Question 5

What is the process for understanding internal control and assessing control risk?

Answer 5

1) obtain and document understanding of internal control design and operation ( from narrative, flowchart, internal control questionnaire)
2) Assess control risk ( is entry “auditable”?) ( compares internal control and sales transaction’s objectives)
3) Design, perform and evaluate tests of controls
4) Decide planned detection risk and substantive tests

Question 6

What are significant control deficiencies?

Answer 6

1) comparing a 2 x 2 box that evaluates significance and likelihood of materiality or immateriality.

Question 7

What do test control evaluate?

Answer 7

1) Inquire of personnel
2) Examine documents, records, and reports
3) Re-perform client procedures
4) Observe control related activities

Question 8

What are adequate control activities?

Answer 8

1) adequate separation of activities
2) Proper authorization of transactions and activities
3) adequate documents and records
4) physical control over records and assets
5) Independence of checks