CH 10 B

Question 1

What is management’s three broad objectives of designing effective internal controls?

Answer 1

1) compliance with laws
2) Reliability of financial reporting
3) efficiency/ effectiveness of operations

Question 2

Since Section 404 requires management to document internal controls, what has to be documented?

Answer 2

1) design of controls (each of five components)

2) results of testing and evaluation

Question 3

What are the five narrative of internal controls have to describe?

Answer 3

1) Origin of docs and records of business
2) business’s processing of services and/or goods
3) purpose of doc and record of system
4) Types of controls that are relevant to the assessment of control risk

Question 4

What does a internal control questionnaire accomplishes?

Answer 4

Helps identify internal control deficiencies

Question 5

What are the five implementations to evaluate internal controls?

Answer 5

1) update and evaluate auditor’s previous experience with the entity
2) Make inquires of client personnel
3) Examine documents and records
4) Observe entity Activities and records
5) Perform walkthroughs of the accounting system

Question 6

What is a preliminary assessment of control risk?

Answer 6

1) an assessment that measures an auditor’s expectations that internal controls will prevent material misstatements

Question 7

What is control risk matrix?

Answer 7

1) an assessment of control risk.

Question 8

what are the five steps in control risk matrix?

Answer 8

1) identify audit objectives
2) Identify existing controls from previous docs and reports
3) Identify key controls
4) Associate control with related audit objectives
5) evaluate control deficiencies, significant deficiencies, and material weaknesses

Question 9

What is the five step process that determines control deficiencies, significant deficiencies, and material weaknesses

Answer 9

1) identify existing controls
2) Identify the absence of key controls
3) evaluate the possibility of compensating controls
4) Decide whether there is a significant deficiency or material weakness
5) Determine potential misstatements that could result

Question 10

What are the four procedures for tests of operating effectiveness of internal controls?

Answer 10

1) Inquire of client personnel
2) examine doc, records, and reports
3) reperform client procedures
4) observe control related activities

Question 11

Extent of procedure, help to lower control risk. What are three methods

Answer 11

1) Reliance from prior year’s audit evidence
2) Testing relation between controls and significant risks
3) testing less than entire audit period