Ch 7 Flashcards
What is internal control?
- A process, effected by the entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the categories of (1) effectiveness and efficiency of operations, (2) reliability of financial reporting, and (3) compliance with applicable laws and regulations.
Identify the five components of an organization’s control environment.
- (1) the control environment, (2) the risk assessment process, (3) control activities, (4) the information system relevant to financial reporting and communication (accounting information system), and (5) the monitoring of controls.
How does separation of the record keeping function from custody of assets contribute to internal control?
- To not allow one individual to have incompatible duties that would allow him to both perpetrate and conceal errors or fraud in the normal course of his or her duties. Pg. 252
Name three factors you consider of greatest importance in protecting a business against losses through embezzlement.
5.
Describe the two types of monitoring and provide an example of each.
- (1) Ongoing monitoring evaluations include regularly performed supervisory and management activities such as continuous monitoring of customer complaints. (2) Separate evaluations - performed on a non routine basis such as periodic audits by the internal auditors. pg 253
Identify the four types of control activities and describe how each type contributes to effective internal control.
- Performance reviews, information processing controls, physical controls, segregation of duties. Pg 250
What consideration, if any, may independent auditors give to the work of a client’s internal audit staff?
- They consider existence and quality of the function in their assessment of control risk. Pg 272
What are the purposes of the consideration of internal control required by generally accepted auditing standards?
13.
Distinguish between the two subsections of Section 404 of the Sarbanes-Oxley Act of 2002.
- Section a - report by management (acknowledges its responsibility for establishing & maintaining adequate internal control over financial reporting (internal control), (2) provides an assessment of internal control effectiveness as of the end of the most recent financial year.
Section b - company’s auditors attest to, and report on, internal control over financial reporting.
List the five stages of the auditors’ overall approach in an audit of internal control performed in accordance with PCAOB requirements.
- Plan the engagement, use a top-down approach to identify control to test, test & evaluate design effectiveness of internal control, test & evaluate operating effectiveness of internal control, form an opinion on the effectiveness of internal control over financial reporting.
Describe the required documentation of internal control matters.
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