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Audit Part 3 > chap 10 COSO components of internal control > Flashcards

chap 10 COSO components of internal control Flashcards

1
Q

in the COSO framework,what are the 5 component of internal control that managment designs and implements to provide reasonable assurance that its control objectives will be met

A
  1. control environment
  2. control activities
  3. risk assessment
  4. information and communication
  5. monitoring
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2
Q

COSO represents the direct relationship between what ? (3)

A
  1. the 3 internal control objectives- reporting, operations, compliance
  2. the 5 components of internal control- control environmnet, control activities, risk assessment, information and communication, and monitoring activities
  3. the organizational structure - entity, division, operating unit, function
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3
Q

within each of the COSO components, there are broad ____ included that provide more ____ to support the respective component

A

principals

guidance

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4
Q

The COSO principals apply across all types of entitites and to each of the internal control _____

A

objectives

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5
Q

all of the 1 COSO principals must be present and functioning for internal controls to be ____

A

effective

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6
Q

what does the internal control component of control environment consist of?

A

the actions, policies, and procedures that refect the overall attitudes of top managment, directors, and owners of an entity about internal control and its importance to the entity

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7
Q

the actions, policies, and procedures that refect the overall attitudes of top managment, directors, and owners of an entity about internal control and its importance to the entity represents what component of COSO?

A

control environment

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8
Q

_____ _____ consists of the the actions, policies, and procedures that refect the overall attitudes of top managment, directors, and owners of an entity about internal control and its importance to the entity

A

control environment

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9
Q

control environment consists of the _____, ______,
and _____ that refect the overall attitudes of top managment, directors, and owners of an entity about internal control and its importance to the entity

A

actions, policies, and procedures

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10
Q

control environment consists of the the actions, policies, and procedures that refect the overall ____ of top managment, directors, and owners of an entity about internal control and its importance to the entity

A

attitudes

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11
Q

control environment consists of the the actions, policies, and procedures that refect the overall attitudes of top ____, _____, and _____ of an entity about internal control and its importance to the entity

A

managment, directors, and owners

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12
Q

control environment consists of the the actions, policies, and procedures that refect the overall attitudes of top managment, directors, and owners of an entity about ____ ____ and its importance to the entity

A

internal control

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13
Q

control environment consists of the the actions, policies, and procedures that refect the overall attitudes of top managment, directors, and owners of an entity about internal control and its _____ to the entity

A

importance

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14
Q

the control environmnet serves as the ____ for the other 4 components

A

umbrella

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15
Q

which component of COSO is so important that unless it is effective , the other 4 components are unlikely to result in effective internal control, regardless of their quality

A

control environment

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16
Q

the essense of an effectively controlled organization lies in the what?

A

attitude of its board of directors and senior management

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17
Q

what are the 5 underlying principals related to the control environment component of COSO?

A
  1. committment to integrity and ethical values
  2. an independent board of directors that is responsible for oversight of internal controls
  3. establishing approprate structures and reporting lines
  4. a commitment to attracting, developing, and retaining competent personnel
  5. holding individuals accountable for internal control responsibilities
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18
Q

integrity and ethical values are the product of the entitity ethical and behavioral _____, as well as how they are _____ and _____ in practice

A

standards
communicated
reinforced

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19
Q

integrity and ethical values include managements actions to remove or reduce _____ and _____ that might prompt personnel to engage in dishonest, illegal, or unethical acts

A

incentives

temptations

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20
Q

integrity and ethical values include the communication of these standards to personnel through what 3 forms?

A
  1. policy statements
  2. codes of conduct
  3. by example
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21
Q

understanding managements ____ and ____ style gives the auditor a sense of managments attitude about internal control

A

philosophy

operating

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22
Q

who has the ultimate responsibility to make sure managment implements proper internal control and financial reporting processes?

A

the board of directors

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23
Q

an effective board of directors is independent of _____

A

management

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24
Q

an effective board of directors is independent of management and does what?

A

stays involved in and scrutinizes managements activities

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25
Q

the board must exercise oversight of the ____ and _____ of controls

A

design

performance

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26
Q

an active and objective board can reduce the likelihood that management will do what?

A

override existing controls

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27
Q

the board creates an audit committee that is charged with oversight responsiblility for what ?

A

financial reporting

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28
Q

the audit committee is responsible for maintaing ongoing communication with who?

A

external and internal auditors

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29
Q

the audit committe is responsible for approving what done by auditors for public companies?

A

audit and nonaudit services

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30
Q

maintaing ongoing communication with external and internal auditors allows the audit committee to do what?

A

discuss with the auditors matters that might relate to managment integrity or the appropriateness of actions taken by management

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31
Q

what aspects of the audit committee are important determinants of its ability to effectiely evaluate internal controls and FSs prepared by management? (2)

A
  1. their independence from management

2. their knowledge of financial reporting issues

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32
Q

the Sarbanes Oxley Act directed the SEC to require the national stock exchanges (NYSE and NASDAQ) to strengthen what?

A

audit committee requirements for public companies listing securities on the exchange

33
Q

the national stock exchanges will not list any security from a company with an audit commitee that what? (5)

A
  1. is not comprised solely of independent directors
  2. is not soley responsible for hiring and firing the company’s auditors
  3. does not establish procedures for the receipt and treatment of complaints (whistleblowing) regarding accounting, internal control, or auditing matters
  4. does not have the ability to engage its own counsel and other advisors
  5. is inadequately funded
34
Q

PCAOB standards require the auditor to evaluate the effectiveness of the audit committees what? (2)

A
  1. oversight of the companys external finacial reporting

2. oversight of the companys internal control over financial reporting

35
Q

individuals responsible for overseeing the strategic direction of the entity and the accountability of the entity , inc luding financial reporting and disclosure are called what by auditing standards?

A

those charged with governance

36
Q

in auditing standards, those charged with governance are responsible for what? (2)

A
  1. overseeing the strategic direction of the entity

2. overseeing the accountability of the entity , including financial reporting and disclosure

37
Q

the entitys organizational structure defines the existing lines of _____ and ______

A

responsibility

authority

38
Q

the organizational structure can consist of (4)?

A
  1. entity level
  2. division level
  3. operating units
  4. functions within those units
39
Q

T/F

controls operate at each level of the corporate structure

A

T

40
Q

by understanding the clients organizational structure, the auditor can learn the ____ and _____ elements of the business and perceive how controls are ______

A

management
functional
implemented

41
Q

what is competence?

A

the knowledge and skills necessary to accomplish task that define an individuals job

42
Q

if employees are ____ and _____ , other controls can be absent and reliable FSs will still result

A

competent

trustworthy

43
Q

because of the importance of competent, trustworth personnel in providing effective control, the methods by which persons are ____ , _____, _____, _____, and _____ are an important part of internal control

A 
hired
trained
evaluated
promoted
compensated
44
Q

who is responsible for comminicating expectationa and holdign individuals accountable for internal control duties (2)?

A

managment

board of directgors

45
Q

what 3 things make the accountability process effective?

A
  1. management setting the appropriate tone
  2. appropriate structures and reporting lines put in place
  3. incentives to fulfill internal control duties
46
Q

what is risk assessment?

A

a process for identifying and analyzing risks that may prevent the organization from achieving its objectives

47
Q

what are the 4 underlying principals related to risk assessment?

A
  1. company should have clear objecctives in order to be able to identify and assess the risk relating to those objectives
  2. should determine how the risks should be managed
  3. should consider the potential for fraudulent behavior
  4. should monitor changes that could impact internal controls
48
Q

specific risk related to ____ should be considered as they can lead to substantial losses if ignored

A

IT

49
Q

if IT systems fail, organizastions can be parayzed by what /(2)

A
  1. the inability to retrieve info

2. the use of unreliable info caused by processing errors

50
Q

what are 7 factors that may lead to increased risk?

A
  1. failure to meet prior objectives
  2. quality of personnel
  3. geographic dispersion of company operations
  4. significance and complexity of core business processes
  5. intro of new IT
  6. economic downturns
  7. entracnce of new competitors
51
Q

what are 3 things managment does once it identifies a risk?

A
  1. estimates the significance of that risk
  2. assesses the likelihoood of the risk occurring
  3. develops specific actions that need to be taken to reduce the risk to an acceptable level
52
Q

what is the differences between management and the auditor with respect to risk assessment?

A

management- assesses risk as a part of designing and operating internal controls to minimize errors and fraud

auditors- assess risk to decide the evidence needed in an audit

53
Q

what are control activities?

A

the policies and procedures , in addition to those included in the other 4 control components, that help ensure that necessary actions are taken to address risks to the acheivement of the entitys objectives

54
Q

what are the 3 underlying principles related to control activities?

A
  1. develop control activities that mitigate risks to an acceptable level
  2. developing general controls over technology
  3. establishing appropriate policies, procedures, and expectations
55
Q

what are the 5 types of typcial control activities?

A
  1. adequate separation of duties
  2. proper authorization of transactions and activities
  3. adequate documents and records
  4. physical control over assets and records
  5. independent checks on performance
56
Q

what 4 general guidelines for adequate separation of duties to prevent fraud and errors are especially significant to auditors?

A
  1. separation of the custody of assets from accounting for those assets
  2. separation of the authorization of transactions fro the custody of related assets
  3. separation of operational responsibility from record keeping responsibility
  4. separation of IT duties from user departments
57
Q

to protect a company from embezzlement, a person who has custody of an asset should not ____ for that asset

A

account

58
Q

to reduce embezzlement, you should prevent persons who authorize transactions from having control over the _____ ____

A

related asset

59
Q

to ensure unbiased info, ____ ____ is typically the responsibility of a separate department reporting to the controller

A

record keeping

60
Q

T/F

Every transaction must be properly authorized if controls are to be satisfactory

A

T

61
Q

authorization can be either ____ or ____

A

general specific

62
Q

what happens under general authorization?

A

managment establishes policies and subordinates are instructed to implemetn these general authorizations by approving all transactions within the limits set by the policy

63
Q

Specific authorization applies to _____ transactions

A

individual

64
Q

what is the distinction between authorization and approval?

A

authorization is a policy decision for eithe ra general class of transactions or a specific transaction and approval is the implementation of managments general authorization decisions

65
Q

documents and records are the records upon which transactions are _____ and _____

A

entered

summarized

66
Q

adequate documents are essential for correct _____ of transactions and control of _____

A

recording

assets

67
Q

what are the principals that dictate the proper design and use of documents and records? (4)

A
  1. prenumbered consecutively to facilitate control over missing documents and records and as aid in locating them when needed at later date. important for completeness assertion
  2. prepared at time transaction takes place or as soon as possible after to minimize timing errors
  3. designed for multiple use to minimize the number of different forms
  4. constructed in manner that encourages correct preparation . can do by providing internal checks within form or record
68
Q

what is a control closely related to documents and records?

A

chart of accounts

69
Q

what does the chart of accounts do?

A

classifies transactions into individual B/S and I/S accounts

70
Q

the chart of accounts is helpful in preventing _____ errors if it accurately describes which type of transactions should be in each account

A

classification

71
Q

to maintain adequate internal control, ____ and ____ must be protected

A

assets

records

72
Q

the most important type of protective measure for safeguarding assets and records is the use of ?

A

physical precautions

73
Q

what is the control activity of independent check or internal verification on performance?

A

the careful and continuous review of the other four control activities

74
Q

why does the need for independent checks arise?

A

because internal controls tend to change over time unless there is frequent review

75
Q

independent checks on performance are necesarry beccause personnel are likely to forget or intntionally fail to follow procedure, or may become careless unless someone ____ and ____ their performance

A

observes

evaluates

76
Q

personnel responsible for performing internal verification procedures must be independent of what?

A

those originally responsible for preparing the data

77
Q

what is the least expensive means of internal verification?

A

separtion of duties

78
Q

most accounting system involve technologies wehre many internal verification procedures are ____

A

automated

79
Q

what is the purpose of an entitys accounting info and communication system?

A

to initiate, record, process, and report the entityes transactions and to maintain accountability for the related assets

Audit Part 3 (19 decks)

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