chap 12 obtain and document understanding of internal control Flashcards
for ____ audits, auditors need to understand controls that are relevant to the audit in order to identify and assess the risks of material misstatements
FS
the procedures the auditors uses to obtain an understanding of internal control involves gathering evidence about the ____ of internal controls and whether they have been implemented, and then using that info as a basis for assessing control risk and for the integrated audit
design
For integrated audits of large, publicly traded companies, the level of understanding of internal control and the ____ of testing need to be sufficient to issue an opinion on the effectiveness of internal control over financial reporting in addition to assessing the risks of material misstatement as part of the audit planning process
extent
the procedures the auditors uses to obtain an understanding of internal control involves gathering ____ about the design of internal controls and whether they have been implemented, and then using that info as a basis for assessing control risk and for the integrated audit
evidence
update and evaluate auditor’s previous experience with entity is especially useful to determine what?
whether controls that were not previously operating effectively have been improved
the level of understanding required for the audit of ____ ____ exceeds what is required for an audit of only the ____ ____
internal control FSs
what are the 2 main disadvantages of an internal control questionaire?
- their inability to provide an overview of the system 2. inapplicability for some audits, especially smaller ones
For integrated audits of large, publicly traded companies, the level of understanding of internal control and the extent of testing need to be sufficient to issue an opinion on the effectiveness of internal control over financial reporting in addition to ____ the risks of material misstatement as part of the audit planning process
assessing
For integrated audits of large, publicly traded companies, the level of understanding of internal control and the extent of testing need to be sufficient to issue an ____ on the effectiveness of internal control over financial reporting in addition to assessing the risks of material misstatement as part of the audit planning process
opinion
For integrated audits of large, publicly traded companies, the level of ____ of internal control and the extent of testing need to be sufficient to issue an opinion on the effectiveness of internal control over financial reporting in addition to assessing the risks of material misstatement as part of the audit planning process
understanding
what is a major source of info in gaining the understanding of internal controls?
managements documentation
when making inquires of client personnel about their duties, you hare trying to ascertain what?
whether employees understand their duties and o what is described in the clients control documentation
For integrated audits of large, ____ traded companies, the level of understanding of internal control and the extent of testing need to be sufficient to issue an opinion on the effectiveness of internal control over financial reporting in addition to assessing the risks of material misstatement as part of the audit planning process
publicly
what are the 2 advantages of flowcharts over narratives?
- they are easier to read 2. they are easier to update
T/F typically a company will use a narrative and a flowchart to describe the same system
F they both present the same info
For integrated audits of large, publicly traded companies, the level of understanding of internal control and the extent of testing need to be sufficient to issue an opinion on the ____ of internal control over financial reporting in addition to assessing the risks of material misstatement as part of the audit planning process
effectiveness
For integrated audits of large, publicly traded companies, the level of understanding of internal control and the extent of testing need to be sufficient to issue an opinion on the effectiveness of internal control over ____ ____ in addition to assessing the risks of material misstatement as part of the audit planning process
financial reporting
for FS audits, auditors need to understand controls that are relevant to the audit in order to _____ and _____ the risks of material misstatements
identify assess
why are the use of questionnaires and flowcharts together useful for understanding the clients internal control design and identifying internal controls and deficiencies ?
flowcharts provide an overview of the system while questionnaires offer useful checklists to remind the auditor of many different types of internal controls that should exist
for FS audits, auditors need to ____ controls that are relevant to the audit in order to identify and assess the risks of material misstatements
understand
the procedures the auditors uses to obtain an understanding of ____ ____ involves gathering evidence about the design of internal controls and whether they have been implemented, and then using that info as a basis for assessing control risk and for the integrated audit
internal control
why is a well preparted flowchart advantageious?
because they provide a concise overview of a clients system, including separation of duties, which helps auditors identify controls and deficiencies in the clients system
what is the fourth and final step in the process of understanding internal control and assessing control risk ?
decide planned detection risk and substantive tests
why is it important to observe client personnel carrying about their normal accounting and control activiites?
it imroves the auditors understanding and knowledge that controls have been implemented
what is the third step in the process of understanding internal control and assessing control risk ?
design, perform, and evaluate test of controls
the ____ the auditors uses to obtain an understanding of internal control involves gathering evidence about the design of internal controls and whether they have been implemented, and then using that info as a basis for assessing control risk and for the integrated audit
procedures
what 4 elements does an adequate flowchart contrain?
- the origin of every document and record in the system 2. all processing that takes place 3. the disposition of every document and record in the system 4. an indication of the controls relevant to the assessment of control risk
in addition to assessing the risks of material misstatement as part of the audit planning process, auditors need to have a sufficient level of understanding of internal control and sufficient extent of testing when dealing with audits of large publicly traded companies in order to do what ?
issue an opinion on the effectiveness of internal control over financial reporting
the procedures the auditors uses to obtain an understanding of internal control involves gathering evidence about the design of internal controls and whether they have been implemented, and then using that info as a basis for assessing control risk and for the ____ ____
integrated audit
a diagram of the clients documents and their sequential flow in the organization is called ?
a flowchart
the procedures the auditors uses to obtain an ____ of internal control involves gathering evidence about the design of internal controls and whether they have been implemented, and then using that info as a basis for assessing control risk and for the integrated audit
understanding
auditors sometimes depend on the untested accuracy of computer generated output because they forget what?
that computers perform only as well as they are programmed
The understanding of internal control is necessary for what 2 audits?
- the audit of internal controls over financial reporting 2. the audit of FSs
what are the 4 steps in the process of understanding internal control and assessing control risk ?
- obtain and document understanding of internal control design and operation 2. assess control risk 3. design, perform, and evaluate test of controls 4. decide planned detection risk and substantive tests
in the first step of the process of understanding internal control and assessing control risk , you ____ and ____ understanding of internal control ____ and ____
obtain and document design and operation
what 3 things does an auditor do at each stage of processing in a walkthrough
- makes inquires 2. observes activities 3. examines completed documents and recordsq
As a part of the auditors ____ ____ procedures, the auditor uses procedures to obtain an undestanding of internal controls
risk assessment
the procedures the auditors uses to obtain an understanding of internal control involves gathering evidence about the design of internal controls and whether they have been implemented, and then using that info for what?
- as a basis for assessing control risk 2. the integrated audit
For integrated audits of large, publicly traded companies, the level of understanding of internal control and the extent of testing need to be ____ to issue an opinion on the effectiveness of internal control over financial reporting in addition to assessing the risks of material misstatement as part of the audit planning process
sufficient
the procedures the auditors uses to obtain an understanding of internal control involves gathering evidence about the design of internal controls and whether they have been implemented, and then using that info as a ____ for assessing control risk and for the integrated audit
basis
For integrated audits of ____ , publicly traded companies, the level of understanding of internal control and the extent of testing need to be sufficient to issue an opinion on the effectiveness of internal control over financial reporting in addition to assessing the risks of material misstatement as part of the audit planning process
large
what is the second step in the process of understanding internal control and assessing control risk ?
assess control risk
a written description of a clients internal controls. is called a ?
narrative
the procedures the auditors uses to obtain an understanding of internal control involves gathering evidence about the design of internal controls and whether they have been implemented, and then using that info for what?
- as a basis for assessing control risk 2. the integrated audit
what is a narrative?
a written description of a clients internal controls.
in the third step of the process of understanding internal control and assessing control risk, you ____, ____, and _____ test of controls
design perform evaluate
For ____ audits of large, publicly traded companies, the level of understanding of internal control and the extent of testing need to be sufficient to issue an opinion on the effectiveness of internal control over financial reporting in addition to assessing the risks of material misstatement as part of the audit planning process
integrated
the procedures the auditors uses to obtain an understanding of internal control involves gathering evidence about the design of internal controls and whether they have been implemented, and then using that info as a basis for assessing ____ ____ and for the integrated audit
control risk
what is a flowchart?
a diagram of the clients documents and their sequential flow in the organization
what is the first step in the process of understanding internal control and assessing control risk ?
obtain and document understanding of internal control design and operation
what is an internal control questionnaire?
it asks a series of questions about the controls in each audit area as a means of identifying internal control deficiencies
T/F Auditing standards require auditors to obtain and document their understanding of internal control for every audit
T
it asks a series of questions about the controls in each audit area as a means of identifying internal control deficiencies ?
internal control questionnaire
what are the 4 types of evidence used by auditors to obtain an understanding of the design and implementation of controls?
- inspection 2. inquiry of entity personnel 3. observation of employees performing control processes 4. reperformance by tracing one or a few transactions through the accounting system from start to finish
what are the 5 methods for understanding the design of intenral controls and evaluating if they’ve been implemented?
- update and evaluate auditor’s previous experience with entity 2. make inquires of client personnel- ask them to explain their duties 3. examine documents and records- see if info in narratives, flowcharts , and questionnaires has been implemented 4. observe entity activities and operations 5. perform walkthroughs of the accounting system
what are the 3 types of documents auditors commonly use to obtain and document their understanding of the design of internal control?
- narratives 2. flowcharts 3. internal control questionnaires
most internal control questionaires require a yes or no response with no responses indicating what?
potential internal control deficiencies
the procedures the auditors uses to obtain an understanding of internal control involves gathering evidence about the design of internal controls and whether they have been ____, and then using that info as a basis for assessing control risk and for the integrated audit
implemented
why is the documentation of the assessment of design effectiveness of internal control over financial reporting usually already prepared before the auditors obtain and document their understanding of the design of internal control
because Section 404 of the Sarbanes Oxley Act requires management to do this
what is a walkthrough?
the auditor selects one a a few documents of a transaction type and traces them from initation throught the entire accounting process
for the fourth step of the process of understanding internal control and assessing control risk, you decided ____ ____ risk and ____ tests
planned detection substantive
for FS audits, auditors need to understand controls that are ____ to the audit in order to identify and assess the risks of material misstatements
relevant
before concluding that info is reliable, auditors must _____ and ____ computer based control in the same way they do for manual controls
understand test
in addition to understanding the design of internal controls, the auditor must also evaluate whether the designed controls are ____
implemented
For integrated audits of large, publicly traded companies, the level of understanding of internal control and the extent of testing need to be sufficient to issue an opinion on the effectiveness of internal control over financial reporting in addition to assessing the risks of material misstatement as part of the audit ____ process
planning
what 4 things does a proper narrative of an accounting system and related controls include?
- the origin of every document and record in the system ex. where customer orders come from and how sales invoices are generated 2 all processing that takes place- process describes how sales amounts are determined by quatities shipped times standard prices in master price file 3. the disposition of every document and record in the system- the filing, archiving of documents, sending them to customers , or destroying them should be described 4. an indication of the controls relevant to the assessment of control risk - separating of dutires, authorizations and approvals, internal verification, etc
the procedures the auditors uses to obtain an understanding of internal control involves gathering evidence about the design of internal controls and whether they have been implemented, and then using that info as a basis for ____ control risk and for the integrated audit
assessing
