Chap 13 - Intro to Internal Control Systems

Question 1

What is an internal control?

Answer 1

It is the policies, plans and procedures implemented by management of an organization to protect its assets, to ensure accuracy and completeness of its financial information and to meet its business objectives.

Question 2

What are the 4 objectives of internal controls?

Answer 2

1. Safeguard assets
2. Check the accuracy and reliability of accounting data
3. Promote operational efficiency
4. Enforce prescribed managerial policies

Question 3

What are the 5 components of the 1992 COSO Report?

Answer 3

1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring

Question 4

What are 3 additional components of an internal control system as defined by the 2004 COSO ERM

Answer 4

1. Objective Setting
2. Event Identification
3. Risk Response

Question 5

What are some examples of control activities?

Answer 5

1. good AUDIT trail
2. sound personnel POLICIES and PROCEDURES
3. separation of DUTIES
4. physical PROTECTION of assets
5. REVIEWS of operating performance
6. timely performance REPORTS

Question 6

A good audit trail helps how?

Answer 6

enables auditors to follow the path of the data from the initial source docs to the final dispostion of the data on the report

Question 7

How do personnel policies help?

Answer 7

companies can encourage ethical behavior among employees by reviewing the rules and the Code of Conduct as well as offering annual training

Question 8

How does separation of duties help?

Answer 8

structure work assignments to that one employee’s work serves as a check on another employee(s).
Assign 3 different functions to different employees: authorizing, recording and custody of assets

Question 9

Three different areas to have physical protection?

Answer 9

inventory, document and cash

Question 10

How do reviews of operating performance help?

Answer 10

when performing these reviews internal auditors may find that some internal controls are not functioning properly

Question 11

2 principles relating to monitoring internal controls?

Answer 11

1) ongoing and/or seperate evaluations of internal controls

2) internal control deficiencies or weaknesses should be identified and communicated promptly

Question 12

What are the elements of monitoring?

Answer 12

1. Establish a foundation for monitoring (determine the current baseline)
2. Design and execute monitoring procedures
3. Assess and report the results of monitoring those key controls

Question 13

What is COBIT?

Answer 13

a system that supports the COSO requirements by using IT resources to support business processes

Question 14

What are 3 types of control?

Answer 14

Preventative controls (put in place to prevent problems from occurring)
Detective controls (alerts managers when preventative controls fail)
Corrective controls (procedures a company uses to correct a problem)

Question 15

The report from an external audit of a company’s internal control system must include what info?

Answer 15

• statement that management understands that they are responsible for establishing and maintaining internal control structure and procedures
• an assessment, at year end, of the effectiveness of the internal control structure
• an attestation by the company’s auditor that the assessment is accurate

Question 16

What is an “ideal control”?

Answer 16

a control procedure that reduces to practically zero the risk of an undetected error or irregularity

Question 17

What are most important controls for the Sales and Cash Receipts cycle?

Answer 17

• adequate documents and records
• authorization of transactions
• separation of the custody of assets from accounting
• independent checks on performance
• monthly statements to customers

Question 18

What are examples of source documents for Sales and Cash Receipts?

Answer 18

• customer purchase order
• bill of lading and perpetual inventory record
• sales invoice and price list

Question 19

What are examples of source documents for Purchases and Cash Disbursements?

Answer 19

• Purchase requisition (doc stating a need for good or services)
• Purchase order
• Receiving report
• Vendor’s invoice

Question 20

What are some internal controls for the Purchases and Cash Disbursements cycle?

Answer 20

• adequate documents and records
  .prenumbered receiving reports
• authorization of transactions
  .ordering goods
  .authorization of price (assure buying goods at lowest cost)
  .receiving goods or services
  .authorizing payment
• separation of the custody of assets from accounting
• independent checks on performance
  .account for all receiving reports
  .check prices paid vs price on price list
  .check the math
  .reconcile all control accounts (A/P and fixed assets)
• bank reconciliation