Chapter 10

Question 1

internal control objectives

Answer 1

reliability of financial reporting
efficiency and effectiveness of operations
compliance with laws and regulations

Question 2

who’s responsibility is it to develop internal controls

Answer 2

management

Question 3

reasonable assurance

Answer 3

companies should develop rules that give this

Question 4

SOX 404

Answer 4

requires all public companies to issue an internal control report that includes:
a statement that management is responsible for establishing and maintaining adequate internal control structure and procedures for financial reporting
an assessment of the effectiveness of the internal control structure and procedures for financial reporting as of the end of the company’s fiscal year

Question 5

COSO

Answer 5

Committee of sponsoring organizations: developed the internal control framework used by most companies

Question 6

audit objectives

Answer 6

occurence
completeness 
accuracy
posting and summarization
classification
timing

Question 7

COSO framework

Answer 7

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

Question 8

control environment

Answer 8

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

Question 9

board of directors

Answer 9

should regularly assess internal controls

Question 10

audit committee

Answer 10

responsible for communicating with internal and external auditors, including the approval of audit and non audit services conducted by outside firms

Question 11

audit committees can’t have this

Answer 11

1. is not comprised solely of independent directors
2. is not solely responsible for hiring and firing the company’s auditors
3. does not establish procedures for the receipt and treatment of complaints 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

Question 12

those charged with corporate governance

Answer 12

anyone responsible for overseeing the direction of an entity and the accountability thereof

Question 13

risk assessment

Answer 13

managements identification and analysis of risks relevant to the preparation of f/s in conformity with appropriate accounting standards

Question 14

control activities

Answer 14

adequate separation of duties
proper authorization of transactions and activities
adequate documents and records 
physical control over assets and records
independent checks on performance

Question 15

separation of custody of assets and…

Answer 15

accounting

Question 16

separation of operational responsibility from

Answer 16

record keeping responsibility

Question 17

separation of IT duties from

Answer 17

user departments

Question 18

general authorization

Answer 18

where policies enable employees to be authorized on a broader scale

Question 19

specific authorization

Answer 19

individual transaction authorization

Question 20

adequate documents and records

Answer 20

numbering controls for documents
time stamps
etc.

Question 21

chart of accounts

Answer 21

classifies accounts on the b/s and i/s

Question 22

independent checks

Answer 22

careful and continuous review of the other four control activities

Question 23

Information and Communication

Answer 23

purpose is to initiate, record, and report the entity’s transactions and to maintain accountability for the related assets

Question 24

monitoring activities

Answer 24

deal with ongoing or periodic assessment of the quality of internal control by management to determine that controls are operating as intended and that they are modified as appropriate for changes in conditions

Question 25

narrative

Answer 25

written description of a client’s internal controls, includes:
the origin of every document and record in the system
all processing that takes place
the disposition of every document and record in the system
an indication of the controls relevant to the assessment of control risk

Question 26

flowchart

Answer 26

a diagram of the client’s documents and their sequential flow in the organization

Question 27

internal control questionnaire

Answer 27

asks a series of questions about the controls in each audit area as a means of identifying internal control deficiencies

Question 28

key controls

Answer 28

controls expected to have the greatest effect on meeting the transaction related audit objectives

Question 29

control deficiency

Answer 29

exists if design or operation of controls do not permit company personnel to prevent or detect misstatements

Question 30

significant deficiency

Answer 30

exists if one or more control deficiencies exist tat is less sever than a material weakness

Question 31

material weakness

Answer 31

exists if a significant deficiency, by itself or in combination with other significant deficiencies, results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements on a timely basis

Question 32

5 step approach to identify deficiencies

Answer 32

1. identify existing controls
2. identify the absence of key controls
3. consider the possibility of compensating controls
4. decide whether there is a significant deficiency or material weakness
5. determine potential misstatements that could result

Question 33

management letter

Answer 33

used to communicate less sever issues

Question 34

tests of controls

Answer 34

procedures to test effectiveness of controls

Question 35

evidence from prior years

Answer 35

tests of control effectiveness must be every three years

Question 36

section 404 reporting on internal control

Answer 36

unqualified opinion:
no identified material weaknesses
there have been no restrictions on the scope of the auditor’s work
adverse opinion:
when one or more material weaknesses exist
qualified or disclaimer of opinion:
scope limitation