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ACC-420 > Chapter 10 > Flashcards

Chapter 10 Flashcards

1
Q

A measure of the auditor’s expectation that internal controls will neither prevent material misstatements from occurring nor detect and correct them if they have occurred; control risk is assessed for each transaction-related audit objective in a cycle of class of transactions

A

Assessment of Control Risk

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2
Q

A listing of all of the entity’s accounts, which classifies transactions into individual balance sheet and income statement accounts

A

Chart of Accounts

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3
Q

A control elsewhere in the system that offsets the absence of a key control

A

Compensating Control

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4
Q

A cooperative effort among employees to steal assets or misstate records

A

Collusion

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5
Q

Policies and procedures, in addition to those included in the other four components of internal control, that help ensure that necessary actions are taken to address risks in the achievement of the entity’s objectives; They typically include the following five specific control activities: (1) adequate separation of duties, (2) proper authorization of transactions and activities, (3) adequate documents and records, (4) physical control over assets and records, and (5) independent checks on performance

A

Control Activities

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6
Q

A deficiency in the design or operation of controls that does not permit company personnel to prevent or detect and correct misstatements on a timely basis

A

Control Deficiency

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7
Q

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

A

Control Environment

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8
Q

A methodology used to help the auditor assess control risks by matching key internal controls and internal control deficiencies with transaction-related audit objectives

A

Control Risk Matrix

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9
Q

Controls that have a pervasive effect on the entity’s system of internal controls; also referred to as company-level controls

A

Entity-level Controls

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10
Q

A diagrammatic representation of the client’s documents and records and the sequence in which they are processed

A

Flowchart

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11
Q

Company wide policies for the approval of all transactions within stated limits

A

General Authorization

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12
Q

Internal control activities designed for the continuous internal verification of other controls

A

Independent Checks

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13
Q

The set of manual and/or computerized procedures that initiates, records, processes, and reports an entity’s transactions and maintains accountability for the related assets

A

Information and Communication

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14
Q

A process designed to provide reasonable assurance regarding the achievement of management’s objectives in the following categories: (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations

A

Internal Controls

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15
Q

A series of questions about the controls in each audit area used as a means of indicating to the auditors aspects of internal controls that may be inadequate

A

Internal Control Questionnaire

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16
Q

Controls that are expected to have the greatest effect on meeting the transactions-related audit objectives

A

Key Controls

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17
Q

An optional letter written by the auditor to a client’s management containing the auditor’s recommendations for improving any aspects of the client’s business

A

Management Letter

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18
Q

A significant deficiency in internal control that, by itself, or in a combination with other significant deficiencies, result in a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected

A

Material Weakness

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19
Q

Management’s ongoing and periodic assessment of the quality of internal control performance to determine that controls are operating as intended and are modified when needed

A

Monitoring

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20
Q

A written description of a client’s internal controls, including the origin, processing, and disposition of documents and records, and the relevant controls procedures

A

Narrative

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21
Q

Procedures used by the auditor to gather evidence about the design and implementation of specific controls

A

Procedures to obtain and understanding

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22
Q

Management’s identification and analysis of risks relevant to the preparation of financial statements in accordance with an applicable accounting framework

A

Risk Assessment

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23
Q

Separation of the following activities in an organization: (1) custody of assets from accounting, (2) authorization from custody of assets, (3) operational responsibility from record keeping, and (4) IT duties from outside users of IT

A

Separation of Duties

24
Q

One or more control deficiencies exist that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company’s financial reporting

A

Significant Deficiency

25
Q

Risks the auditor believes require special audit considerations; the auditor is required to test the operating effectiveness of controls that mitigate these risks in the current year audit if control risk is to be assessed below the maximum

A

Significant Risks

26
Q

Case-by-case approval of transactions not covered by companywide policies

A

Specific Authorization

27
Q

Audit procedures to test the operating effectiveness of controls in support of reduced assessed control risk

A

Test of Controls

28
Q

The person(s) with responsibility for overseeing the strategic direction of the entity and its obligations related to the accountability of the entity, including overseeing the financial reporting and disclosure process

A

Those charged with governance

29
Q

The tracing of selected transactions through the accounting system to determine that controls are in place

A

Walkthrough

30
Q

What are the three broad objectives in designing an effective internal control system?

A
  1. Reliability of financial reporting
  2. Efficiency and effectiveness of operations
  3. Compliance with laws and regulations
31
Q

Section 404(a) of Sarbanes-Oxley Act requires management of all public companies to issue an internal control report that includes the following:

A
  • A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedure 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.
32
Q

The internal control framework used by most U.S. companies is

A

COSO- the Committee Of Sponsoring Organization of the treadway commission Internal Control - Integrated Framework

33
Q

Put in place to prevent or detect material misstatements in the financial statements

A

Design of Internal Controls

34
Q

What are the five components to COSO’s Internal Control - Inegrated Framework?

A
  1. Control environment
  2. Risk assessment
  3. Control activities
  4. Information and Communication
  5. Monitoring
35
Q

What is essential to have an effective Board of Directors?

A

An effective Board of Directors is independent of management, and its members stay involved in and scrutinize management’s activities

36
Q

The exchanges will not list any security from a company with an audit committee that:

A
  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
37
Q

IMPORTANT

What are the five types of 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
38
Q

What are the four general guidelines for adequate separation of duties to prevent both fraud and errors?

A

a. Separation of the custody of assets from accounting
b. Separation of the authorization of transactions from the custody of related assets
c. Separation of operational responsibility from record keeping responsibility
d. Separation of IT duties from user departments

39
Q

Issuance of fixed price lists for the sale of products, credit limits for customers, and fixed reorder points for making acquisitions. What is this an example of?

A

An example of General Authorization

40
Q

A sales transaction by the sales manager for a used car company. What is this an example of?

A

An example of Specific Authorization

41
Q

Document and Records should be:

A
  • Prenumbered
  • Prepared at the time a transaction takes place
  • Designed for multiple use, when possible, to minimize the number of different forms
  • Constructed in a manner that encourages correct preparation
42
Q

A control that is closely related to documents and records.

A

Chart of Accounts

43
Q

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

A

Physical Precautions

44
Q

To maintain adequate internal control, BLANK and BLANK must be protected

A

Assets and records

45
Q

What is the last category of control activities which is careful and continuously reviews the other four?

A

Independent checks (or Internal verification)

46
Q

Personnel responsible for performing internal verification procedures must be BLANK of those originally responsible for preparing the data.

A

Independent

47
Q

The least expensive means of internal verification is the BLANK

A

Separation of duties

48
Q

To understand the design of the accounting information systems, the auditor determines:

LESS IMPORTANT

A
  1. The major classes of transactions
  2. How the transactions are initiated and recorded
  3. What accounting records exist and their nature
  4. How the system captures other events that are significant to the financial statements, like declines in asset values
  5. The nature and details of the financial reporting process followed , including procedures to enter transactions and adjustments in the general ledger
49
Q

What are the four phases of understanding internal control and assessing control risk?

A
  1. Obtain and document understanding of internal control design and operation
  2. Assess control risk
  3. Design, perform, and evaluate tests of controls
  4. Decide planned detection risk and substantive tests
50
Q

A proper narrative of an accounting system and related controls describes four things:

A
  1. 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
51
Q

What are the 3 deficiencies that make up the control risk matrix

A

Control, significant, and material weakness

52
Q

What is the five step approach to identify deficiencies and weaknesses

A

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 of material weakness, 5) determine potential misstatements that result

53
Q

What are the four types of procedures for test of controls

A

1) Make inquiries of appropriate client personnel, 2) examine documents, records, and reports, 3) observe control related activities, 4) reperform client procedures

54
Q

When one or more material weakness exists, the auditor must express a BLANK opinion on the effectiveness of internal control

A

Adverse Opinion

55
Q

There are no identified material weaknesses and there have been no restrictions on the scope of the auditor’s work

A

Unqualified opinion

56
Q

This type of opinion is issued when the auditor is unable to determine if there are material weaknesses, due to a restriction on the scope of the audit of internal control or where the auditor is unable to obtain sufficient appropriate evidence

A

Qualified opinion

ACC-420 (16 decks)

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