Chapter 16 Flashcards
What is internal control?
The process designed and effected by management to provide reasonable assurance about the achievement of the entity’s objectives with regards to:
- reliability of financial reporting
- effectiveness and efficiency of operations
- compliance with applicable laws and regs
What are internal checks?
checks on day-to-day transactions. They prevent ‘bad things’ form happening like fraud
What is the purpose of internal control?
is implied by the definition given earlier, to help management achieve the entity’s objectives
what does internal control ensure?
- the orderly and efficient conduct of the business
- the safeguard of assets
- the prevention and detection of fraud and error
- the accuracy and completeness of the accounting records,
- the timely preparation of reliable financial info
What are the components of internal control?
- Control environment
- Information system
- monitoring
- risk assessment process
- control activities
What is the control environment?
the overall attitude of management regarding internal controls and their importance.
What is the risk assessment process?
an entity’s process for identifying and responding to business risk
What is the information system?
procedures to process transactions and maintain control over assets, liabilities and balances
What are control activities?
policies to ensure management directives are carried out
what is monitoring of controls?
assessment of internal control performance over time
What is authorisation?
involves a member of staff having to obtain approval from managers or other key members of staff for various transactions
What is comparison?
Involves looking into analysis and reports in order to identify management or control issues from past performance
What are computer controls?
Tend to be 2 separate types - general and application controls
Both are designed to ensure that computer systems operate as intended
What are arithmetic controls?
These check for minor errors or frauds that would not otherwise have been detected
What is maintaining a TB and control accounts?
This will often enable the organisation to easily see if errors or frauds have occurred by way of a simple review
What is accounts reconciliation?
Receivable and payables ledger reconciliations and bank reconciliations are useful tools in identifying errors and frauds and can be performed regulary
What are physical controls?
These are often overlooked but they are essential as admin or accounting procedures e.g., no point in having an efficient inventory tracking system if there is inadequate security
What is segregation of duties?
Splits any given transaction into 3 elements; authorisation, recording and maintaining custody of assets.
What are preventative controls?
Prevent frauds and errors
What are detective controls?
Detect is any problems have occurred
What are corrective controls?
Address any problems that have occurred
What are financial controls?
this involves IT being used as a check for the financial data in the organisation
What are operational controls?
This is where IT is used as a control on the day-to-day activities of the business
What 2 categories can computer controls fall into?
General controls and application controls
What are general controls?
These are policies and procedures that support the effective function of application controls by helping to ensure the continued proper operation of information systems
Give examples of general controls?
- Physical controls (door locks)
- Hardware and software configuration (updated)
- Logical access (passwords)
- Disaster recovery (ensure continuation)
- Output controls (outputs secure and complete)
- Techincal support (training)
What are application controls?
Fully automated and tend to be designed to ensure that the data input into the system is complete and accurate
What do application controls ensure?
- completeness
- authorisation
- identification
- validity
- forensic check
What does external audit focus on?
The accounts, provide the shareholders with an independent opinion on whether the financial statements are true and fair and properly prepared
What does internal audit focus on?
much broader in scope, covering any aspect of the company’s operations.
Internal audit may use similar techniques to external audit, but the objectives are different
Is external or internal audit required by law?
External
Who does external audit report to?
Shareholders
Who does internal audit report to?
Board of directors/audit committee
What does external audit report on?
Whether the financial statements are:
true and fair
properly prepared
Whether the director’s report is consistent with the financial stateemnt
What does internal audit report on?
Adequacy of internal contorls etc
What is the purpose of external audit?
Unlimited, to fulfil statutory obligations
What is the purpose of internal audit?
Prescribed by management
What are the activities involved in internal audit?
Monitoring internal control systems
Examining financial and operating information
Special investigations e.g., into suspected fraud
Reviewing compliance with laws and other external regulations
Reviewing the economy, efficiency and effectiveness of operations
Monitoring the overall risk management policy for effectiveness
Internal audit will only succeed when?
if properly staffed and resources
how can internal auditors reduce fraud?
- set the work agenda for internal reports
- receives internal audit reports
- is able to ensure the internal audit is properly resourced
- has a ‘voice’ at main board level
What is the overall objectives of the external auditor?
- obtain reasonably assurance a bout whether the financial statements as a whole are free form material misstatement, whether due to fraud or error
- express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework
Adv of external auditors?
Applications to third party for finance may be enhanced by audited accounts
Dis adv of external audit?
audit fee, audit involves the client’s staff and management giving time to providing info to the auditor
What are substantive tests?
tests of accuracy and they are used to establish facts
