Chapter 16

Question 1

What is internal control?

Answer 1

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

Question 2

What are internal checks?

Answer 2

checks on day-to-day transactions. They prevent ‘bad things’ form happening like fraud

Question 3

What is the purpose of internal control?

Answer 3

is implied by the definition given earlier, to help management achieve the entity’s objectives

Question 4

what does internal control ensure?

Answer 4

• 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

Question 5

What are the components of internal control?

Answer 5

• Control environment
• Information system
• monitoring
• risk assessment process
• control activities

Question 6

What is the control environment?

Answer 6

the overall attitude of management regarding internal controls and their importance.

Question 7

What is the risk assessment process?

Answer 7

an entity’s process for identifying and responding to business risk

Question 8

What is the information system?

Answer 8

procedures to process transactions and maintain control over assets, liabilities and balances

Question 9

What are control activities?

Answer 9

policies to ensure management directives are carried out

Question 10

what is monitoring of controls?

Answer 10

assessment of internal control performance over time

Question 11

What is authorisation?

Answer 11

involves a member of staff having to obtain approval from managers or other key members of staff for various transactions

Question 12

What is comparison?

Answer 12

Involves looking into analysis and reports in order to identify management or control issues from past performance

Question 13

What are computer controls?

Answer 13

Tend to be 2 separate types - general and application controls
Both are designed to ensure that computer systems operate as intended

Question 14

What are arithmetic controls?

Answer 14

These check for minor errors or frauds that would not otherwise have been detected

Question 15

What is maintaining a TB and control accounts?

Answer 15

This will often enable the organisation to easily see if errors or frauds have occurred by way of a simple review

Question 16

What is accounts reconciliation?

Answer 16

Receivable and payables ledger reconciliations and bank reconciliations are useful tools in identifying errors and frauds and can be performed regulary

Question 17

What are physical controls?

Answer 17

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

Question 18

What is segregation of duties?

Answer 18

Splits any given transaction into 3 elements; authorisation, recording and maintaining custody of assets.

Question 19

What are preventative controls?

Answer 19

Prevent frauds and errors

Question 20

What are detective controls?

Answer 20

Detect is any problems have occurred

Question 21

What are corrective controls?

Answer 21

Address any problems that have occurred

Question 22

What are financial controls?

Answer 22

this involves IT being used as a check for the financial data in the organisation

Question 23

What are operational controls?

Answer 23

This is where IT is used as a control on the day-to-day activities of the business

Question 24

What 2 categories can computer controls fall into?

Answer 24

General controls and application controls

Question 25

What are general controls?

Answer 25

These are policies and procedures that support the effective function of application controls by helping to ensure the continued proper operation of information systems

Question 26

Give examples of general controls?

Answer 26

- 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)

Question 27

What are application controls?

Answer 27

Fully automated and tend to be designed to ensure that the data input into the system is complete and accurate

Question 28

What do application controls ensure?

Answer 28

- completeness - authorisation - identification - validity - forensic check

Question 29

What does external audit focus on?

Answer 29

The accounts, provide the shareholders with an independent opinion on whether the financial statements are true and fair and properly prepared

Question 30

What does internal audit focus on?

Answer 30

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

Question 31

Is external or internal audit required by law?

Answer 31

External

Question 32

Who does external audit report to?

Answer 32

Shareholders

Question 33

Who does internal audit report to?

Answer 33

Board of directors/audit committee

Question 34

What does external audit report on?

Answer 34

Whether the financial statements are: true and fair properly prepared Whether the director's report is consistent with the financial stateemnt

Question 35

What does internal audit report on?

Answer 35

Adequacy of internal contorls etc

Question 36

What is the purpose of external audit?

Answer 36

Unlimited, to fulfil statutory obligations

Question 37

What is the purpose of internal audit?

Answer 37

Prescribed by management

Question 38

What are the activities involved in internal audit?

Answer 38

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

Question 39

Internal audit will only succeed when?

Answer 39

if properly staffed and resources

Question 40

how can internal auditors reduce fraud?

Answer 40

- 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

Question 41

What is the overall objectives of the external auditor?

Answer 41

- 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

Question 42

Adv of external auditors?

Answer 42

Applications to third party for finance may be enhanced by audited accounts

Question 43

Dis adv of external audit?

Answer 43

audit fee, audit involves the client's staff and management giving time to providing info to the auditor

Question 44

What are substantive tests?

Answer 44

tests of accuracy and they are used to establish facts