Chapter 2: Internal Control

Question 1

General ledger

Answer 1

Central database that includes all the accounting info that the company works with
Periodic summaries of transactions

Question 2

Journal entries

Answer 2

Individual transactions recorded

Question 3

T-accounts

Answer 3

Visual aid which help in keeping accounting database near and tidy

Question 4

3 functions of accounting system

Answer 4

information system
security system
control system

Question 5

Internal control

Answer 5

Process operated by governing body of the company to:

1. Safeguard firms assets
2. Ensure operational effectiveness and efficiency
3. Ensure reliability of information
4. Comply with laws and regulations

Question 6

Internal control consists of five interrelated components:

Answer 6

Control environment
Risk assessment
Control activities
Information and communication
Monitoring

Question 7

Control environment

Answer 7

Central aspect of internal control, factors include:
Integrity, values, competence, management philosophy, hierarchy etc.
(Company culture)

Question 8

Risk assessment

Answer 8

Identification and analysis of risks to achievement of objectives, forming basis for determining how the risks should be managed

Question 9

Control activities

Answer 9

Procedures that help ensure management directives are enacted to reach org. goals
e.g. segregation of duties, physical controls, analytical reviews, process controls

Question 10

Information and communication

Answer 10

Important info must be collected and communicated from top management to personnel, urge employees to take control responsibilities seriously

Question 11

Monitoring

Answer 11

Internal control system is continuously monitored, so that system performance can be evaluated

Question 12

Internal auditing

Answer 12

Evaluation of effectiveness of internal control. Internal auditors responsible for ongoing effectiveness of the system in place

Question 13

External auditing

Answer 13

Performed by independent party, tasks of external auditors are:

1. Evaluate adequacy of org internal control
2. Check that accounting database picks up all company activities
3. Check financial statements correct representation of accounting database

Question 14

BIDE formula - Reconciliations

Answer 14

Beginning balance of account + Increase in account - Decrease in account = Ending balance of account
Tool to verify whether accounts are correct or not