Chapter 3 Section 8: Internal Control Flashcards
What are the three categories of an entity’s objectives?
Reliability of financial reporting
Effectiveness and efficiency of operations
Compliance with laws and regulations
What are the five components of internal control?
CRIME
Control environment Risk assessment Information and communication systems Monitoring Existing control activities
Define control environment
Overall tone of the organization
Define risk assessment
Management’s identification of risk
Define information and communication systems
Means of recording transactions and communicating responsibilities. They support the identification, capture, and exchange of information in a timely and useful manner
Define monitoring
Assessment of internal control performance over time
Define existing control activities
Control policies and procedures
What is the CPA required to understand regarding CRIME?
Each component as it relates to the financials
What does the control environment do?
Sets the tone of the organization, provides discipline and structure
What factors contribute to the control environment?
Communication and enforcement of integrity and ethical values of the people
Commitment to competence
Participation of those charged with governance
Management’s philosophy and operating style
Organizational structure
Assignment of authority, responsibility, and accountability
Human resources policies and practices
What should the auditor understand regarding the accounting information system?
Accounting processing, accounting records, and financial reporting process
What are the control activities in a strong system of internal control?
PAID TIPS
Prenumbering documents
Authorization of transactions
Independent checks to maintain asset accountability
Documentation
Timely and appropriate performance reviews
Information processing controls
Physical controls for safeguarding assets
Segregation of duties
What functions should not be combined according to segregation of duties
ARC
Authorization
Record keeping
Custody of related assets
Should the internal control environment prevent collusion or management override?
No
What are preventive controls?
Designed to provide reasonable assurance that only valid transactions are recognized, approved, and submitted for processing
What are detective controls?
Designed to provide reasonable assurance that errors or irregularities are discovered and corrected on a timely basis
What can be included in documentation of understanding of internal control?
FIND
Flowchart
Internal control questionnaire or checklist
Narrative
Documentation from client
What’s the symbol for a decision in a flowchart?
Diamond
What is a narrative?
Written version of a flowchart
What are automated controls suitable for?
High volume or recurring transactions
What are general controls?
Policies and procedures that relate to many applications and support the effective functioning and proper operation of the information system
What are application controls?
Apply to the processing of individual transactions and help to ensure that transactions occurred, are authorized, and are completely and accurately processed and recorded
What are the inherent limitations of internal controls?
Management override of internal control
Human error
Deliberate circumvention of controls by collusion
