Chapter 5 - internal controls

Question 1

What 4 step method can be used to reduce risk?

• Using brushing teeth as an exapmple

Answer 1

1. Control objective → have clean teeth
2. Risk → Teeth may not be clean
3. Control → brush teeth / visit dentist
4. Test → observation / checking of dental records

Question 2

Give some internal controls can be used?

Answer 2

• Observations
• Comparisons
• Discoungt for early payment → reduce risk of bad debt
• Quality checks
• Authorisation

Question 3

What are the limitations of internal controls?

Answer 3

• Human error
• Unusual transactions
• Collusion → staff getting together and choosing not to follow controls
• Individuals doing multiple jobs (limited no. of staff)
• Lack of documentation

Question 4

What are the 5 components of an internal audit?

Answer 4

1. Control environment
2. Risk assessment process
3. Infomation system
4. Control activities
5. Monitoring

Question 5

1. What is a control environement?
2. What factors indicatte a strong control environment?

Answer 5

1. Managment / directors efforts concering internal control
   2.

Question 6

1. What is an audit committee?
2. Who has to have an audit committee by law?
3. Who is an audit committee made up of?
4. What do they oversee?

Answer 6

1. A board of directors with a particular interest in the accounting and fianance activities of the company
2. All listed companies
3. Non-executive directors → on flat pay with no bonus related to profit
4. Financial statements, internak & external audit

Question 7

1. What is the risk assessment process?
2. What steps are involved?

Answer 7

1. Management idenifying risks relative to objectives and decides on internal controls to reduce them.
   2.

Question 8

1. What is an information system?
2. What are auditors interested in when reviewing information systems?

Answer 8

1. The process of recording report entity transactions to maintain accountability for related assets, liability and equity.
   2.

Question 9

1. What is a control activity?
2. What are the 6 types of control activities?

Answer 9

1. Manual or compterised procedures that help an organisation to ochieve its objectives and limit risk.
2. Authorisation

• Performance reviews → comparisons
• Information processing → check accuracy _{(e.g bank refconcilation, sequence checks)}
• Physical controls → retrictions on access to data _{(passwords / locks)}
• Segregation of duties
• Computer contols → general & application

Question 10

1. What are general computer controls
2. Give some examples

Answer 10

1. Controls that support the effective functions of applications
   2.

Question 11

1. What are application computer controls?
2. Give examples of…

• Completeness controls
• Accuracy controls
• Authorisation controls
• Standing data controls

Answer 11

1. Manual or automated procedures to ensure completeness and accuracy

Question 12

1. What are monitoring controls?
2. Wher is responsible for them?

Answer 12

1. The overal monitoring of all internal controls
2. Directors decide whether internal controls are still adequate after change.

• Internal auit → may recommend new systems if there is weakness
• External audit → may highlught weaknesses

Question 13

What happens after the review of the internal controls?

Answer 13

• Documentation of control system _{(methods in picture)}
• The auditor performs a walkthrough test to confirm understanding of system
• If controls are stong testing will start