Chapter 5 Internal Controls (Task 2)

Question 1

5 main reasons for internal controls

Answer 1

Facilitate operations - ensure the smooth running of the business

Safeguard Assets - Safeguard both physical and intangible assets

Prevent and detect fraud - prevent and detect

Ensure quality of reporting - ensure accuracy of information for both internal and external reports

Compliance - relevant laws and regulations

Question 2

Control environment

Answer 2

formed by attitudes, awareness and actions of managers

Good control environment might have:
Management integrity
Communication of management
Communication of ethical behavior
HR policies - staff handbook

Question 3

Risk environment

Answer 3

internal control systems responds to risks identified, consider objectives of the organisation? what are the risks? what controls are in place? Sufficient? Recommendation to improve control?

Question 4

Types of control activities

Answer 4

Performance review, information processing, physical controls, seg of duties, monitoring controls

Question 5

What are the limitations of internal controls?

Answer 5

Even the best control system can only provide “reasonable assurance” that the financial statements can be relied upon.

People are relied on to implement the controls.
The controls will only work properly if people are conscientious about their operation.
Human error will have an impact on the effectiveness of internal controls.
Also, internal controls cannot account for “collusion”.
This is where two or more people work together to defraud the company by getting around the controls.

Question 6

Control Objective

Control Risk

Control Procedure

Answer 6

Control Objective
What is the aim of the control?
What is it trying to ensure or prevent from happening?

Control Risk
What is the condition that exposes the company to danger?
What could go wrong?

Control Procedure
What do we need to do the reduce the risk that the control objective is not met?
What procedures can we put in place to protect the business?