Chapter 6

Question 1

It is the control exercised within the business by management and overseen by the board. It also includes the control of activities that have been outsourced.

Answer 1

Internal Control

Question 2

The control exercised over the business from outside - by owners and other stakeholders.

Answer 2

External Control

Question 3

*Father of management theory
*first to describe “control” as a function of management along with other functions which he set (planning, organizing, commanding, coordinating, controlling)

Answer 3

Fayol

Question 4

It comprises the plan of organization and the co-ordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies.

Answer 4

Internal control

Question 5

It comprises the plan of the organization and the procedures and records that are concerned with the safeguard of assets and the reliability of financial records.

Answer 5

Accounting control

Question 6

It includes, but it not limited to, the plan of organization and the procedures and records that are concerned with the decision processes leading to management’s authorization of transactions.

Answer 6

Administrative control

Question 7

(COSO) It is broadly defined as process, effected by the entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
* Effectiveness and efficiency of operations
* Reliability of financial reporting
* Compliance with applicable laws and regulations

Answer 7

Internal Control

Question 8

3 Frameworks of Internal Control

Answer 8

COSO (US)
CoCo (Canada), and
Turnbull (UK)

Question 9

Six (6) Internal Control Paradigms

Answer 9

1. COSO on Internal Control
2. Turnbull on Internal Control
3. CoCo on Internal Control
4. A systems/cybernetics model of Internal Control
5. Control by Division with Supervision
6. Control by Category

Question 10

Control depends on each of the other functions of management. There is no control without: (5)

Answer 10

*Planning
*Organizing
*Directing and leading
*Staffing
*Co-ordinating

Question 11

Three parties responsible for internal control:

Answer 11

1. Board of Directors
2. Management
3. Other personnel

Question 12

Overall Objective of Internal Control (COSO)

Answer 12

To provide reasonable assurance that the organization will achieve all of its objectives.

Question 13

Five essential components of internal control (COSO)

Answer 13

1. Control environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring

Question 14

It is to do with the “tone at the top” in terms of example set by top management and the board, whether they tend to override controls in their own interests and whether they act consistently and appropriately to wrongdoing.

Answer 14

Control environment

Question 15

It includes the values, ethics, culture, and commitment of the organization and its members.
It embraces the policies of the board which relate to internal control (Code of business conduct, whistleblowing policy, internet security policy)

Answer 15

Control Environment

Question 16

It can be regarded as the foundation component of the five essential internal control components.

Answer 16

Control Environment

Question 17

Six (6) Elements of Control Environment (PCAOB)

Answer 17

*Integrity and ethical values
*Management’s philosophy and operating style
*Organizational structure
*Assignment of authority and responsibility
*Human resource policies and practices
*Competence of personnel

Question 18

The identification of risk within a business should be an ongoing process sensitive to the implications of changed market conditions, operational workloads, macroeconomic parameters, and so on.

Answer 18

T

Question 19

Identification of threats to the organization, their assessment or measurement and deciding how they should be responded to.

Answer 19

Risk Assessment

Question 20

It refers to all procedures the organization operates which have a control purpose (locking doors, undertaking reconciliations and so on)

Answer 20

Control Activities

Question 21

Two dimensions of control activities

Answer 21

1. Establishment of a POLICY– defines what has to be done to achieve the related business objective.
2. A PROCEDURE is required which defines the processes necessary to meet the policy requirements

Question 22

It may be defined in the form of procedures, user manuals, job description, etc.

Answer 22

Control Activities

Question 23

It can cater for flows in various directions, i.e. up the hierarchy, across functions or down through all layers of management and responsibility.

Answer 23

Internal communications

Question 24

___ requirements will cater for both inward and outward flows.

Answer 24

External Communication

Question 25

Who should undertake the responsibility for monitoring the internal control system?

Answer 25

Board

Question 26

(Turnbull) The board should maintain a sound system of internal control to safeguard shareholders' investments and the company's assets.

Answer 26

Main Principle of Internal Control

Question 27

Turnbull combines "control environment and control activities"

Answer 27

Difference to COSO

Question 28

It is less "mechanical" and more "behaviroal" than the COSO internal control framework and, arguably, has advantages in application within organizations that are more participative and less hierarchical, as well as being a valuable control framework to use in control self assessment situations.

Answer 28

Canadian Institure of Chartered Accountants' Criteria of Control Board (CoCo)

Question 29

As defined in CoCo, it comprises those elements of an organization (including its resources, systems, processes, culture, structure and tasks) that, taken together, support people in the achievement of the organization’s objectives.

Answer 29

Internal Control

Question 30

Objectives of internal Control (CoCo)

Answer 30

1. Effectiveness and efficiency of operations 2. Reliability of internal and external reporting 3. compliance with applicable laws and regulations and internal policies

Question 31

CoCo control framework components (4)

Answer 31

Purpose Commitment Capability Monitoring & Learning

Question 32

In any organization of people, the essence of control is purpose, commitment, capability, and monitoring and learning.

Answer 32

CoCo on Internal Control

Question 33

It groups the criteria that provide a sense of the organization's direction (what to do).

Answer 33

Purpose

Question 34

It groups the criteria that provide a sense of the organization's identity and values (wanting to do it)

Answer 34

Commitment

Question 35

It groups the criteria that provide a sense of the organization's competence (tools to do it)

Answer 35

Capability

Question 36

It groups the criteria that provide a sense of the organization's evolution (Are we doing it?)

Answer 36

Monitoring and learning

Question 37

Two of the criteria within the "Capability" grouping

Answer 37

Information Communication

Question 38

This paradigm veiws the organizational process as analogous too, for instance, an air conditioning system.

Answer 38

Paradigm 4: A systems/cybernetics model of internal control

Question 39

Three main elements of a system

Answer 39

Input process output

Question 40

Basic Elements of a Control System

Answer 40

Control Object Detector Reference point Comparator (analyser) Activator Feedback Feedforward

Question 41

This model of internal control is based on the premise that effective control may be achieved by means of an appropriate combination of various opportunities to "divide" (separate off or segregate), together with supervision.

Answer 41

Paradigm 5: Control by Division with supervision

Question 42

Different Divisions opportunities that can be utilized

Answer 42

▪Division of Duties ▪Division of Fundamentally Incompatible Responsibilities ▪Division of Operations ▪Division of Staff ▪Division of Data ▪Division of Data Entry and Accounts Postings ▪Division of Authority ▪Division of Time

Question 43

A particular type of control may be appropriate in certain circumstance, and indeed more than one of type of control may be needed to bear down effectively on a particular risk.

Answer 43

Paradigm 6: Control by Category

Question 44

Different categories of Control

Answer 44

1. Preventive 2. Pre-emptive 3. Directive 4. Performance 5. Detective 6. Corrective 7. Investigative

Question 45

Objectives of Internal Control Processes (4)

Answer 45

To provide reasonable assurance of: a. the reliability and integrity of financial and operational information b. The effectiveness and efficiency of operations c. the safeguarding of assets d. compliance with laws, regulations, policies, and contracts