Chapter 6 Internal Control in a Financial Statement Audit

Question 1

Components of Internal Control

-Control environment-

Answer 1

The control environment is the the set of standards, processes, and structures that provide the basis for carrying out internal control across the organization. The board of directors and senior management establish the tone at the top regarding the importance of internal control and expected standards of conduct.

Question 2

Components of Internal Control

-The entity’s risk assessment process-

Answer 2

Risk assessment involves a dynamic and iterative process for identifying and analyzing risks to achieving the entity’s objectives, thereby forming a basis for determining how risks should be managed. Management considers possible changes in the external environment and within its own business model that may impede its ability to achieve its objectives

Question 3

Components of Internal Control

-Information and communication-

Answer 3

Information is necessary for the entity to carry out internal control responsibilities in support of achievement of its objectives. Communication occurs both internally and externally and provides the organization with the information needed to carry out day-to-day internal control activities. Communication enables personnel to understand internal control responsibilities and their importance to the achievement of objectives

Question 4

Components of Internal Control

-Control activities-

Answer 4

Control activities are the actions established by policies and procedures to help ensure that management directives to mitigate risks to the achievement of objectives are carried out. Control activities are performed at all levels of the entity and at various stages within business processes

Question 5

Components of Internal Control

-Monitoring of controls-

Answer 5

Ongoing evaluations, separate evaluations, or some combination of the two are used to ascertain whether each of the five components of internal control, including controls to effect the principles within each component, are present and functioning. Findings are evaluated and deficiencies are communicated in a timely manner, with serious matters reported to senior management and to the board