Chapter 7

Question 1

What are Internal Controls

Answer 1

Internal control are the related methods and measures adopted within a company to help it achieve reliable financial reporting, effective and efficient operations and compliance with relevant laws and regulations
used to prevent and detect errors, prevent misstatements, theft etc.

Question 2

What are the primary components of a good internal control system

Answer 2

Control environment: The values of the organization, which are set and enforced at the top
Risk assessment: A company must review their operations and identify where risk exists
Control activities: Create policies and procedures to minimize the identified risks
Information and communication: Capture and communicate the information to the end user
Monitoring: The internal control system must be reviewed and monitored to ensure applicability

Question 3

What control activities that apply to most companies?

Answer 3

Authorization of transactions and activities - When only one person is authorized to perform a specific task
Segregation of duties - Separating processes to ensure that one person is not responsible for everything
Documentation- documents provide evidence that transactions and events occurred
Physical controls - Passwords on computers, locks on doors, alarms, time clocks etc.
Independent checks of performance - Internal or external auditors
Human resource controls - Conducting background checks, bonding of employees who handle cash, rotating employees duties

Question 4

What is the concept of reasonable assurance based on?

Answer 4

The concept of reasonable assurance is based on the belief that the costs of establishing control activities should not be more than their expected benefit

Question 5

What are the limitations to reasonable assurance?

Answer 5

The cost of the system versus the potential benefit
The human element or collusion
The size of business

Question 6

What is cash?

Answer 6

Coins
Currency
Cheques
Money orders

If the bank will accept it for deposit, it is considered cash

Question 7

What are the two causes for bank statements and accounting statements to not be the same?

Answer 7

Time lags that prevent one of the parties from recording the transaction in the same period as the other party
Errors by either party in recording transactions