Chapter 8: Internal Control and its Role in F/S Audits Flashcards

1
Q

What is the role of internal control?

A

minimize risk of material misstatement and helping to plan audit tests

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the relationship between internal control and control risk?

A

when internal control is strong, control risk is low

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Evidence collecting strategies

A

Reliance and Substantive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How is the choice between what evidence collecting strategy to use made?

A

Depends on the strength of IC and cost of strategy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What strategy is used when controls are weak?

A

Substantive Strategy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Reliance Strategy

A

auditor places some reliance on ICs to help ensure the assertions are accurate (CR < 100%)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

When is a reliance strategy acceptable?

A

when ICs are deemed to be adequate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Substantive Strategy

A

auditor decides not to place any reliance on ICs to help ensure assertion is correct (CR = 100%)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Reasons for employing a substantive strategy

A

1) CR is high, 2) Cheaper

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

COSO

A

primary framework used in US to understand and evaluate IC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Internal Control (COSO definition)

A

process effected by personnel that is designed to provide reasonable assurance regarding achievement of objectives

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Objectives of Internal Controls

A

1) reliability of financial reporting, 2) Compliance with laws and regulations, 3) Effectiveness and Efficiency of operations, 4) Safeguarding of Assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Internal Controls (Simple Definition)

A

processes, policies, devices, and organizational structures implemented by organization to mitigate threats

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the primary purpose of financial reporting process?

A

to accurately identify, record, classify, aggregate and report transaction information and supporting information in compliance with GAAP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Four components of financial reporting system

A

1) Source documents, 2) Journals, 3) General and Subsidiary Ledgers, 4) Financial Statements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Source Documents

A

documents generated when transaction takes place, byproduct of transaction that provide information about transaction

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Journals

A

where transactions are recorded and summarized

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

General Journals

A

used to record any transaction

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Specialized Journals

A

used for specific types of transactions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Ledgers

A

used to aggregate transaction information that was recorded in journals, made up of accounts which have balances at specific points in time

21
Q

General Ledger

A

summary of net activity for all accounts contained in chart of accounts at a particular point in time

22
Q

Subsidiary Ledger

A

contain more detailed information about specific accounts

23
Q

Trial Balance

A

list of general ledger accounts and their balances at specific point in time

24
Q

Financial statements

A

report the line items that summarize a company’s account balances

25
Q

Limitations for accounting ICs

A

1) Management Override, 2) Collusion, 3) Human misunderstanding/Error

26
Q

Management override

A

person who has ability to fire an employee can often coerce employee to by-pass controls

27
Q

Collusion

A

refers to two or more getting together to beat the system

28
Q

Human misunderstanding/Error

A

humans may misunderstand or goof up their IC assignment which can cause a control failure

29
Q

Segregation of Duties

A

no single individual is in a position where they can both perpetrate and cover-up fraudulent activity

30
Q

Segregation of Duties at the Macro-Level of the Organization

A

Segregation of the accounting function from the operating function

31
Q

Operating Function

A

enter into and complete transactions, have access to assets

32
Q

Accounting function

A

ability to manipulate accounting records

33
Q

Segregation of Duties at the Micro-Level of the Organization

A

At least three employees involved in processing a transaction: authorization, execution, and accounting

34
Q

Requirements for Adequate Documentation of Transactions

A

1) Transaction Trail should be left and be easy to follow, 2) Using pre-numbered documents, 3) Document transaction events in a timely fashion

35
Q

Physical Controls to Safeguard Assets

A

controls that impede the ability for someone to steal assets

36
Q

Reconciliations

A

check for agreement between two or more different information sources that provide information about the same event or account

37
Q

Types of Internal Controls

A

1) Company level controls, 2) System level controls, 3) Period-end controls

38
Q

Company level controls

A

create control climate/attitude for organization (ex. corporate governance structure)

39
Q

System Process Level Controls

A

day-to-day controls that ensure transactions occur correctly

40
Q

Period-end controls

A

refers to controls over period-end adjustment and closing process

41
Q

Forms of IT controls

A

general and application

42
Q

General controls

A

controls that affect all IT applications

43
Q

Application controls

A

controls that only impact specific IT application

44
Q

Echo Check

A

components of system send messages to each other to verify transmission of data between components

45
Q

Validity/Existence Check

A

computer compares input customer account number to internally stored list of valid account numbers to ensure account number correctly input

46
Q

Control Total

A

comparison of computer processed totals to manually computed totals of all daily sales to ensure all of the day’s sales were accurately input and processed

47
Q

Limit (reasonableness) Check

A

test to ensure that numeric value of data input does not exceed certain prescribed value

48
Q

Parity check

A

computer adds a bit to each byte to make byte either positive or negative, done so computer can continuously verify internal accuracy of data transmission/processing

49
Q

Check Digit Verfication

A

numerically-computed number added to five-digit part number to ensure accuracy of part number input