Chapter 8 - Internal Controls

Question 1

Objectives of Internal Controls

Answer 1

Minimize Material Misstatements caused by human errors, fraud, irregularities

Safeguard assets for purpose of the company (Theft)

Ensure compliance with rules and regulations of GAAP

Ensure that the transactions are captured on a timely basis

Question 2

Assertions established with Financial Statements

Answer 2

“Every CPA Can Right Very Properly”

Existence

Completeness

Cutoff

Rights and Obligations

Valuation

Presentation and Disclosure

Question 3

How does the financial statement asserts come back to the objectives of an auditor?

Answer 3

The lack/weaknesses of these assertions establish the auditors objectives

Question 4

What direction would “existence” misstatement be in ?

Answer 4

The account balance would be overstated. These transactions do not have an originating point. “ASSET ACCT”

Question 5

What direction would “completeness” misstatement be in ?

Answer 5

The account balance would be understated. “LIABILITY ACCT”

Question 6

What are the steps of an audit responsibilities for an external auditor

Answer 6

1. Plan the audit
2. Obtain an understanding of the client and its environment, including internal control
3. Assess the risks of material misstatement and design further audit procedures
4. Perform further audit procedures
5. Complete the audit
6. Form an opinion and issue the audit report

Question 7

Five internal control components

Answer 7

• Control environment - Tone at the Top
• Accounting information system/ Communications
• Risk assessment
• Control activities
• Monitoring

Question 8

Documenting the Understanding of Internal Control

Answer 8

•Questionnaires
    Typically standardized by firm
•Written Narratives
    Memos that describe flow of transactions
•Flowcharts
    Systems flowcharts
•Walk-through
     Trace one or two transaction through cycle

Question 9

Do you need to understand internal controls for non public companies?

Answer 9

Yes, in order to understand the nature timing and content

Question 10

COSO framework is used to…

Answer 10

help companies establish effective internal controls.

Sponsored by: AICPA , PCAOB, Institute of Internal Auditors

Question 11

Control Procedures Include

Answer 11

“satisfy the key elements of control”

Authorization 
Validity -> makes sure # ares correct
Segregation of Duties
Accuracy
Timeliness
Completeness
Cut Off - No incorrect period transactions

Question 12

Risk Assessment is defined as:

Answer 12

are all COSO objectives satisfied by internal control activities?

Question 13

Accounting Risk equals

Answer 13

Inherent Risk X Control Risk X Detection Risk

Question 14

Calculate Detection Risk by:

Answer 14

Audit Risk / IR * CR

Question 15

To apply control activities you have to have a general and specific purpose. Examples of those are…

Answer 15

Segregation of Duties
Who Should access the system

Specific objective:
Validation of Inputs

Question 16

External Auditors’ responsibilities regarding internal control structure of the company?

Answer 16

a. Auditors are required to obtain an understanding of the environment & internal structure
b. Test controls for effectiveness

Question 17

Why do Auditors need to understand the tone and internal structure of a company?

Answer 17

Identify potential misstatements
Consider Factors that affect risk of material misstatements
Design test of controls and substantive procedures

Question 18

Auditors responsibility for control deficiencies of internal control.

Answer 18

Provide a notice to both management and the audit committee and provide a notice for corrective action. They are required communication for both a significant deficiency or material weakness. Communication must be in writting

Question 19

Define: Deficiency in internal controls

Answer 19

design of operation of a control does not allow management or employees to detect material misstatement or weakness in a timely basis.

Question 20

Define: Material weakness in internal controls

Answer 20

Material weaknesses will not be prevented or detected on a timely basis.

Question 21

How to prevent theft from accounts payable operator

Answer 21

Segregation of duties between assets and record keeping

Independent Validation of Paperwork for review

Approved Vendors and Manager approval

Limit on check balances for vendors

Question 22

How to detect online theft or fraud from employees

Answer 22

Controls that detect transfers to employee’s accounts from business accounts

Separation of client’s accounts and employees accounts

Question 23

How to prevent a computer from being hacked?

Answer 23

The passwords need to be established properly

Question 24

How to prevent untimely transactions to affect real time transactions

Answer 24

compare the actual time to the real time of recorded transaction

Question 25

What is the task asking for when writing down the objection and deviation of internal controls

Answer 25

The objective is the purpose that the internal control is performing and what they are doing to confirm the objective. The deviation would be the lack of the performing objective.