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AA - Audit and Assurance > Chapter 8 - Systems and Controls > Flashcards

Chapter 8 - Systems and Controls Flashcards

1
Q

What is control risk?

A

the risk of internal controls not being able to prevent or detect material misstatements

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2
Q

What would occur if control risk is low?

A
  • rely on internal controls
  • perform less substantive testing
  • audit strategy is updated to reflect that fewer substantive procedures may be required
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3
Q

What would occur if control risk is high?

A
  • perform 100% substantive testing
  • focus on tests of detail rather than analytical procedures
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4
Q

What are limitations of controls?

A
  • Human error
  • Management override
  • Collusion
  • Non-routine transactions
  • Outdated systems
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5
Q

What is collusion?

A

Many of the internal controls we expect to see in a company revolve around segregation of duties, or having more than one person involved in a transaction. Work together to commit fraud

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6
Q

Each system of internal control should contain how many components?

A

5 - Control environment
Entity’s risk assessment process
Monitoring
Information system
Control activties

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7
Q

What is control environment?

A

how seriously management take internal controls

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8
Q

What is risk assessment?

A

how management identifies the risks that require controls

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9
Q

What are information systems?

A

how transactions get processed

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10
Q

What are control activities?

A

the actual controls in place to mitigate the risks

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11
Q

What are monitory of controls?

A

reviewing if the controls are effective or need changing

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12
Q

The risk assessment process will involve what steps?

A
  1. Identify relevant business risks
  2. estimate the significance of the risks
  3. assess the likelihood of occurrence
  4. Decide on actions to address the risks
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13
Q

What are internal control procedures?

A

controls put in place by the client within any system to try prevent or detect errors arising

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14
Q

What is an example of a control procedure?

A

all timesheets have to be approved by supervisors, before going to payroll

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15
Q

What are control objectives?

A

not the control themselves but what the control will be hoping to achieve. trying to ensure something good happens or something bad doesn’t happen

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16
Q

What is an example of control objectives?

A

to ensure no fake overtime gets paid

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17
Q

What are risks?

A

control objectives in reverse

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18
Q

What is an example of risks?

A

that overtime is paid for that was never worked

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19
Q

What is test of control?

A

tests performed by the auditor to see if a control is working

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20
Q

What is an example of test of control?

A

pick a sample of timesheets to see if they have been signed as approved

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21
Q

What are the 5 types of control activities set out in the auditing standards?

A
  • authorisation (preventative control)
  • reconciliations (detective control)
  • verifications
  • physical or logical controls
  • segregation of duties
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22
Q

Computer controls fall into what 2 categories?

A
  • general controls
  • information processing controls
23
Q

What are general IT controls?

A

support the continued proper operation of the IT environment, including effective functioning of the information processing controls and the integrity of information in the information system

24
Q

What are examples of general controls?

A

Password protection
Back-up procedures
Disaster recovery procedures
Virus checks
Firewalls
Staff training

25
Q

What are examples of information processing controls?

A
  • range checks
  • batch controls
  • sequence checks
26
Q

What are information processing controls?

A

relate to the processing of information in IT applications or manual processes that directly address risks to the integrity of information

27
Q

Procedures used to obtain evidence regarding the design and implementation of controls include?

A
  • enquiries of relevant personnel
  • observing the application of controls
  • Tracing a transaction through the system to understand what happens
  • inspecting documents, such as internal procedure manuals.
28
Q

How do we document client systems?

A
  • Narrative notes
  • Flow charts
  • Internal control questionnaire (ICQ)
  • Internal control evaluation (ICEQ)
29
Q

What are narrative notes?

A

tell a story about how the system works

30
Q

Give one advantage and one disadvantage of narrative notes.

A

ADV - can be completed by a junior member of the team
DIS - Important sections might be missed out

31
Q

What are flow charts?

A

a diagrammatical representation of the system

32
Q

Give one advantage and one disadvantage of flow charts.

A

ADV - show key elements only
DIS - Staff need training, hard to amend

33
Q

What are Internal control questionnaires (ICQ)?

A

a list of common controls and the client is asked whether they have them in place. Closed questions e.g., Does.

34
Q

Give one advantage and one disadvantage of ICQs.

A

ADV - Can assess strength of system, junior staff can complete it quickly
DIS - Client knows expected answer

35
Q

What are internal control evaluations (ICEQ)?

A

a list of risks and the client is asked to explain the controls they have in place to mitigate them. Open questions, e.g, How.

36
Q

Give one advantage and one disadvantage of ICEQs.

A

ADV - can appraise unusual systems
DIS - need more senior staff to complete

37
Q

Test of controls are performed when?

A

only on those controls that the auditor has determined are suitably designed to prevent, or detect and correct a material misstatement in a relevant assertion

38
Q

Controls will only be worth testing when?

A

if they are designed appropriately in the first place and implemented

39
Q

A test of control involves what?

A

the auditor obtaining evidence that the client has implemented the controls and that they have worked effectively, during the period.

40
Q

Typical methods of controls testing include?

A
  • observation of control activities
  • inspection of documents recording performance of the control
  • using test data
41
Q

When are deficiencies significant?

A

if they are likely to lead to material misstatement, result in fraud, relate to a subjective balance or relate to areas where there is a high volume of activity

42
Q

If the auditor find deficiencies in the internal controls, they must communicate them to who?

A

mangement

43
Q

If the auditor find significant deficiencies in the internal controls, they must communicate them to who?

A

those charged with governance (usually the audit committee)

44
Q

How are deficiencies communicated?

A

in a report to management or management letter. This is presented in a table format as an appendix to the covering letter

45
Q

What will the covering letter explain?

A

what is being communicated and sets out the limitations of the report

46
Q

What will the report to management look like?

A
  • Deficiencies
  • Implications
  • Recommendations
  • Management response
47
Q

When answering an exam question on control deficiencies what information should we look out for?

A

Look for information which indicates:
- controls are missing, e.g., sales orders are not sequentially numbered
- controls are not effective, e.g., bank recs are supposed to be performed but often dont

48
Q

How would we tailor our answer when giving recommendations?

A

Try and recommend which person in the company should perform the control and how frequently. Suggest everything that needs to happen to make the control effective

49
Q

What are direct controls?

A

control procedures which are properly designed, in place and working effectively at addressing the risk of material misstatement at the assertion level

50
Q

How would we tackle a question relating to direct controls?

A

Read the scenario and looks for controls being mentioned, such as reconciliations being performed, authorisation of transactions, segregation of duties, restricted access to valuable items etc

51
Q

What is a control?

A

an activity performed that is in addition to the normal processing of the system, to ensure that the system operates as it should

52
Q

What is a test of control?

A

an audit procedure which will provide evidence as to whether the control procedure is in place and working effectively

53
Q

What is the sales system sequence?

A
  1. order received
  2. goods despatched
  3. invoice sent
  4. sale recorded
  5. cash received
54
Q

What is the purchase system sequence?

A
  1. Order placed
  2. Goods received
  3. Invoice received
  4. Purchase recorded
  5. Payment

AA - Audit and Assurance (12 decks)

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