Internal Control 1 Flashcards
What happens if Internal Controls are deficient?
Control Risk increasesScope of substantive procedures increasesDetection Risk decreasesMaterial Weakness - Reasonable possibility that a material misstatement in Financial Statements would not be found- more than a remote chance of occurrence
What is a Material Weakness?
Reasonable possibility exists that a material misstatement in Financial Statements would not be found- and has more than a remote chance of occurrence.
What does Tracing test?
Tests CompletenessStarts with source document and traces forward to the journal entry.
What does Vouching test?
Tests Existence.Starts with a journal entry and searches for a voucher or source document to support the entry.
What activities represent Segregation of Duties?
Non-compatible duties performed by separate individuals- such as
Authorization of asset disbursement vs. Recording of Assets vs. Custody of assets
If supporting audit evidence doesn’t exit - use Observation and Inquiry Accounting should be segregated from Production
With respect to signing checks - how are duties segregated?
Employees who prepare vouchers/invoices should not also have the authority to SIGN CHECKSTip - Remember this as an underlying theme with Segregation of Duties. The authority to make a payment should not also lie in the hands of those creating invoices/vouchers. Why? People commit fraud by setting up fake companies and basically paying themselves
With respect to custody of assets - how should duties be segregated?
Employees who have custody of assets should not also RECORD those assets
Someone in charge of petty cash should not also control the petty cash records
Treasury Department (custodians) should NOT have record keeping duties
They control assets and should not be able to adjust any recording of those assets
What are the limitations on Control Activities?
Controls can’t stop collusion or bad judgment
Management can override controls
Cost vs. Benefit relationship of Internal Control
What is required if a Material Weakness is identified?
A written report to management is required.
Report declaring that no material weaknesses were found is allowed
Previous weaknesses reported that still exist should be reported again
Should be reported no later than 60 days after audit report release date
If one or more material weaknesses is uncorrected at year-end- an Adverse Opinion on Internal Control must be given
What is the effect of a Significant Deficiency? What is it?
A significant deficiency adversely affects a company’s ability to report in the financial statements according to GAAP.
A significant deficiency is a more than a remote likelihood of material misstatement by more than an inconsequential amount
What must occur if a Significant Deficiency is identified?
If a Significant Deficiency is identified- a written report to management required
Report declaring that no significant deficiencies exist is not allowed
Previous deficiencies reported that still exist should be reported again
Should be reported no later than 60 days after the audit report release date
What is a Control Deficiency?
A control is not operating as intended.
What must an auditor ask if using the work of third parties?
Are they competent?Are they objective?
What must an auditor understand with respect to internal auditors?
Auditor needs to understand the role of Internal Auditors within the organization because their work affects the audit plan
Responsibility for judgments about materiality or appropriateness of entries or estimates cannot be shared with third parties like Internal Auditors
Internal Auditors should be asked to do some of the legwork like preparing schedules or running reports
They should not be asked to make any decisions or judgments
What are the three objectives of Internal Control?
Reliability of Financial Reporting
Operational Efficiency/Effectiveness
Compliance with Law and Regulations
