Internal Control 2 Flashcards
If Internal Control is poor and a company’s accounting practices are sloppy - which risk is higher?
Control risk increases with poor Internal Controls and sloppy accounting practices.
If Internal Control is poor - what is the effect on the audit?
Auditor will need to perform more testing and dig deeper into accounts in order to arrive at an opinion regarding the financial statements.
What does Internal Control provide reasonable assurance for?
Internal control provides reasonable assurance that
Material misstatements will be prevented
Reliability/integrity of financial statements will be preserved
Assets are protected against misuse
What is required in an examination of Internal Control under Sarbanes-Oxley?
CEO/CFO must disclose Internal Control deficiencies
Management must provide assessment of Internal Control
Management must certify Financial Statements
What is the relationship between Internal Control and Substantive Testing?
Inverse Relationship
Stronger Internal Controls - Less Testing Needed
Weaker Internal Controls - More Testing Needed
What is the purpose for a Control Environment assessment?
Sets tone for the entire company
What does an auditor’s assessment of Detection Risk determine?
Detection Risk determines nature- timing- and extent of audit procedures.
What determines the acceptable level of Detection Risk?
Risk of material misstatement determines acceptable level of Detection Risk
What items could increase the risk of material misstatement?
Rapid growth in the company.
The methods management uses to identify risk- estimate its significance and assess the likelihood of occurrence
Major changes to operations- personnel- systems- IT- products- corporate organization- and foreign operations.
What happens when Control Risk is assessed to be at the maximum level?
No Internal Control testing is performed.
All audit procedures are increased in intensity to compensate for increased risk.
Describe some common examples of Control Activities.
Performance Reviews
Information Processing
Physical Controls
Segregation of Duties
What questions should be asked to determine the risk of material misstatement?
Were all transactions recorded? Were they timely? Measured appropriately? Recorded in correct period? Presented and disclosed properly? Did Management communicate their responsibilities?
What is the purpose of testing Internal Controls?
Auditor needs reasonable assurance that controls are functioning as designed and effective
Internal Control Testing should be strong as (IRON) so that nothing gets past them
Inquiry - Interview company personnel
Re-performance - Can it be replicated?Observation - Watch the control be applied
INspection - Dig into the details/documentsIf results are as expected- substantive procedures do not need to be adjusted
When can controls tested by an auditor in a prior year be used in the current year’s audit assessment?
Controls tested by auditor in a prior year can be used in the current year’s audit assuming they are re-tested every third yearException If the control has changed since the last audit
