Internal Control Flashcards
What is internal control?
A process designed to provide reasonable assurance that objectives are met
What are the five components of internal control?
Control activities Risk assessment Information and communication systems Monitoring Environment
What are control activities?
Activities/processes taken to reduce risk, as decided by management
What are some common control activities?
Performance reviews
Information processing (verifying transaction info)
Physical controls
Segregation of duties
What is risk assessment?
The entity’s (not the auditor’s) analysis of risks
What is monitoring?
Evaluating the internal control system’s effectiveness over time (and making certain corrections)
It is necessary, since internal controls tend to fail over time
What is the control environment?
The general “atmosphere” for controls, consisting of attitudes within mgmt and personnel to excellence and integrity
Is it necessary for an entity to have all five components of internal control?
No – the framework is helpful for the auditor’s evaluation, not necessarily a description for all entities
Also, the auditor’s main job is testing effectiveness, not categorizing
Should the auditor evaluate all of an entity’s internal control systems?
No, only controls relevant to the financial statements (and only ones with significant risks)
What are some examples of irrelevant controls?
Controls to ensure compliance with safety regulations
Controls to set an optimal price on a product
What is an important consideration when evaluating controls?
Some controls will have overlapping purposes – both financial reporting and operations (e.g. a lockbox for collecting payments)
What are the two parts of understanding a control?
Design – whether it prevents/detects misstatements
Implementation – whether it is actually being used
What are some procedures for assessing the design and implementation of controls?
Inquiries
Observing the applications of controls
Inspecting documents
Tracing transactions through the information system
What should the auditor document regarding internal control?
(1) Key elements of the five components
(2) Sources
(3) Risk assessment procedures that were performed
What are different ways to document an entity’s internal control?
Flowchart
Questionnaire
Narrative/memorandum
What are the advantages and disadvantages of a flowchart?
Advantages:
- very clear
- hard to overlook things
- requires complete understanding to create
Disadvantages:
-more time-consuming to create