Internal Control Flashcards

1
Q

Control risk increases with poor Internal Controls and sloppy accounting practices.

A

Internal Control

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2
Q

Auditor will need to perform more testing and dig deeper into accounts in order to arrive at an opinion regarding the financial statements.

A

Internal Control

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3
Q

Internal control provides reasonable assurance that

Material misstatements will be prevented

Reliability/integrity of financial statements will be preserved

Assets are protected against misuse

A

Internal Control

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4
Q

CEO/CFO must disclose Internal Control deficiencies

Management must provide assessment of Internal Control

Management must certify Financial Statements

A

Internal Control

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5
Q

Inverse Relationship

Stronger Internal Controls - Less Testing Needed

Weaker Internal Controls - More Testing Needed

A

Internal Control

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6
Q

Reliability of Financial Reporting

Operational Efficiency/Effectiveness

Compliance with Law and Regulations

A

Internal Control

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7
Q

Control Environment

Risk Assessment

Information and Communication

Monitoring

Control Activities

A

Internal Control

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8
Q

Sets tone for the entire company

A

Internal Control

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9
Q

Integrity/Ethics of Management
Competence of Management
Organizational Structure
Human Resource Policies
Assignment of Authority/Responsibility
Management’s Style (riskier with a dominant/aggressive individual)
Board/Audit Committee involvement

A

Internal Control

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10
Q

Detection Risk determines nature- timing- and extent of audit procedures.

A

Internal Control

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11
Q

Risk of material misstatement determines acceptable level of Detection Risk

A

Internal Control

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12
Q

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.

A

Internal Control

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13
Q

No Internal Control testing is performed.

All audit procedures are increased in intensity to compensate for increased risk.

A

Internal Control

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14
Q

Auditor tests Internal Controls.

Auditor evaluates Control Risk based on tests

Auditor adjusts substantive tests accordingly

Weaker Internal Control - More substantive tests

Stronger Internal Control - Less substantive tests

A

Internal Control

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15
Q

Performance Reviews

Information Processing

Physical Controls

Segregation of Duties

A

Internal Control

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16
Q

Understand Client’s

Major transaction classes
Transaction initiation
Support records/documents
Transaction processing
Financial Statement internal reporting process
Financial Statement external reporting process

A

Internal Control

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17
Q

Through written documentation such as Internal Control memos- flowcharts- and questionnaires

A

Internal Control

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18
Q

Were all transactions recorded?
Were they timely?
Measured appropriately?
Recorded in correct period?
Presented and disclosed properly?
Did Management communicate their responsibilities?

A

Internal Control

19
Q

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/documents

If results are as expected- substantive procedures do not need to be adjusted

A

Internal Control

20
Q

Controls tested by auditor in a prior year can be used in the current year’s audit assuming they are re-tested every third year

Exception If the control has changed since the last audit

A

Internal Control

21
Q

Control Risk increases

Scope of substantive procedures increases

Detection Risk decreases

Material Weakness - Reasonable possibility that a material misstatement in Financial Statements would not be found- more than a remote chance of occurrence

A

Internal Control

22
Q

Reasonable possibility exists that a material misstatement in Financial Statements would not be found- and has more than a remote chance of occurrence.

A

Internal Control

23
Q

Tests Completeness

Starts with source document and traces forward to the journal entry.

A

Internal Control

24
Q

Tests Existence.

Starts with a journal entry and searches for a voucher or source document to support the entry.

A

Internal Control

25
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
Internal Control
26
Employees who prepare vouchers/invoices should not also have the authority to SIGN CHECKS Tip - 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
Internal Control
27
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
Internal Control
28
Controls can't stop collusion or bad judgment Management can override controls Cost vs. Benefit relationship of Internal Control
Internal Control
29
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
Internal Control
30
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
Internal Control
31
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
Internal Control
32
A control is not operating as intended.
Internal Control
33
Are they competent? Are they objective?
Internal Control
34
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
Internal Control
35
CEO/CFO must disclose deficiencies Management must provide assessment of Internal Controls Management must certify Financial Statements
Internal Control
36
Has inverse relationship Stronger Internal Control results in LESS substantive testing Weaker Internal Control leads to MORE substantive testing
Internal Control
37
Reliability of Financial Reporting Operational Efficiency/Effectiveness Compliance with Law and Regulations
Internal Control
38
Control Activities Risk Assessment Information and Communications Monitoring Control Environment
Internal Control
39
Integrity/Ethics of Management Competence of Management Organizational Structure Human Resources Policies Assignment of Authority/Responsibility Management's Style (riskier with a dominant/aggressive individual) Board/Audit Committee involvement
Internal Control
40
Auditor tests Internal Controls. Auditor evaluates Control Risk based on tests Auditor adjusts substantive tests accordingly Weaker Internal Control - More substantive tests Stronger Internal Control - Less substantive tests
Internal Control
41
Understand Client's Major transaction classes Transaction initiation Support records/documents Transaction processing Financial Statement internal reporting process Financial Statement external communication process
Internal Control
42
Auditor must document understanding of Internal Control via Memos - Flowcharts - Questionnaires
Internal Control
43
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/documents If results are as expected - substantive procedures do not need to be adjusted
Internal Control