Internal Control Concepts 1 Flashcards
How does an auditor obtain an understanding of internal control and the flow of documents related to the entity’s transactions?
1 Inquiry of appropriate personnel
2 Observation of client activities
3 Review of documentation
The auditor’s internal control analysis tends to focus on what?
The entity’s major transaction cycles
What’s the Transaction Cycle?
A group of essentially homogeneous transactions, that is, transactions of the same type
Implication
Each transaction within a specific transaction cycle is captured, processed, and recorded subject to the same set of internal control policies and procedures
What are typical types of transaction cycles?
1 Revenue/receipts 2 Expenditures/disbursements 3 Payroll 4 Financing/investing activities 5 Inventory, especially if inventory is manufactured, rather than purchased
The understanding should the auditor document?
1 The understanding of internal control
2 The extensiveness of the review
NOTE
The emphasis on understanding internal controls increases if reliance on internal control is planned
What is a Flow chart of transaction cycles?
A graphical depiction of the client’s accounting systems for major categories of transactions with emphasis on the origination, processing, and distribution of important underlying accounting documents
What are the advantages and disadvantages to Flow Charts?
Advantages—A fairly systematic approach that is unlikely to overlook important considerations; tailored to client-specific circumstances; fairly easy for others to review and understand; and fairly easy to update from year to year.
Disadvantages—Can be rather tedious and time consuming to initially prepare
What is a Narrative write-up?
A written memo describing the important control-related activities in the transaction cycles under consideration
What is performing a walkthrough?
The auditor may select a few transactions to trace them through the client’s entire accounting system
