Internal Control- Concepts and Standards Flashcards
When planning an audit, when information would we need to know to not have to understand the internal control structure?
Materiality and inherent risk; if immaterial and inherent risk is low means that the auditor can skip the procedures to obtain an understanding of the internal control structure in an effort to plan an audit
When understanding the environment of IC the auditor should focus on substance of control rather than form because?
Management may establish appropriate procedures but not enforce compliance with them.
-IC must be effective and be properly acted upon
Decision Table
presents logical relationships between conditions and actions
Having budgets and forecasts helps management to supervise more effectively.
true
Flowchart
helps to understand the system
provide a visual depiction of client activities
Why is it necessary to understand the control system?
necessary for audit planning and one can plan by determining what tests/procedures to be performed by understanding the control system
What is an auditors primary concern when it comes to the IC?
determining if it affects the f/s
-cost/benefit
What are the inherent limitations of IC?
management override
mistakes in judgement
collusion among employees
Management override
ex) CEO can request a check without a purchase order
Assessing control risk and obtaining an understanding of an entity’s internal control structure may be performed concurrently.
true
Assessing CR below the maximum level
1) obtain an understanding of the internal control structure;
2) identify specific controls relevant to specific financial statement assertions; and
3) test the identified controls to determine if they are operating effectively.
Why is assessed level of CR used?
to determine detection risk for f/s assertions and to contribute to the auditor’s evaluation of the risk that material misstatements may exist in the financial statement
What does it mean that the CR is too high?
this means that the sample indicates that CR is not working properly when in fact it is which means that the the CR is greater than the operating effectiveness of the control
Usually performing tests of controls are considered efficient because it reduces substantive testing but if it doesn’t then it is inefficient and hence performing tests of controls should not be performed
true
What techniques does an auditor use when assessing CR?
inspection, reperformance, observation, and inquiries
Auditor is not required to obtain knowledge of the operative effectiveness of the IC structure.
true
Management integrity is a critical component of internal control
true
Control Environment Factors
(1) communication and enforcement of integrity and ethical values;
(2) commitment to competence;
(3) participation of those charged with governance;
(4) management’s philosophy and operating style;
(5) the entity’s organizational structure;
(6) the entity’s assignment of authority and responsibility;
(7) human resource policies and practices
What is the objective of tests of controls?
to determine whether IC are designed properly or operated efficiently
1) designed-detects mm in f/s
2) operation- how IC was applied, who applied it, and consistency of which it was applied
What is an advantage of electronic form evidence?
attract evidence from client databases
Auditors report on significant deficiencies
The auditor’s report on significant deficiencies should indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on the internal control structure.
The lack of objectivity can affect f/s. So it would be needed to be communicated as a significant deficiency to the audit committee
true
Material weaknesses should be separate from significant deficiencies
true
what factors should be considered in evaluating deficiencies?
entity’s size, its complexity, and the nature and diversity of its business activities.