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AudTheo > Internal Control Notes > Flashcards

Internal Control Notes Flashcards

1
Q

Assessing control risk

A

process of evaluating the design and operating effectiveness of an entity’s IC as to how it prevents or detects material misstatements in the FS

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2
Q

assessed level of control risk

A

conclusion reached as a result of assessing control risk

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3
Q

Internal control

A
  • Responsibility of the management to establish a control environment and maintain policies an procedure
  • means of achieving the entity’s objective
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4
Q

Internal Control

A

(PSA 315)

  • process
  • designed and effected by those charged w/ governance, mgt, and other staff
  • t o provide reasonable assurance
  • about achievement of entity’s objective
  • with regards to fs reporting
  • Effectiveness and efficiency of operations and compliance with applicable law and regulations
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5
Q

Inherent limitations of Internal Control (CRHCMI)

A
  1. cost of IC > benefits to be derived
  2. routine transaction
  3. human error
  4. collusion
  5. management overriding
  6. inadequate procedure
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6
Q

NOTES

A

operational and compliance objectives may be relevant to the audit if they relate to data the auditor evaluates to determine the reliability of some fs assertions

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7
Q

components of IC (CRICM)

A
  1. Control Environment
  2. Risk Assessment
  3. Information and communication systems
  4. Control Activities
  5. Monitoring
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8
Q

Control environment

A
  • includes the attitudes, awareness, and actions of mgt and those charged w/ governance concerning the entity’s IC and its importance in the entity.
  • includes gov and mgt functions and sets the tone of an org
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9
Q

Control Environment Factors (IMACPA)

A

a. integrity and ethical values
b. Mgt philosophy and operating style
c. active participation of those charged with
governance
d. commitment to competence
e. personnel policies and procedures
f. assignment of responsibility and authority/
organizational structure

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10
Q

Risk Assessment

A

Entity should take into account those business risks

Auditor should take into account those risks that are relevant to the prep of reliable FS

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11
Q

Business risk

A

The risk that the entity’s objective will not be attained as a result of internal and external factors.

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12
Q

Info and Communication system

A
  • effective IC must provide timely information and communication
  • communication involves providing an understanding of individual roles and responsibilities pertaining to internal control over financial reporting.
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13
Q

open communication(I&C)

A

help ensure that exceptions are reported and acted on

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14
Q

Control Activities

A

policies and pro that help ensure that mgt directives are carried out

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15
Q

Control Activities (PIPS)

A
  1. Performance Reviews
  2. Information Processing
  3. Physical Controls
  4. Segregations of Duties
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16
Q

Specific control Procedures(CA) (PIPSA)

A

a. Performance Reviews
b. Info Processing
c. Physical Controls
d. Segregation of Duties
e. Authorization

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17
Q

Performance Reviews (CA)

A

include reviews and analyses of actual performance versus budgets, forecasts and prior period performance

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18
Q

Info Processing (CA)

A
  • a variety of controls are performed to check accuracy, completeness, and authorization of transactions
  • when computer processing is used in significant acctg application the it can be classified as general and application controls
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19
Q

Physical Controls (CA)

A

physical security of assets, including adequate safeguards such as secured facilities over access to assets and records.

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20
Q

segregation of duties (CA)

A

assigning different people the responsibilities of authorizing ,recording and maintaining custody of asset

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21
Q

Monitoring

A

process of assessing the quality of internal control performance over time.

22
Q

Ongoing monitoring (M)

A

built into the normal recurring activities of an entity and include regular mgt and supervisory activities such as preparation of monthly bank recon.

23
Q

Separate Evaluations (M)

A

performed on a non-routine basis, such as functions performed by internal auditors.

24
Q

Internal Control for Small business

A
  • IC tend to be weak but can be compensated if the owner/manager actively participates in the operations of the business
25
Q

Consideration of IC

A

auditors should give adequate consideration to these controls because the quality of the entity’s IC systems can have a significant impact on the audit.

26
Q

Steps to consideration of entity’s IC system (UDAPD)

A

a. understanding to the IC
b. Docu the understanding of IC
c. assess the level of Control risk
d. Perform tests of controls
e. Docu the assessed level of CR

27
Q

a. obtain understanding to the IC

A

involves:

a. evaluating the design of a control
b. determining whether it has been implemented

28
Q

initial understanding of the design

A

obtained by inquiry, inspecting documents and records, observing entity’s activity and operations

29
Q

Walk-through test(implementation)

A

involves tracing 1 or 2 transactions thru the entire accounting systems, from their initial recording at source to their final destination as a component of an account balance in the FS

30
Q

NOTES

A
  • auditor is not required to obtain knowledge about the operating effectiveness of the IC when obtaining understanding of the entity’s IC
  • In Understanding Internal Control the audit auditor is only concerned about the design of relevant control policies and procedure and whether such controls are actually being applied
31
Q

uses of understanding to IC for the Auditor

A

a. identify types of potential misstatements that can occur
b. consider factors that affect the risk of material misstatements
c. design the nature, timing, and extent audit procedures to be performed

32
Q

b. Documenting the understanding of IC

A
  • the extent of documentation may vary depending on size and complexity of the entity and nature of the entity’s internal control systems.
  • can be narrative, flowchart, questionnaire
33
Q

c. assess the level of Control risk

A

auditor’s preliminary assessment of control risk may be at a high level or less than a high level

34
Q

c. assess the level of Control risk

A
  • if IC is NOT EFFECTIVE –> the auditor may simply assess control risk at a HIGH LEVEL –> no test of control –> rely on substantive tests
  • if it is MORE EFFICIENT to rely on the entity’s IC –>less than high level —> :
    a. identify specific IC that likely prevent or detect and correct material misstatements
    b. perform test of control
35
Q

d. Perform tests of controls

A

before the auditor can rely on the effectiveness of internal control to reduce the substantive test, auditor must obtain evidence that they are working effectively as the preliminary assessment suggests

36
Q

d. Perform tests of controls

A

to obtain evidence of the effectiveness of ;

a. design of acctg and IC systems
b. operation of IC throughout the period

37
Q

NOTES

A

(PSA) auditor should obtain audit evidence thru test of control to support any assessment of control risk at less than high level

38
Q

Nature of test of control (IOIR)

A

contains 1 or a combination of:

a. inquiry
b. observation
c. inspection
d. Re performance

39
Q

Inquiry

A

consists of searching for the appropriate info about the effectiveness of IC from knowledgeable persons inside or outside the entity

40
Q

observation

A

refers to looking at the process being performed by the others

41
Q

Inspection

A

involves the examination of documents and records to provide evidence of reliability depending on their nature and source and the effectiveness of internal control over their processing.

42
Q

Re performance

A

repeating the activity performed by the client to determine whether proper results were obtained

43
Q

Timing of tests of control

A

-usually during an interim visit in advance of period end.

In determining whether or not to test the remaining period:

  • results of the interim tests
  • the length of the remaining period
  • whether changes have occurred in the acctg and IC systems during the remaining period
44
Q

Extent of test of control

A
  • auditor cannot examine all nature

- should determine the size of a sample sufficient to support the assessed level of control risk

45
Q

using the results of tests of control

A
  • auditor uses assessed level of CR and IR to determine the acceptable level of DR
  • Inverse relationship DR with CR & IR
46
Q

Operating effectiveness vs Implementation

A
  • Audit evidence of implementation by performing risk assessment procedures, determines that the relevant controls exists and entity is using them.
  • When performing test of operating effectiveness auditor obtain audit evidence that controls operate effectively
47
Q

e. Documenting the assessed level of CR

A
  • if ACR is at high level –> document the conclusion

- if ACR is at low level –> document the conclusion and basis(results of the test of control)

48
Q

Communication of IC weakness

A

Auditor is required to report to the appropriate level of management material weakness in he design or operation of the acctg and IC system.

(in writing: earliest opportunity as possible so appropriate corrective action may be taken)

49
Q

NOTES

A

Emphasize that auditors are not required to search for and or identify IC weakness. just communicate if it come to their attention

50
Q

Management Letter

A

document for IC weakness together with other matters of concern

AudTheo (6 decks)

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