Internal Controls

Question 1

Objectives of I/C

Answer 1

1) Reliability of financial reporting
2) Effectiveness and efficiency of Operations
3) Compliance with applicable laws and regulations

Question 2

Inherent Limitations

Answer 2

1) Human Error
2) Collusion, fraud, deliberate circumvention
3) Management Override

Question 3

Key points of Control Environment

Answer 3

1) Integrity
2) Competence
3) Participation of those charged with governance
4) Management philosophy
5) Organization Structure
6) Role Assignment
7) Promotion and training (HR)

Question 4

Key Points of Control Activities

Answer 4

Prenumbering of documents
Authorization of Transactions
Independent Checks to maintain Asset accountability
Documentation
Timely and appropriate performance reviews
Information Processing Controls
Pysical controls for safeguarding assets
Segregation of duties

Question 5

Procedures to obtain evidence about design & implementation of Internal controls

Answer 5

1) Inquiry of personnel
2) Observation of application of controls & premises/plant facilities
3) Inspection of documents and reports
4) Walkthroughs

Question 6

Procedures of pre-numbering of documents

Answer 6

All transactions are recorded (completeness)

No transactions are recorded more than once (existence)

Question 7

Procedures of Authorization of transactions

Answer 7

Authorization should occur before commitment of resources

Question 8

Procedures of Independent checks to maintain asset accountability

Answer 8

1) Review Bank Reconciliations
2) Comparison of Subsidiary records to control accounts
3) Comparison of physical inventory counts to perpetual records

Question 9

Procedures of timely and appropriate performance reviews

Answer 9

Analytical Procedures

1) Comparison of actual to budget, forecasts and prior periods
2) Comparison of financial and nonfinancial information
3) Review and evaluation of functions or activities

Question 10

Procedures of Information processing controls

Answer 10

Application Controls - Individual Transactions

General Controls - throughout the company/multiple controls

Question 11

Procedures of Physical Controls for safeguarding assets

Answer 11

1) Physical segregation of security of assets
2) Authorized access to assets and records
3) Periodic counting and comparison of amounts should in accounting records. (physical counts, inspection of assets, reconciliations, review of computer reports) (Cost of goods sold formula)