Internal Controls

Question 1

Internal control

Answer 1

Internal control is the process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objective with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations

Question 2

Understanding accounting system

Answer 2

The auditors must understand the accounting system and control environment in order to determine their audit approach

An understanding of internal control assists the auditor to:

Identify potential misstatements
Identify factors thag affect the risk of material
Design the nature, timing and extent of audit procedures

Question 3

Internal control 5 components

Answer 3

Internal control 5 components:

The control environment 
The entity’s risk assessment process
The information system relevant to financial reporting
Control activities 
Monitoring controls

Question 4

internal control 5 components: 1. The control environment

Answer 4

The control environment:

Governance and management functions
Attitudes, awareness and actions of management
Sets the tone by creating a culture of honesty and ethical behaviour
Provide an appropriate foundation for the other components of internal control

Question 5

Internal control 5 components: 2. The entity’s risk assessment process

Answer 5

The entity’s risk assessment process:
How management identifies risk
How management decides on actions to address those risks

Question 6

Internal control components: 3. The info system relevant to financial reporting

Answer 6

The information system relevant to financial reporting:

Includes the financial reporting system

ConSists if infrastructure, software, people, procedures and data to initiate, record, process and report transactions

Auditor needs understanding of the related:
Accounting records
Supporting info
Specific accounts in the fs

Question 7

Internal control components; 4. Control activities

Answer 7

Control activities are those polices and procedures that help ensure that management directives are carried out.

eg:
Approval and control of documents
Controls over it
Checking the arithmeticql accuracy of records
Maintaining control accounts and trial balances
Physical controls
Segregation of duties

Question 8

Internal control components: 5. Monitoring of controls

Answer 8

Monitoring of consoles is a process to assess the effectiveness of internal control performance over time

It involves assessing the effectiveness of controls on a timely basis and taking necessary remedial actions

Question 9

Limitations of internal control

Answer 9

Inherent limitations of controls:

The cost of control must not outweigh the benefits

The potential for human error

collusion between employees

The possibility that controls are overridden by management

Controls are designed to cope with routine transactions

Question 10

Significant deficiencies

Answer 10

A significant deficiency is internal control is a deficiency that in the auditors professional judgement, is of sufficient importance to merit the attention of those charged with governance

Significant deficiencies shall be communicated in writing to those charged with governance in a report to management

Question 11

Computer systems control

Answer 11

The internal control in a computerised environment include both manual procedures and procedures designed into the computer programmes .

The consoles which the auditor would expect To find are:

General it policies - policies and procedures that relate to many applications

Application controls - manual or automated procedures that typically operate at a business process level, for specific applications

General it controls and application controls are inter related