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Assurance > Introduction to internal control > Flashcards

Introduction to internal control Flashcards

1
Q

Define internal control (2)

A
  1. The process designed and implemented by those charged with governance, management, and other personnel
  2. Provides reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations.
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2
Q

What is the purpose of internal controls?

A

To help an organisation to achieve its objectives and mitigate its risks

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3
Q

What are the limitations of internal controls? (4)

A

CUTSCHE

  1. COLLUSION
  2. UNUSUAL TRANSACTIONS tend to be outside the scope of control systems
  3. Special considerations in SMALL COMPANIES
  4. HUMAN ERROR
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4
Q

What are the special considerations in small companies that limit the effectiveness of internal controls? (2)

A
  1. Informal nature/lack of documentation

2. Limited numbers of staff make segregation of duties difficult

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5
Q

What does ISA 315 set out as the components of internal control? (5)

A

AIMER

  1. Control ACTIVITIES
  2. INFORMATION SYSTEM
  3. MONITORING
  4. Control ENVIRONMENT
  5. RISK ASSESSMENT process
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6
Q

Define control environment

A
  1. governance and management functions
  2. attitudes, awareness, and actions of those charged with governance and management concerning the entity’s internal control and its importance in the entity
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7
Q

Define audit committee

A

A subsection of the board of directors that has a particular interest in the accounting and finance activities of the company

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8
Q

Key features of an audit committee

A

NORU

  1. Comprised of NON-EXECUTIVE DIRECTORS
  2. OVERSEES the financial statements, internal audit, and external audit
  3. Required to have written terms of REFERENCE
  4. Requirement for UK listed companies under the UK CORPORATE GOVERNANCE CODE
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9
Q

Define risk assessment process

A

The process by which management in a business identifies business risks relevant to financial reporting objectives and decides what actions to take to address those risks

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10
Q

What are the stages of the risk assessment process? (4)

A
  1. Identify relevant business risks
  2. Estimate the significance of the risks
  3. Assess the likelihood of occurrence
  4. Decide on actions to address the risks
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11
Q

What sort of actions might be taken to address risks uncovered in a risk assessment?

A

Control activities, insurance, changes in operations

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12
Q

Define information systems

A

Comprises all the information that flows into the financial statements and includes the process of financial statement preparation

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13
Q

Define control activities

A

Manual or computerised procedires that help an organisation to achieve its objectives and mitigate the business risk it faces

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14
Q

What are the five different types of control activities set out by ISA 315? (5)

A

SPIRA

  1. Segregation of duties
  2. Physical controls
  3. Information processing, including computer controls
  4. Review of performance
  5. Authorisation
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15
Q

Define general controls

A

Policies and procedures that relate to many applications and support the effective function of application controls by helping to ensure the CONTINUED PROPER OPERATION of information systems

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16
Q

Define application controls

A

MANUAL or AUTOMATED procedures that apply to individual areas within the system to ensure COMPLETENESS, ACCURACY, and VALIDITY of the recording and processing of transactions

17
Q

What sort of computer control are virus checks on software on employees’ computers?

A

General

18
Q

Which component of ISA 315 ‘Identifying and Assessing the Risks of Material Misstatement Through Understanding of the Entity and its Environment’ does the process of preparing the financial statements illustrate?

A

Information system

19
Q

Which component of ISA 315 ‘Identifying and Assessing the Risks of Material Misstatement Through Understanding of the Entity and its Environment’ does locking the inventory storeroom illustrate?

A

Control activities

20
Q

Are companies required to have an audit committee?

A

Only listed companies

21
Q

Whose attitude is a significant aspect of an entity’s control environment?

A

Directors and other senior staff

22
Q

Which type of internal control activity is illustrated by the financial controller counting petty cash on a monthly basis?

A

Physical control

23
Q

Which type of internal control activity is illustrated by there being two keys to a safe; one held by the finance director and the other by the managing director?

A

Physical control

24
Q

Which type of internal control activity is illustrated by the financial controller reconciling the receivables ledger to the receivables ledger control account monthly?

A

Information processing; are undertaken to check the completeness and accuracy of information

25
Q

Which type of internal control activity is illustrated by the receivables ledger clerk posting invoices to the receivables ledger and the cash book clerk posting cash receipts to the receivables ledger?

A

Segregation of duties

26
Q

What type of system would be the simplest way of recording a straightforward system not subject to a great deal of change annually?

A

Narrative notes

27
Q

Define monitoring controls

A

Controls that consider the adequacy of internal controls in the light of changes in the environment and business risks. Includes reviewing the effectiveness of controls.

28
Q

Which type of internal control activity is illustrated by the financial controller reconciling the payables ledger to the payables ledger account?

A

Information processing

29
Q

Which component of ISA 315 ‘Identifying and Assessing the Risks of Material Misstatement Through Understanding of the Entity and its Environment’ does the entity’s internal audit function illustrate?

A

Monitoring of controls; the internal audit function monitors controls that are already in operation

30
Q

Which component of ISA 315 ‘Identifying and Assessing the Risks of Material Misstatement Through Understanding of the Entity and its Environment’ does the audit committee illustrate?

A

Control environment; the audit committee contributes to the status of internal controls within an organisation

31
Q

Who appoints and recommends the external auditor?

A

The external auditor is appointed by shareholders but the audit committee makes recommendations in relation to this.

32
Q

Define input completeness

A

All valid events and objects are captured and entered into a system

Assurance (15 decks)

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