Lecture 3 Flashcards
What are internal controls designed to do?
Prevent, detect or correct undesired events and ensure data reliability.
Internal controls are essential for maintaining the integrity of financial reporting and operational efficiency.
Define business risk.
A risk that could adversely affect an entity’s ability to achieve its objectives and execute its strategies.
Business risks can arise from significant conditions, events, or inappropriate objectives.
What is the definition of internal control according to ISA 315?
A system designed to provide reasonable assurance about the achievement of an entity’s objectives regarding reliability of financial reporting, effectiveness and efficiency of operations, and compliance with laws.
ISA 315 outlines the auditor’s responsibilities related to internal controls.
What is the relationship between business risks and audit risks?
Not all business risks are audit risks, and they can be different.
Understanding this distinction is crucial for effective auditing.
What is meant by ‘tone at the top’?
The culture of honesty and ethical behavior established by management.
‘Tone at the top’ is critical for the effectiveness of internal controls.
What are the five components of internal control?
- Control Environment
- Risk Assessment
- Control Activities
- Information System and Communication
- Monitoring Activities
These components are part of the COSO framework for internal controls.
Fill in the blank: Control activities are policies and procedures that help ensure that management directives are carried out. They are generally _______ or _______.
preventative; detective
What does the risk assessment process evaluate?
Identifying risks relevant to financial reporting, assessing their significance, and addressing those risks.
An effective risk assessment process is vital for effective internal control.
True or False: Management can override internal controls.
True
This highlights the importance of a robust governance structure.
What types of controls are included in IT controls?
- General IT Controls
- Application Controls
IT controls are increasingly important in today’s technology-driven business environment.
What is the purpose of monitoring controls?
To ensure that controls are functioning as intended and remain effective.
Continuous monitoring is essential for the long-term efficacy of internal controls.
What should a risk register maintain?
A record of business risks and how they develop over time.
Larger entities often utilize risk registers as part of their risk management strategy.
What is the trade-off mentioned regarding risk management?
Between the risk of loss/error and the cost of control.
This trade-off is influenced by the entity’s risk appetite.
What role do audit committees play in internal controls?
They help establish a culture of accountability and effectiveness in internal controls.
Audit committees are essential for governance and oversight.
Fill in the blank: Control deficiencies identified in the control environment _______ the system of internal control.
undermine
