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AA Question Rote > Minor Areas Section B Rote (Internal Controls) > Flashcards

Minor Areas Section B Rote (Internal Controls) Flashcards

1
Q

A deficency in an internal control is significant ISA 265 (likelihood deficiency)

A

Likelihood of deficiencies leading to material misstatements in FSs in the futre

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2
Q

A deficency in an internal control is significant ISA 265 (suspectibility fraud)

A

The suspectibility to loss or fraud of related asset or liability

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3
Q

A deficency in an internal control is significant ISA 265 (controls reporting)

A

The improtance of controls to financial reporting process

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4
Q

A deficency in an internal control is significant ISA 265 (subjectivity estimated)

A

Subjectivity and complexity of determining estimated amounts

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5
Q

Control objective of sales system (orders accepted customers)

A

Orders are only accepted if goods are available to be processed for customers

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6
Q

Control objective of sales system (orders recorded completely)

A

Ensure all orders are recorded completely and accurately

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7
Q

Control objective of sales system (goods supplied credit)

A

Goods are not supplied to customers who are poor credit risks

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8
Q

Control objective of sales system (goods dispatched timely)

A

Goods are dispatched for all orders on a timely basis

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9
Q

Control objective of sales system (correct quantity)

A

Ensure correct quantity of goods dispatched and are of adequate quality

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10
Q

Control objective of sales system (cash allocated)

A

Ensure cash received is allocated against correct customer and invoices to prevent disputes

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11
Q

A deficency in an internal control is significant ISA 265 (amounts exposed)

A

Amounts exposed to the deficiencies

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12
Q

Limitation of controls (Human error)

A

Mistake by those responsible for performing controls

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13
Q

Limitation of controls (Circumvention of internal control)

A

Employees may manipulate internal control for personal gain or to conceal fraudulent activity

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14
Q

Limitation of controls (Management override of internal control)

A

Can be used to conceal information or for personal financial gain

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15
Q

Limitation of controls (professional judgment)

A

Professional judgment needed to determine type and extent of internal controls. Systems deal with routine transactions and may be inadequate

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16
Q

What are narrative notes?

A

Written description of the system. Details of control that operate at each stage

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17
Q

What are flowcharts?

A

Illustration of control system. Lines demonstrate the sequence of events

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18
Q

What are questionnaires?

A

Contain a list of questions for each major transaction cycle

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19
Q

Advantage of narrative notes?

A

They are simple toi record and facilitate understanding by all members of audit team

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20
Q

Advantage of flowcharts?

A

Easy to view system in its entirety. Effective at discovering missing controls

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21
Q

Advantage of questionnaires?

A

Are quick to prepare. All controls present within the system are considered and recorded

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22
Q

Disadvantage of narrative notes?

A

May prove time consuming if internal controls are missing notes

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23
Q

Disadvantage of questionnaires?

A

Internal controls may be overssated if client is aware auditor is looking for a particular answer

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24
Q

Limitation of internal controls (ineffective controls)

A

Controls which do not work as intended

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25
Q

What is included in a report to management?

A

The address

Please find enclosed report on deficiencies …

Report only addresses deficiency identified during the audit …

Report solely for use of management …

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26
Q

Why is it important for auditor to communicate to those charged with governance (responsibility financial reporting)

A

Those charged with governance in fulfilling their responsibility to oversee financial reporting process, reducing risks of MM in FS

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27
Q

Why is it important for auditor to communicate to those charged with governance (two-way)

A

Promotes effective two-way communication between auditor and those charged with governance

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28
Q

Emphasis of matter paragraph (auditor approach)

A

Auditor should explain planned approach to audit as well as audit timetable

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29
Q

Emphasis of matter paragraph (significant difficulties)

A

Any significant difficulties encountered during audit should be communicated

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30
Q

Emphasis of matter paragraph (audit risks)

A

Key audit risks identified during planning stage should be communicated

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31
Q

Emphasis of matter paragraph (modifications audit opinion)

A

If auditors are intending to make any modifications to audit opinion

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32
Q

Objective of external auditor?

A

Express an opinion on truth and fairness of FSs

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33
Q

Reporting of external auditor?

A

Report to shareholders

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34
Q

Availability of report external auditor?

A

Publicly available

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35
Q

Scope of work external auditor?

A

Verifying truth and fairness of FSs

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36
Q

Appointment and removal external auditor?

A

By shareholders of the company

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37
Q

Relationship with company external auditor?

A

Must be independent of the company

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38
Q

Objective of internal auditor?

A

Improve company’s operations by reviewing efficiency and effectiveness of internal controls

39
Q

Reporting of internal auditor?

A

Reports to management on those charged with governance

40
Q

Availability of report of internal auditor?

A

Not publicly available. Usually only seen by management

41
Q

Scope of work of internal auditor?

A

Wide in scope

42
Q

Appointment and removal of internal auditor?

A

Audit committee or board of directors

43
Q

Relationship with company of internal auditor?

A

May be employees or an outsourced function

44
Q

Assignments of internal audit department (value for money review)

A

Asked to assess whether obtaining value for money in areas such as asset expenditure

45
Q

Assignments of internal audit department (IT system reviews)

A

Asked to perform review over computer environment and controls

46
Q

Assignments of internal audit department (Fraud ivnestigations)

A

Can investigate any specific cases of suspected fraud

47
Q

Assignments of internal audit department (Cash controls)

A

Controls testing over cash payments

48
Q

Assignments of internal audit department (Regulatory compliance)

A

Help monitor compliance with regulations

49
Q

Assignments of internal audit department (asset levels)

A

Undertake physical verification of PPE at production site and compare to non-current asset register

50
Q

Steps to confirm prior year flowcharts (system notes payables)

A

Obtain system notes from last year’s audit and ensuire documentation on payables and purchases cover all expected stages

51
Q

Steps to confirm prior year flowcharts (review weaknesses investigation)

A

Review audit file for indications of weaknesses in system and note those for investigation

52
Q

Steps to confirm prior year flowcharts (interview warehouse)

A

Interview client staff to ascertain whether systems have changed and ensure flowcharts and anrrative notes produced last year are correct

53
Q

Steps to confirm prior year flowcharts (walk-through trace transactions)

A

Perform a walk-through test by tracing a sample of transactions through purchases and payable system to ensure flowcharts and narrative notes to ensure accuracy

54
Q

Control activities ISA 315 (segragation of duties)

A

Ensure tasks of recording transactions and maintaining custody of asset are carried out by different people

55
Q

Control activities ISA 315 (verifications)

A

Controls which compare two or more items with each other or compare an item with a policy

56
Q

Control activities ISA 315 (authorisation)

A

Approval of transactions by a suitably responsible official to ensure transactions are valud

57
Q

Control activities ISA 315 (physical or logical controls)

A

Restricting access to physical assets and certain computer programs

58
Q

Control activities ISA 315 (reconciliation)

A

Compare two or more data elements to confirm completeness or accuracy of the data

59
Q

Outsorucing internal audit advantage (staffing)

A

No need to spend money on recruiting further staff to expand its internal audit department

60
Q

Outsorucing internal audit advantage (immediate)

A

Outsourcing can provide number of staff needed straight away. Recruiting takes more staff

61
Q

Outsorucing internal audit advantage (skills)

A

Likely to have skilled staff already available if there’s a large pool

62
Q

Outsorucing internal audit advantage (flexibility)

A

Total flexibility in its internal audit service. Ensures that staff are readily available for long or short periods of time

63
Q

Outsorucing internal audit disadvantage (increased costs)

A

Internal audit fee charged by provider may increase over time

64
Q

Outsorucing internal audit disadvantage (confidentiality)

A

Knowledge of company systems available to service provider. Engagement letter may not be enoguh to stop breaches

65
Q

Outsorucing internal audit disadvantage (control)

A

Once outsourced, timings with service provider need to be discussed in advance

66
Q

Outsorucing internal audit disadvantage (in-house)

A

Vaulable internal audit knowledge may be lost

67
Q

Cash receipts system (received and banked)

A

All valid cash receipts are received and banked promptly

68
Q

Cash receipts system (recorded bank)

A

All cash receipts are recorded in bank ledger account

69
Q

Cash receipts system (safeguarded)

A

All cash is safeguarded to prevent theft

70
Q

Cash receipts system (period)

A

All cash receipts are recorded in correct accounting period

71
Q

Cash receipts system (general)

A

Cash receipts are correctly posted to the general ledger

72
Q

When a client’s system of internal control is weak?

A

Greater risk of MM within FS as control won’t have prevented misstatements corrected

73
Q

When internal controls are not effective, what should be used instead?

A

Full substantive procedures used to obtain appropriate audit evidence

74
Q

What happens if internal controls are effective?

A

More emphasis on these, less on substantive procedures

75
Q

Establishing an internal audit department (interim audit)

A

Need to perform a risk assessment to assist in the planning process

76
Q

Establishing an internal audit department (documentation)

A

Rely on any internal control documentation produced by internal audit to assess control environment has changed

77
Q

Suitability of analytical procedures (large volume)

A

More suitable to large volume transactions that are predictable over time

78
Q

Suitability of analytical procedures (info analysed procedures)

A

If information being analysed is unreliable, the results of the analytical procedures will be unreliable

79
Q

Suitability of analytical procedures (difference acceptable)

A

Amount of difference between expected amounts and recorded amounts. Depends on level of materiality

80
Q

Internal control components (control environment)

A

Set controls, processes and structures that address management’s oversight responsibilities, entity’s assignment of authority and responsibility

81
Q

Internal control components (risk assessment process)

A

How entity identifies business risks relevant to fianncial reporting objectives, and assess their likelihood

82
Q

Internal control components (information system)

A

Consists all activities and policies relevant to preparation of FSs

83
Q

Internal control components (monitor system)

A

Evaluating the effectiveness of controls over time and taking remedial action

84
Q

Internal audit department needed (employees)

A

Large number of employees, may detect fraud at work and prevent errors

85
Q

Internal audit department needed (complexity)

A

Complexity of activities, more internal checks needed

86
Q

Internal audit department needed (corporate governance)

A

Desire for adopting best practice voluntarily to increase confidence of shareholders

87
Q

Internal audit department needed (assurance)

A

Level of insurance required by management, senior management want to know that controls of the company are adequate

88
Q

Advantages of automated tools (large volume)

A

Enables the audit team to test a large volume of inventory data accurately and quickly

89
Q

Advantages of automated tools (test data)

A

Test data can test general IT controls, such as passwords

90
Q

Advantages of automated tools (frequency)

A

Enables auditors to perform audit procedures throughout the year rather than just at year end

91
Q

Advantages of automated tools (human error)

A

Potentially reduces the level of human error in testing

92
Q

Disadvantage of automated tools (training)

A

if first time automated tools used, may require training

93
Q

Disadvantage of automated tools (cost)

A

Cost will be high in first year as there are significant set up costs

94
Q

Disadvantage of automated tools (not complete)

A

Data obtained may not be complete which limits assurance that can be obtained

AA Question Rote (30 decks)

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