Module 6: Evaluating Systems of Internal Control

Question 1

What are internal controls?

Answer 1

How are accounting information systems designed by management?

Question 2

Systems of internal control

5

Answer 2

1. Control enviroment
2. Client risk assessment process
3. Client’s process to monitor the system of internal control
4. Information system and communication
5. Control activities

Question 3

Why are internal controls important?

Answer 3

provides assurance over:
* reliability of financial reporting
* Effectiveness and efficency of operations
* Compliance with applicable laws and regulations

Question 4

What are the limitations of internal controls?

Answer 4

• Relevence
• Cost
• Collusion
• Human error
• Unusual/infrequent transactions
• Management override

Question 5

Types of control

Answer 5

• Direct controls - precise enough to address risks of material misstatement at the assertion level
• Indirect controls - controls that support direct controls eg. control enviorment, risk assessment and momitoring internal control systems

Question 6

Catagories of control

5

Answer 6

1. Authorisation and approval
2. Reconcilliations
3. Verification
4. Segregation of duties
5. Physical or logical controls

Question 7

How are accounting information systems designed by management?

Answer 7

1. Identify the company’s objectives
2. Identify risks to these objectives
3. Implement control activities to mitigate these risks where possible

Question 8

What are general IT controls?

Answer 8

• policies and procedures relating to the overall IT environment
• Support effective functioning of unformation processing controls
• e.g. access to data, maintaining IT

Question 9

What are information processing controls?

Answer 9

• processing of specific types of transactions (eg invoicing customers or paying suppliers)
• ensure transactions are genuine, accurate and complete

Question 10

How do the components of internal control affect the auditor’s work?

Answer 10

• Understanding and documentation of processes, systems and controls
• walkthrough of systems; evaluation of the design of controls
• tests of control; assessment of the risk of material misstatement (RoMM)
• production of audit programmes in response to risk.

Takes longer if internal control is weak

Question 11

What are walkthrough procedures?

Answer 11

Selects one or more transactions relating to a specific system and follows them through the system begining to end

Question 12

How is audit data analytics (ADA) used for process mining?

Answer 12

Allows a client’s process to be mapped, where the data is available
* Allows understanding of the key processes and ikdentify deviations
* used in place of walkthrough
*

Question 13

How are test of controls performed?

Answer 13

• Identify key controls
• Assess the design of key controls
• Test whether key controls operated effectively throughout the year

Can involve enquiry, inspection, observing and reperformance

Question 14

What is a controls reliance approach in auditing?

Answer 14

If controls are designed well and operated effectively throughout the year, there is a relianvce on the controls as control risk is low

Question 15

What is the management letter?

Answer 15

Significant defficencies in accounting and internal controls reported to those charged with governance and management in writing.
Must be given on a timely basis

Question 16

What does a management letter include?

Answer 16

• The issue (e.g. control weakness)
• The effects or implications
• A reccomendation to resolve issue

Question 17

Sales Cycle

Question 18

Purchase cycle

Question 19

Inventory cycle

Question 20

Payroll cycle

Question 21

What are the main elements of the system for monthly financial reporting?

Question 22

What are the different types of control activities in the system for monthly financial reporting?

Answer 22

• Maintain a formal checklist and timetable of reconciliations
• Staff are trained and reconcilliations are reviewed
• Reconcilliation performa used

Question 23

What is internal audit?

Answer 23

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations.

Question 24

What is the purpose, scope and composition of an internal audit function?

Answer 24

purpose - Check internals controls are adequate, reliable info, compliance with law, assess safegaurds, operations are efficent and effective
scope - reviewing checks for the above and special investigations eg into suspected fraud
Composition - Not required to have qualifications, independant, report to audit committee

Question 25

Why is internal audit needed?

Answer 25

gain assurance that the management and control of the organisation are robust