Obtaining an understanding of internal control

Question 1

List the disadvantages of flowcharts to document the auditor’s understanding of internal controls.

Answer 1

1. )Tedious and time consuming to prepare initially

2. )Might fail to recognize deficiencies by getting overly absorbed in details

Question 2

List the disadvantages of internal control questionnaires (ICQs) to document the auditor’s understanding of internal controls.

Answer 2

1. )These are generic and not tailored to any client specifically.
2. )Irrelevant questions may annoy clients.
3. )Client might conceal deficiencies by incorrect answers.

Question 3

List the advantages of using flowcharts to document the auditor’s understanding of internal controls.

Answer 3

1. )Systematic approach with emphasis on important accounting records
2. )Tailored to client
3. )Fairly easy for others to review and understand
4. )Easy to update from year to year

Question 4

Identify three procedures an auditor might perform to obtain an understanding of internal controls.

Answer 4

1. )Inquiry of appropriate personnel
2. )Observation of client’s activities
3. )Review of entity’s documentation of internal controls

Question 5

Identify three ways auditors might document their understanding of internal controls.

Answer 5

1. )Flowcharts of transaction cycles
2. )Internal control questionnaires
3. )Narrative write-ups (memos)

Question 6

What is the purpose of performing a walkthrough?

Answer 6

To obtain some feedback as to whether the way the auditor has understood (and documented) the entity’s internal controls is consistent with the way the entity is actually processing such transactions

Question 7

Define “transaction cycle.”

Answer 7

A group of essentially homogeneous (i.e., transactions, that is, transactions of the same basic type)

Question 8

List the disadvantages of narratives (memos) to document the auditor’s understanding of internal controls.

Answer 8

1. )Writing such a memo is rather unstructured, lacking a systematic approach
2. )It may be rather easy to overlook relevant internal control issues

Question 9

List the advantages of narratives (memos) to document the auditor’s understanding of internal controls.

Answer 9

1. )Tailored to client
2. )Can be as detailed or as general as desired
3. )Easy to prepare
4. )Easy to read

Question 10

List the advantages of internal control questionnaires (ICQs) to document the auditor’s understanding of internal controls.

Answer 10

1. )Can have a standard form for many clients

2. )Deficiencies are easily indicated by “no” answers.