Obtaining an Understanding of Internal Control Flashcards
Review Phase
The auditor should obtain an initial understanding of internal controls and document that understanding.
Review Phase
A: The auditor obtains an understanding of internal control and the flow of documents related to the entity’s transactions primarily through:
1) Inquiry of appropriate personnel
2) Observation of client activities
3) Review of documentation—The auditor reviews relevant documentation, including the client’s accounting manuals, prior-year’s audit documentation (working papers), etc.
Review Phase
C: Transaction cycle
Defined to be a group of essentially homogeneous transactions, that is, transactions of the same type.
Review Phase
F: Document the Auditor’s Understanding
The auditor should document that understanding of internal control. The extensiveness of the review and documentation varies with the circumstances
Document the Auditor’s Understanding:
1) Flow charts of transaction cycles
2) Internal control questionnaires (ICQs)
Internal control questionnaires (ICQs):
Questionnaires consisting of a listing of questions about client’s control procedures and activities; a “no” answer is usually designed to indicate a control weakness.
Review Phase
G: Perform a Walkthrough
The auditor may select a few transactions to trace them through the client’s accounting system. The purpose is merely to get some feedback as to whether the auditor has accurately understood (and documented) the way the client entity is processing transactions. The walkthrough is not considered evidence or a form of documentation and should not be confused with tests of control.
Decision tables differ from program flowcharts in that decision tables emphasize
A decision table presents in tabular form the conditions and alternative actions related to making a particular decision. It emphasizes logical relationships (decision rules) among the conditions and actions.
An auditor’s primary consideration regarding an entity’s internal control structure policies and procedures is whether they
The auditor is primarily interested in whether an entity’s internal controls affect the financial statement assertions
When obtaining an understanding of an entity’s internal control procedures, an auditor should concentrate on the substance of the procedures, rather than their form, because
Management may establish appropriate procedures but not enforce compliance with them
In planning an audit of certain accounts, an auditor may conclude that specific procedures used to obtain an understanding of an entity’s internal control structure need not be included because of the auditor’s judgments about materiality and assessments of
Inherent Risk
**If the auditor has concluded that an account is immaterial and that inherent risk is low, the auditor might decide to skip the procedures used to obtain an understanding of the related internal controls because the risk of a material misstatement occurring is low.
An advantage of using systems flowcharts to document information about internal control, instead of using internal control questionnaires, is that systems flowcharts
They provide a visual depiction of clients’ activities
Which of the following most accurately describes the process of a walkthrough?
A walkthrough means following a transaction from inception through the entity’s accounting system until the transaction is recorded in the entity’s general ledger.
An auditor’s flowchart of a client’s accounting system is a diagrammatic representation that depicts the auditor’s
Understanding of the system
