Section 3: Internal Control Flashcards
Objectives of Internal Control:
ACE
Accurate & reliable financial reporting
Compliance with laws & regulation
Effectiveness & efficiency of operations
5 Componenets of Internal Control:
CRIME
Control Environment
Risk Assessment
Control Activities
Information & Communication
Monitoring
Control Environment:
CHOPPER
Commitment to competence
Human resource policies & practice
Organizational structure
Participation of those charged w/governance
Philosophy of mgmt & mgmt operating style
Ethical values & integrity
Responsibility assignment
Control Activities:
PIPS
Performance reviews
Information processing
Physical controls
Segregation of duties
ARCC-S
segregation of duties:
Authorization of transactions
Recording (posting) of transactions
Custody of assets
Comparisons
Risk Assessment Procedures:
AIIO
procedures designed to provide the auditor with an adequate understanding to enable the auditor to effectively assess the risk of material misstatements on the financial statements
Analytical procedures
Inquiries
Inspection
Observation
Goals of Risk Assessment Procedures
- identify types of potential misstatements (error or fraud)
- consider factors that affect the risk of material misstatement
- design tests of controls and substantive procedures
How to document understanding of internal controls:
FIND
Flowchart
Internal control questionnaire
Narrative or memorandum
Decision table/tree
4 procedures for testing controls:
testing cycles for ARCC’s by doing RIIO
Reperformance
Inspection
Inquiry
Observation (most effective)
Inherent Limitations of Internal Control:
COCO
Collusion
Override by management
Competence/human error
Obsolescence
Management’s Assertions:
U-PERCV
Understandability & Classification
Presentation & Disclosure
Existence or Occurence (vouching)
Rights & Obligations
Completeness (tracing) & Cutoff
Valuation, Allocation & Accuracy
Tracing
- going from the source to the books
- testing for completeness
Vouching
- going from the books to the source
- testing for existence/occurance
ICQ Key Questions:
PRAISE
Physical controls
Recording
Authorization
Independent checks
Segregation of duties
Evaluate performance
Material Weakness
a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement on the entity’s financial statements will not be prevented, or detected and corrected on a timely basis