Short CH 3

Question 1

Can you list the five elements of an internal control system?

Answer 1

1) Control environment
4) Control activities
5) Monitoring of controls
2) Risk assessment process
3) Information system

Question 2

Can you explain the purpose of an external audit?

Answer 2

External audit: an independent examination and expression of opinion on the financial statements of a company
- examination is to obtain sufficient appropriate audit evidence on which to base the audit opinion
- opinion prepared for benefit of shareholders
- independence crucial if audit opinion to have credibility

Question 3

Do you know what is meant by stewardship?

Answer 3

External audit addresses the ‘Agency Issue’. Directors are considered stewards of the company, they are accountable to the shareholders for the performance. External audit gives accountability.

Question 4

What is the difference between controls testing and detailed testing

Answer 4

Controls testing – testing on systems to ensure that the internal control systems that directors have in place are capable of preventing errors in financial information or detecting and correcting them
Detailed testing on higher-risk areas to ensure that reported transactions and balances do not contain material misstatements

Question 5

What are the components of audit risk

Answer 5

-Inherent risk
-Control risk
-detection risk

Question 6

Can you explain the main differences between internal and external audit

Answer 6

-Objectives
-standards
-who they report to
-status
-qualification

Question 7

Can you provide examples of the different types of internal audit assignments?

Answer 7

-VFM
-IT
-Financial
-Reg
-Fraud
-Customer Expereince
-operation

-Project
-Management
-Environmental

Question 8

Can explain what is meant by materiality?

Answer 8

: A transaction or balance is considered material if its omission or misstatement could influence the economic decision of users
Materiality allows an external auditor to focus on significant areas of financial statements

QQR - quantity, quality, repetition

Question 9

Can you define what Fraud is?

Answer 9

deprivation by deceit – the intentional misstatement or misappropriation of assets by an individual or group of individuals
The responsibility for prevention and detection of fraud lies with management and those charged with governance (the board)

Question 10

Can you list different types of control activities which can help prevent fraud?

Answer 10

Authorisation
Physical controls
Segregation of duties
information processing
Documenting