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SU 3 Flashcards

1
Q

What is internal control

A
  • Provides reasonable assurance on achievement of entity’s objectives
  • Links directly to risks
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2
Q

What are the objectives of internal control (3)

A
  • Reliability of financial reporting
  • Effectiveness & efficiency of operations
  • Compliance with laws & regulations (companies act)
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3
Q

Who is responsible for internal control

A

Directors (can delegate responsibilities)

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4
Q

What are the 5 components of internal control

A
  • Control environment (foundation of internal control)
  • Risk assessment
  • Info system & communication
  • Control activities
  • Monitoring of controls
  • Each component dependent on previous
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5
Q

Components of control environment (5)

A
  • Integrity
  • Ethical values
  • HR policies & competence
  • Organisational structure
  • Overall values & attitude
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6
Q

Components of risk assessment (4)

A
  • Governance of risk & risk management
  • Risk identification
  • Risk evaluation
  • Risk response
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7
Q

2 parts of information system & communication

A
  • Accounting system
  • Business processes
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8
Q

Explain information system & communication (3)

A
  • Audit trail of transactions
  • Reports to be communicated internally
  • Process & activities in preping financial info
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9
Q

4 stages of accounting system

A
  1. Initiate
  2. Records
  3. Process
  4. Report
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10
Q

Explain ‘initiate’ step of accounting system

A

Activities where transaction begins / when completed

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11
Q

Explain ‘record’ step of accounting system (2)

A
  • Source documents issued & prepared
  • Step skipped if computerised
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12
Q

Explain ‘process’ step of accounting system (2)

A
  • Entries made in actual records
  • From after source documents to trial balance
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13
Q

Explain ‘report’ step of accounting system

A

All other steps combined to prepare annual financial statements

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14
Q

5 components of business processes

A
  • Revenue & receipts
  • Purchases & payments
  • Inventory & production
  • Human resources
  • Investment & financing
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15
Q

Explain ‘revenue & receipts’ of business processes (2)

A
  • Sales/credit sales to customers
  • Payments received
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16
Q

Explain ‘inventory & production’ of business processes (2)

A
  • Manufacturing
  • Safekeeping
17
Q

Explain ‘purchases & payments’ of business processes (2)

A
  • Ordering & receiving from suppliers (also on credit)
  • Making payments to suppliers
18
Q

Explain ‘human resources’ of business processes (3)

A
  • Employees
  • Appointments & terminations
  • Remuniration
19
Q

Explain ‘investing & financing’ of business processes (3)

A
  • Acquisition of non-current assets
  • Raising funds
  • Repayments
20
Q

Explain control activities (3)

A
  • Controls implemented by management to address risks identified
  • Internal control measures
  • Policies & procedures
21
Q

Explain monitoring of controls (6)

A
  • Ensure implementation & application
  • Internal audit
  • Supervisors
  • Management (implement control)
  • Those charged with governance
  • Employees (execute control measures)
22
Q

5 control activities (internal control measures)

A
  • Documentation & records
  • Authorisation & approval
  • Segregation of duties
  • Access controls
  • Verification, recons, independent checks
  • Some activities overlap
23
Q

Explain ‘documentation & records’ of control activities (3)

A
  • Document design (all documents should look same)
  • Stationary controls (sequentially nr documents)
  • Chart of accounts (no postings outside prescribed GL accounts)
24
Q

Explain ‘authorisation & approval’ of control activities (2)

A
  • Valid & accurate transaction
  • Levels of approval
25
Explain 'segregation of duties' of control activities
Incompatible duties performed by different employees
26
Explain 'access controls' of control activities (2)
- Physical & logical - Passwords, security
27
Explain 'verification, recons, independent checks' of control activities (2)
- Reviews between data sets - Signatures
28
Inherent limitations of internal control (7)
- Controls circumvented by collusion of ≥2 people - Management/employees abusing authority by overriding controls - Implementation of only cost-effective controls - Controls don't control non-routine transactions (exceptions) - Human error - Time & training constraints of employees - Changes in business with no updates to controls
29
Internal controls only provide reasonable assurance
Some areas susceptible to error due to different reasons
30
What if internal controls don't work
High probability that risks related to non-functioning controls will materialise
31
Consequences if internal controls don't work (4)
- Fraud - Inaccuracy - Financial losses - Wrong decisions
32
Why design a proper system of internal control
Ensures each control objective is achieved & related risk addressed
33
3 steps to design a proper system of internal control
1. Identify risks 2. Formulate control objectives 3. Design appropriate controls
34
Identifying risks (3)
- Incorrect calculations on invoice = financial losses (accuracy) - Not all orders placed & authorised are executed & delivered = potential revenue loss (completeness) - Goods invoiced but not ordered by customer = dissatisfaction (validity)
35
Formulating control objectives (3)
- Accuracy: = Ensures calculations are correct - Completeness: = Ensures all authorised orders are timeously executed & delivered to customer - Validity: = Ensures goods are only invoiced if they were ordered
36
Design appropriate controls (3)
- Accuracy: = 2nd staff member checks castings & calculations before invoice processed - Completeness: = Copy of picking slip (from warehouse after goods are picked) sent to sales department to agree to internal sales order (ISO) = Always 2 documents (if not = wrong) - Validity: = 2nd staff member checks if invoice is supported by signed customer delivery note and ISO
37
2 Types of controls
- Preventative - Detective & corrective - Combination for effective system of internal control
38
Explain preventative control
Prevent undesirable effects of risk materialising
39
Explain detective & corrective control (2)
- Detect effects of risk already materialised & ensures action taken to fix undesirable effects - 2nd person comes in to see if something is correct / not

GEAR111 (7 decks)

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