Types and Limitations of Accounting Controls

Question 1

What is Internal Control?

Answer 1

A process designed to provide reasonable assurance.

IC systems provide reasonable (cost-effective) not absolute assurance.

Question 2

Who does the Internal Control?

Answer 2

Effected by management, Board of Directors, and other personnel.

Question 3

What are the goals of Internal Control? (3)

Answer 3

1. Effective and efficient operations
2. Reliable financial reporting
3. Compliance with laws & regulations

Question 4

Limitations of Internal Control

Answer 4

1. Management may set (inappropriate) objectives
2. People screw up
3. Management may over-ride controls
4. Collusion happens
5. External events beyond the organization’s control happen

Question 5

What are control deficiencies?

Answer 5

Shortcomings that reduce the likelihood of an entity achieving its objectives.

Management must assess the severity of deficiency.

Question 6

Types of deficiencies (SEC)

Answer 6

• Control deficiency: The least serious of the three.
• Significant deficiency: More serious than a control deficiency but less severe than a material weakness.
• Material weakness: Creates a reasonable possibility of a material misstatement of the entity’s financial statements.

Question 7

3 Categories of Controls

Answer 7

1. Preventive controls
2. Detective controls
3. Corrective controls

Question 8

What is a Preventive controls?

Answer 8

• “before the fact”
• Attempt to stop an error or irregularity before it occurs.
• “Passive” controls

Question 9

What is a Detective controls?

Answer 9

• “after the fact”
• Attempts to detect an error after it has occurred.
• “Active” controls

Question 10

What is a Corrective controls?

Answer 10

• “reversing”
• Are always paired with detective controls.
• Attempt to reverse the effects of the observed error or irregularity.

Question 11

Examples of preventive controls.

Answer 11

• building locks
• user names and passwords
• segregation of duties

Question 12

Examples of detective controls.

Answer 12

• data entry edits (checks for missing data
• reconcile accounting records to physical assets (inventory counts)
• surveillance cameras (primary: detective; secondary: preventive)

Question 13

Examples of corrective controls.

Answer 13

• backup files
• disaster recovery plans
• insurance

Question 14

Types of Controls

Answer 14

1. General

2. Application

Question 15

What is a general control?

Answer 15

• Apply broadly to most computerized functions (holistic)

Ex: restricting access to computer facility, back up file systems, and background checks of personnel

Question 16

What is an application control?

Answer 16

• Focus on accounting application that include data entry, update and reporting.
  Ex: data checks

Question 17

What do feedback controls do?

Answer 17

Evaluate and respond to the results of a process.

Question 18

What do feed-forward controls do?

Answer 18

Project future results and alter inputs in response.