Types and Limitations of Accountng Control

Question 1

What is Internal Control?

Answer 1

A process designed to provide reasonable assurance

Question 2

Who does Internal Control?

Answer 2

Management, Board of Directors, and other personnel

Question 3

Limitations of Internal Control (6)

Answer 3

1) Management setting poor objectives
2) Internal control depends on people
3) Management may overwrite internal controls
4) Collusion
5) External events beyond organization’s control
6) Inherent limitations

Question 4

Deficiencies in Internal Control

Answer 4

A shortcoming in a component or components that reduces the likelihood of an entity achieving its objectives

Question 5

Types of Internal Control Deficiencies (3)

Answer 5

1) Control deficiency - Least serious of 3 types
2) Significant deficiency - A deficiency in internal control that is more serious than a control deficiency, but less severe than material
3) Material weakness - A deficiency (or combination) that there is reasonable possibility that a material misstatement will not be prevented or detected

Question 6

Categories of Controls - (Preventive, Detective, and Corrective)

Answer 6

1) Preventive - Attempts to stop an error or irregularity before it occurs (tends to be passive); locks on doors, use of user names and password
2) Detective - Detective attempt to detect an error after it has occurred (are active controls), must be performed continually
3) Corrective - Reverse the effects of the observed error or irregularity

Question 7

Categories of Controls - Feedback and Feed-forward controls

Answer 7

Feedback - Evaluate the results of a processes and, if undesirable, adjust the process to correct the results (most detective are feedback)

Feed-forward - Project future results based on current and past information and, if future results are undesirable, change the inputs to the system to prevent the outcome.

Question 8

Categories of Controls - General Controls and Application controls (transaction controls)

Answer 8

General Controls - Controls over the environment as a whole. They apply to all functions, not just specific accounting applications

Application Controls - Controls over specific data input, data processing, and data output.