week 2 - Audit

Question 1

What is an important part of the control environment in an organization?

Answer 1

An effective internal audit function that reports to an audit committee.

Question 2

What do external auditors assess in relation to control risk?

Answer 2

They make a preliminary assessment of control risk for material financial statement assertions and perform tests of control to support that assessment.

Question 3

What is a major objective of company systems?

Answer 3

To reduce risk, particularly the impact of inherent and control risk, by implementing efficient accounting and control systems.

Question 4

What are controls designed to do?

Answer 4

Controls are designed to prevent, detect, or correct unwanted events and ensure data and information meet required standards.

Question 5

What are the basic elements of control in the internal environment?

Answer 5

(a) Control environment and related components (management integrity, competence, philosophy, organizational structure, monitoring, and corrective actions).

(b) Accounting and quality assurance/control systems (data security, hardware security, and data processing controls).

Question 6

How is internal control defined?

Answer 6

• Internal control is a process effected by an entity’s board, management, and personnel to provide reasonable assurance regarding the achievement of objectives in three categories:

1. Operational effectiveness and efficiency (O)
2. Reliability of financial reporting (F)
3. Compliance with applicable laws and regulations (C)

Question 7

What is the “control environment” in internal control?

Answer 7

• The foundation for all other control components, contributing to discipline and structure.
• Reflects management’s actions, attitude, and awareness of the need for control.
• If the control environment is poor, other control measures are ineffective.

Question 8

Why do auditors assess the control environment before considering control activities?

Answer 8

Because a weak control environment undermines the effectiveness of control activities.

Question 9

What is risk assessment in internal control?

Answer 9

A process of identifying risks that could prevent the achievement of objectives, measured in terms of probability and impact.

Question 10

How should risks be managed?

Answer 10

Risks must be continually identified, analyzed, and managed while considering changing internal and external environments.