Chapter 3 Section 8: Internal Control

Question 1

What are the three categories of an entity’s objectives?

Answer 1

Reliability of financial reporting
Effectiveness and efficiency of operations
Compliance with laws and regulations

Question 2

What are the five components of internal control?

CRIME

Answer 2

Control environment 
Risk assessment
Information and communication systems
Monitoring
Existing control activities

Question 3

Define control environment

Answer 3

Overall tone of the organization

Question 4

Define risk assessment

Answer 4

Management’s identification of risk

Question 5

Define information and communication systems

Answer 5

Means of recording transactions and communicating responsibilities. They support the identification, capture, and exchange of information in a timely and useful manner

Question 6

Define monitoring

Answer 6

Assessment of internal control performance over time

Question 7

Define existing control activities

Answer 7

Control policies and procedures

Question 8

What is the CPA required to understand regarding CRIME?

Answer 8

Each component as it relates to the financials

Question 9

What does the control environment do?

Answer 9

Sets the tone of the organization, provides discipline and structure

Question 10

What factors contribute to the control environment?

Answer 10

Communication and enforcement of integrity and ethical values of the people
Commitment to competence
Participation of those charged with governance
Management’s philosophy and operating style
Organizational structure
Assignment of authority, responsibility, and accountability
Human resources policies and practices

Question 11

What should the auditor understand regarding the accounting information system?

Answer 11

Accounting processing, accounting records, and financial reporting process

Question 12

What are the control activities in a strong system of internal control?

PAID TIPS

Answer 12

Prenumbering documents
Authorization of transactions
Independent checks to maintain asset accountability
Documentation
Timely and appropriate performance reviews
Information processing controls
Physical controls for safeguarding assets
Segregation of duties

Question 13

What functions should not be combined according to segregation of duties

ARC

Answer 13

Authorization
Record keeping
Custody of related assets

Question 14

Should the internal control environment prevent collusion or management override?

Answer 14

No

Question 15

What are preventive controls?

Answer 15

Designed to provide reasonable assurance that only valid transactions are recognized, approved, and submitted for processing

Question 16

What are detective controls?

Answer 16

Designed to provide reasonable assurance that errors or irregularities are discovered and corrected on a timely basis

Question 17

What can be included in documentation of understanding of internal control?

FIND

Answer 17

Flowchart
Internal control questionnaire or checklist
Narrative
Documentation from client

Question 18

What’s the symbol for a decision in a flowchart?

Answer 18

Diamond

Question 19

What is a narrative?

Answer 19

Written version of a flowchart

Question 20

What are automated controls suitable for?

Answer 20

High volume or recurring transactions

Question 21

What are general controls?

Answer 21

Policies and procedures that relate to many applications and support the effective functioning and proper operation of the information system

Question 22

What are application controls?

Answer 22

Apply to the processing of individual transactions and help to ensure that transactions occurred, are authorized, and are completely and accurately processed and recorded

Question 23

What are the inherent limitations of internal controls?

Answer 23

Management override of internal control
Human error
Deliberate circumvention of controls by collusion