Audit 2 Flashcards
What are the inherent limitations of internal controls?
The inherent limitations include:
Cost versus benefits
Personnel incompetence, untrustworthiness, fatigue, or carelessness
Management override of control procedures
Collusion among employees
Breakdown of controls
Providing only reasonable, not absolute, assurance
The future is uncertain
Why must an auditor obtain an understanding of the entity and its environment, including internal controls?
To identify and assess the risks of material misstatement, whether due to fraud or error, and to design and perform further audit procedures accordingly.
According to Geoff Hill, where do the flaws in internal controls often lie?
The flaw is in the people, not necessarily in the controls and processes themselves.
How does collusion affect internal controls?
Collusion can render segregation of duties ineffective, as two or more employees working together can bypass controls, making fraud harder to detect.
Who is responsible for internal controls?
- Board of Directors
- Management
- All Employees
- Internal Auditors (evaluate effectiveness)
- External Auditors (provide independent assessment)
What is the role of internal auditing according to the Institute of Internal Auditors (1999)?
Internal auditing is an independent, objective assurance and consulting activity that improves an organisation’s operations by evaluating and improving risk management, control, and governance processes.
What are the three main types of audits related to internal control?
- Compliance auditing: Ensures adherence to rules and regulations
- Efficiency auditing: Evaluates optimal use of resources
- Effectiveness auditing: Assesses if resources are used to achieve proper objectives
What are some other types of internal audits?
- Operational audit
- Management audit
- Value for Money (VFM) audit
- Evaluation audit
What factors contribute to an effective internal audit function?
(a) Support from top management
(b) Independence of the internal auditor
(c) Strong ethical culture
(d) Well-qualified and motivated staff
(e) Continuous education and training
(f) Effective staff appraisal system
(g) Good leadership and communication links
(h) Professional behaviour and high job satisfaction
What is the ‘short-stay syndrome’ in internal auditing?
It refers to a factor that reduces effectiveness when internal auditors do not stay in their roles long enough to develop expertise or make significant contributions.
What must external auditors consider when relying on internal audit work?
Organisational status of internal auditors
Scope of their function
Technical competence
Due professional care (ISA 610)
