Flashcards in Deck 9 Deck (20):
What is the primary objective of the fraud brainstorming session?
Assess the potential for material misstatement due to fraud
Reflects the overall attitude, awareness, and actions of those charged with governance concerning the importance of control
"Substance over form" concerns
Relate to controls that appear on the surface to exist but in reality are not operating effectively.
Proper segregation of duties:
- Reduces the opportunities for any individual to both perpetrate and conceal errors or fraud
- Typically involves assigning different people the responsibilities of authorizing transactions, recording transactions, and maintaining custody of the related assets
What tests assist the auditor in assessing control risk?
Attribute tests, compliance tests, and tests of controls
What is the ultimate purpose of assessing control risk?
To contribute to the auditor's evaluation of the risk that material misstatements exist in the financial statements.
What are inherent limitations?
Limitations that exist despite implementations of appropriate controls
Inherent limitations of internal control include:
Collusion, management override, and human error
Include controls that relate to the entity as a whole, not a specific event
Five components of internal control (COSO Framework)
Information and communication system
Existing control activities
Process that assesses the quality of internal control performance over time (make sure everything is okay)
Policies and procedures that help ensure that management directives are carried out and that necessary steps to address risks are taken (prevent, detect, and defer)
Strong internal control has:
Designed to provide reasonable assurance that only valid transactions are recognized, approved, and submitted for processing
Designed to provide reasonable assurance that errors or irregularities are discovered and corrected on a timely basis
A control has been implemented if it exists and is being used
Trace transactions relevant to financial reporting through the accounting system from inception through recording in the general ledger and presentation in the financial statements
Documentation of the understanding of the design and implementation of the entity's internal controls include:
Internal control questionnaire or Checklists
Documentation from the client
Flowchart that shows the origin of each document in the system, its subsequent processing, and its final disposition