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Flashcards in Internal Control Deck (43):
1

Control risk increases with poor Internal Controls and sloppy accounting practices.

Internal Control

2

Auditor will need to perform more testing and dig deeper into accounts in order to arrive at an opinion regarding the financial statements.

Internal Control

3

Internal control provides reasonable assurance that

Material misstatements will be prevented

Reliability/integrity of financial statements will be preserved

Assets are protected against misuse

Internal Control

4

CEO/CFO must disclose Internal Control deficiencies

Management must provide assessment of Internal Control

Management must certify Financial Statements

Internal Control
Examination of IC is required under SOX

5

Inverse Relationship

Stronger Internal Controls - Less Testing Needed

Weaker Internal Controls - More Testing Needed

Internal Control

6

Reliability of Financial Reporting

Operational Efficiency/Effectiveness

Compliance with Law and Regulations

Internal Control
3 objectives of IC

7

Control Environment

Risk Assessment

Information and Communication

Monitoring

Control Activities

Internal Control
5 components of IC

8

Sets tone for the entire company

Internal Control- Control Environment

9

Integrity/Ethics of Management
Competence of Management
Organizational Structure
Human Resource Policies
Assignment of Authority/Responsibility
Management's Style (riskier with a dominant/aggressive individual)
Board/Audit Committee involvement

Internal Control- Control Environment

10

Detection Risk determines nature- timing- and extent of audit procedures.

Internal Control-Audit Risk Model

11

Risk of material misstatement determines acceptable level of Detection Risk

Internal Control-Audit Risk Model

12

Rapid growth in the company.

The methods management uses to identify risk- estimate its significance and assess the likelihood of occurrence

Major changes to operations- personnel- systems- IT- products- corporate organization- and foreign operations.

Internal Control- Risk Assessment

13

No Internal Control testing is performed.

All audit procedures are increased in intensity to compensate for increased risk.

Internal Control- Audit Risk Model- CR assessed at MAX

14

Auditor tests Internal Controls.

Auditor evaluates Control Risk based on tests

Auditor adjusts substantive tests accordingly

Weaker Internal Control - More substantive tests

Stronger Internal Control - Less substantive tests

Internal Control-CR assessed below MAX

15

Performance Reviews

Information Processing

Physical Controls

Segregation of Duties

Internal Control- Control Activities
R
I
P
S

16

Understand Client's

Major transaction classes
Transaction initiation
Support records/documents
Transaction processing
Financial Statement internal reporting process
Financial Statement external reporting process

Internal Control-Information and Communications

17

Through written documentation such as Internal Control memos- flowcharts- and questionnaires

Internal Control

18

Were all transactions recorded?
Were they timely?
Measured appropriately?
Recorded in correct period?
Presented and disclosed properly?
Did Management communicate their responsibilities?

Internal Control-Information and Communications

19

Auditor needs reasonable assurance that controls are functioning as designed and effective

Internal Control Testing should be strong as (IRON) so that nothing gets past them

Inquiry - Interview company personnel
Re-performance - Can it be replicated?
Observation - Watch the control be applied
INspection - Dig into the details/documents

If results are as expected- substantive procedures do not need to be adjusted

Internal Control

20

Controls tested by auditor in a prior year can be used in the current year's audit assuming they are re-tested every third year

Exception If the control has changed since the last audit

Internal Control

21

Control Risk increases

Scope of substantive procedures increases

Detection Risk decreases

Material Weakness - Reasonable possibility that a material misstatement in Financial Statements would not be found- more than a remote chance of occurrence

Internal Control

22

Reasonable possibility exists that a material misstatement in Financial Statements would not be found- and has more than a remote chance of occurrence.

Internal Control

23

Tests Completeness

Starts with source document and traces forward to the journal entry.

Internal Control-Tracing

24

Tests Existence.

Starts with a journal entry and searches for a voucher or source document to support the entry.

Internal Control-Vouching

25

Non-compatible duties performed by separate individuals- such as

Authorization of asset disbursement vs. Recording of Assets vs. Custody of assets

If supporting audit evidence doesn't exit - use Observation and Inquiry

Accounting should be segregated from Production

Internal Control-Segregation of Duties

26

Employees who prepare vouchers/invoices should not also have the authority to SIGN CHECKS

Tip - Remember this as an underlying theme with Segregation of Duties. The authority to make a payment should not also lie in the hands of those creating invoices/vouchers. Why? People commit fraud by setting up fake companies and basically paying themselves

Internal Control

27

Employees who have custody of assets should not also RECORD those assets

Someone in charge of petty cash should not also control the petty cash records

Treasury Department (custodians) should NOT have record keeping duties

They control assets and should not be able to adjust any recording of those assets

Internal Control

28

Controls can't stop collusion or bad judgment

Management can override controls

Cost vs. Benefit relationship of Internal Control

Internal Control-Limitations

29

A written report to management is required.

Report declaring that no material weaknesses were found is allowed

Previous weaknesses reported that still exist should be reported again

Should be reported no later than 60 days after audit report release date

If one or more material weaknesses is uncorrected at year-end- an Adverse Opinion on Internal Control must be given

Internal Control-Material weakness

30

A significant deficiency adversely affects a company's ability to report in the financial statements according to GAAP.

A significant deficiency is a more than a remote likelihood of material misstatement by more than an inconsequential amount

Internal Control

31

If a Significant Deficiency is identified- a written report to management required

Report declaring that no significant deficiencies exist is not allowed

Previous deficiencies reported that still exist should be reported again

Should be reported no later than 60 days after the audit report release date

Internal Control

32

A control is not operating as intended.

Internal Control- Control Deficiency

33

Are they competent?

Are they objective?

Internal Control- Using work of third party

34

Auditor needs to understand the role of Internal Auditors within the organization because their work affects the audit plan

Responsibility for judgments about materiality or appropriateness of entries or estimates cannot be shared with third parties like Internal Auditors

Internal Auditors should be asked to do some of the legwork like preparing schedules or running reports

They should not be asked to make any decisions or judgments

Internal Control

35

CEO/CFO must disclose deficiencies

Management must provide assessment of Internal Controls

Management must certify Financial Statements

Internal Control

36

Has inverse relationship

Stronger Internal Control results in LESS substantive testing

Weaker Internal Control leads to MORE substantive testing

Internal Control

37

Reliability of Financial Reporting

Operational Efficiency/Effectiveness

Compliance with Law and Regulations

Internal Control

38

Control Activities

Risk Assessment

Information and Communications

Monitoring

Control Environment

Internal Control

39

Integrity/Ethics of Management
Competence of Management
Organizational Structure
Human Resources Policies
Assignment of Authority/Responsibility
Management's Style (riskier with a dominant/aggressive individual)
Board/Audit Committee involvement


Internal Control

40

Auditor tests Internal Controls.

Auditor evaluates Control Risk based on tests

Auditor adjusts substantive tests accordingly

Weaker Internal Control - More substantive tests

Stronger Internal Control - Less substantive tests

Internal Control

41

Understand Client's

Major transaction classes
Transaction initiation
Support records/documents
Transaction processing
Financial Statement internal reporting process
Financial Statement external communication process

Internal Control

42

Auditor must document understanding of Internal Control via Memos - Flowcharts - Questionnaires

Internal Control

43

Auditor needs reasonable assurance that controls are functioning as designed and effective

Internal Control Testing should be strong as (IRON) so that nothing gets past them

Inquiry - Interview company personnel
Re-performance - Can it be replicated?
Observation - Watch the control be applied
INspection - Dig into the details/documents

If results are as expected - substantive procedures do not need to be adjusted

Internal Control