Internal Control

Question 1

auditors of entities that do not report to SEC aka non-issuers are required to follow

Answer 1

GAAS issued by auditing standard board (ASB) of the AICPA

Question 2

auditors of entities that DP report to SEC aka issuers are required understand

Answer 2

internal control

required to perform integrated audit of both internal control over financial reporting and of financial statements

Question 3

5 assertions related to Events and Transactions that occurred during period of audit

Answer 3

CPA-CO

Completeness
Period Cuttof
Accuracy

Classification
Occurrence

Question 4

4 assertions related to Account Balances

Answer 4

RACE

Rights and obligations
Allocation and Valuation
Completeness
Existence

Question 5

5 assertions related to Presentation

Answer 5

RACOU-n

Rights and obligations
Accuracy and valuation
Completeness
Occurence
Understandability and Classification

Question 6

auditor seeks reasonable assurance that internal control are achieving certain objectives:

Answer 6

ACE

Accurate and reliable financial reporting
Compliance w law and reg.
Effectiveness and efficiency of operations

Question 7

5 components of internal control

Answer 7

CRIME

1. control ‘E’nvironment (E)
2. risk assessment (R)
3. control activities (C)
4. info and communication (I)
5. monitoring (M)

Question 8

control environment

Answer 8

CHOPPER

C-ommitment to competence
H-uman resource policies and practices
O-rganizational structure
P-articipation of those charged w governance
P-hilosophy of management and mgt operating style
E-thical values and integrity
R-esponsibility assignment

Question 9

inherent limitation - things that could occur even if theres rly good internal control

Answer 9

COCO

Collusion (no segregation of duties)
Override by mgmt
Competence/Human error
Obsolescent (changes in company’s operation/size , change in tech, changes affecting entity’s business

Question 10

reasonable assurance

Answer 10

cost of maintain internal control should now exceed benefit derived from having the control.

Question 11

Segegration

Answer 11

ARCC

authorization
recording
custody
comparison

Question 12

Factors associated with the control environment include

Answer 12

1. commitment to competence
2. human resource policies and practices
3. organizational structure
4. participation of those charged with governance
5. philosophy of management and operating style
6. ethical values and integrity
7. responsibility assignment

Question 13

what has more scope, internal control or assessment of risk of material misstatement?

Answer 13

In the assessment of RMM, the auditor will only test those controls that are expected to be relied upon, more limited in scope than an examination of internal control

In an examination of internal control, the auditor expresses an opinion in relation to the effectiveness of internal control, requiring an engagement more extensive in scope.

Question 14

letter written about internal control is for who?

Answer 14

The distribution of the report on internal controls in conjunction with an audit is restricted to management, the audit committee and the board of directors

Question 15

Control activities are the policies and procedures that

Answer 15

management uses to provide reasonable assurance that the entity’s objectives will be achieved

Question 16

monitoring

Answer 16

Monitoring is the process the entity uses to make certain that policies and procedures are, in fact, being followed.

Question 17

The control environment, or tone at the top,

Answer 17

would include the fact that management is control conscious and willing to commit the resources to develop policies and procedures, but the policies and procedures themselves are control activities

Question 18

checking credit before sending item is part of manager’s assertion of

Answer 18

valuation

Question 19

management’s assertions: implicit/explicit assertions regarding recognition, measurement, presentation, and disclosure of info in f/s and disclosures. goal is to give opinion about f/s

Answer 19

COCA-CURVE

Completeness
Occurence
Cutoff
Classification

Classification
Understandability
Rights and Obligations
Valuation and Allocation
Existence

Question 20

purchasing manager would be responsible for

Answer 20

authorization, including negotiating terms with vendors, and would not defer to the accounts payable department

Question 21

when to cancel documentation

Answer 21

Documentation will be canceled at the time payment is made, often by the check signer at the time checks are being signed

Question 22

what does accounts payable do

Answer 22

Accounts payable will establish agreement between the vendors invoice, the receiving report, and the purchase order as a basis for determining that payment may be made.

Question 23

personnel, aka

Answer 23

HR

generally approve pay rate changes that are recommended by operating personnel, and deductions from employees’ salaries

Question 24

controller and payroll

Answer 24

are responsible for the recordkeeping function, which should also be segregated from authorization of transactions

Question 25

treasurer

Answer 25

has custody of the cash, which should be segregated from authorization of transactions

Question 26

Analytical procedures and testing account balances are part of

Answer 26

substantive testing

Question 27

report on internal control will include

Answer 27

1. acknowledgement of management’s responsibility for internal control;
2. a description of what aspects of the system of internal control were examined;
3. the criteria used for performing the evaluation;
4. management’s assertion regarding the effectiveness of the entity’s internal controls;
5. a description of any material weaknesses; and
6. the date of the assertion

Question 28

how to understand effectiveness of internal control:

Answer 28

1. inquiry of client personnel
2. inspection of documents and reports
3. observation of client personnel because each provides evidence relevant to the functioning of internal controls.

Question 29

communication of internal control structure related matters is normally addressed to

Answer 29

the board of directors or the audit committee

The report would not be addressed to the director of internal auditing or any member of management because the deficiency may be a result of management actions.

Question 30

what should not be included in a report on internal control structure related matters noted in an audit

Answer 30

The report may NOT indicate that there are “no significant deficiencies”, which are more prone to going undetected in a financial statement audit engagement

may indicate that there are no material weaknesses since a properly designed and executed audit should identify all material weaknesses

Question 31

When performing a risk assessment in an integrated audit of a nonissuer, the auditor will

Answer 31

1. identify significant accounts, a misstatement of which could result in a material misstatement to the financial statements nad
2. the relevant assertions related to those accounts

Question 32

three categories of internal control objectives

Answer 32

1. Operations Objectives
2. Reporting Objectives
3. Compliance Objectives

Question 33

Audit evidence concerning segregation of duties ordinarily is BEST obtained by

Answer 33

Observation of duties.

can also:

1. review of documentation of internal control procedures, 2. obtaining flowcharts,
2. making inquiries.

Question 34

significant deficiency defined as:

Answer 34

a control deficiency that is not as severe as a material weakness but significant enough to merit the attention of management.

Question 35

Accounting pronouncements represent

Answer 35

an external factor that increases the risk that financial statements may be prepared that are not in conformity with GAAP