Internal Control Concepts 1 Flashcards Preview

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Flashcards in Internal Control Concepts 1 Deck (11)
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1
Q

How does an auditor obtain an understanding of internal control and the flow of documents related to the entity’s transactions?

A

1 Inquiry of appropriate personnel
2 Observation of client activities
3 Review of documentation

2
Q

The auditor’s internal control analysis tends to focus on what?

A

The entity’s major transaction cycles

3
Q

What’s the Transaction Cycle?

A

A group of essentially homogeneous transactions, that is, transactions of the same type

4
Q

Implication

A

Each transaction within a specific transaction cycle is captured, processed, and recorded subject to the same set of internal control policies and procedures

5
Q

What are typical types of transaction cycles?

A
1 Revenue/receipts
2 Expenditures/disbursements
3 Payroll
4 Financing/investing activities
5 Inventory, especially if inventory is manufactured, rather than purchased
6
Q

The understanding should the auditor document?

A

1 The understanding of internal control

2 The extensiveness of the review

7
Q

NOTE

A

The emphasis on understanding internal controls increases if reliance on internal control is planned

8
Q

What is a Flow chart of transaction cycles?

A

A graphical depiction of the client’s accounting systems for major categories of transactions with emphasis on the origination, processing, and distribution of important underlying accounting documents

9
Q

What are the advantages and disadvantages to Flow Charts?

A

Advantages—A fairly systematic approach that is unlikely to overlook important considerations; tailored to client-specific circumstances; fairly easy for others to review and understand; and fairly easy to update from year to year.
Disadvantages—Can be rather tedious and time consuming to initially prepare

10
Q

What is a Narrative write-up?

A

A written memo describing the important control-related activities in the transaction cycles under consideration

11
Q

What is performing a walkthrough?

A

The auditor may select a few transactions to trace them through the client’s entire accounting system

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