Module 3: Understanding Internal Control and Assessing Control Risk

Question 1

Major components of Internal Control

Answer 1

1. Control Environment
2. Risk assessment
3. Control activities
4. Information and communication
5. Monitoring

Question 2

Control Envioronment

Answer 2

control environment factors set the tone of an organization…the seven control environment factors:

1. Integrity and ethical values
2. commitment to competence
3. HR policies and practices
4. assignment of authority and responsibility
5. management’s philosophy and operating style
6. Board of directors or audit committee participation
7. organizational structure

Question 3

Risk Assessment

Answer 3

the identification, analysis, and management of risks relevant to the preparation of financial statements following GAAP

Question 4

Control Activities

Answer 4

Various policies and procedures that help ensure that necessary actions are taken to address risks to achieving the entity’s objectives.

Those policies and procedures include:

P - Performance reviews (reviews of actual performance against budgets, forecasts, one another, etc)
I - Information processing (controls that check accuracy, completeness, and authorization of transactions)
P - physical controls (activities that assure that physical security of assets and records)
S - Segregation of duties (separate authorization, recordkeeping, and custody)

Question 5

Information and Communication

Answer 5

the accounting system…consisting of the methods and records established to record, process, summarize, and report entity transactions and to maintain accountability of the related assets and liabilities.

Question 6

Monitoring

Answer 6

Monitoring assesses the quality of internal control performance over time