Section 3: Internal Control

Question 1

Objectives of Internal Control:

ACE

Answer 1

Accurate & reliable financial reporting

Compliance with laws & regulation

Effectiveness & efficiency of operations

Question 2

5 Componenets of Internal Control:

CRIME

Answer 2

Control Environment

Risk Assessment

Control Activities

Information & Communication

Monitoring

Question 3

Control Environment:

CHOPPER

Answer 3

Commitment to competence

Human resource policies & practice

Organizational structure

Participation of those charged w/governance

Philosophy of mgmt & mgmt operating style

Ethical values & integrity

Responsibility assignment

Question 4

Control Activities:

PIPS

Answer 4

Performance reviews

Information processing

Physical controls

Segregation of duties

Question 5

ARCC-S

Answer 5

segregation of duties:

Authorization of transactions

Recording (posting) of transactions

Custody of assets

Comparisons

Question 6

Risk Assessment Procedures:

AIIO

Answer 6

procedures designed to provide the auditor with an adequate understanding to enable the auditor to effectively assess the risk of material misstatements on the financial statements

Analytical procedures

Inquiries

Inspection

Observation

Question 7

Goals of Risk Assessment Procedures

Answer 7

• identify types of potential misstatements (error or fraud)
• consider factors that affect the risk of material misstatement
• design tests of controls and substantive procedures

Question 8

How to document understanding of internal controls:

FIND

Answer 8

Flowchart

Internal control questionnaire

Narrative or memorandum

Decision table/tree

Question 9

4 procedures for testing controls:

testing cycles for ARCC’s by doing RIIO

Answer 9

Reperformance

Inspection

Inquiry

Observation (most effective)

Question 10

Inherent Limitations of Internal Control:

COCO

Answer 10

Collusion

Override by management

Competence/human error

Obsolescence

Question 11

Management’s Assertions:

U-PERCV

Answer 11

Understandability & Classification

Presentation & Disclosure

Existence or Occurence (vouching)

Rights & Obligations

Completeness (tracing) & Cutoff

Valuation, Allocation & Accuracy

Question 12

Tracing

Answer 12

• going from the source to the books
• testing for completeness

Question 13

Vouching

Answer 13

• going from the books to the source
• testing for existence/occurance

Question 14

ICQ Key Questions:

PRAISE

Answer 14

Physical controls

Recording

Authorization

Independent checks

Segregation of duties

Evaluate performance

Question 15

Material Weakness

Answer 15

a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement on the entity’s financial statements will not be prevented, or detected and corrected on a timely basis

Question 16

Significant Deficiency

Answer 16

a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness yet important enough to merit attention by those charged with governance