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Questions and Answers
What is the primary responsibility of the Internal Audit (IA) function within an organization?
What is the primary responsibility of the Internal Audit (IA) function within an organization?
To whom does the Chief Audit Executive (CAE) typically report?
To whom does the Chief Audit Executive (CAE) typically report?
Which task is typically the responsibility of the Audit Committee of the Board of Directors?
Which task is typically the responsibility of the Audit Committee of the Board of Directors?
What is a key function of the Audit Committee in relation to the internal audit plan?
What is a key function of the Audit Committee in relation to the internal audit plan?
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What is the purpose of holding executive sessions with the company's chief audit executive?
What is the purpose of holding executive sessions with the company's chief audit executive?
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Which activity falls under the purview of the audit committee?
Which activity falls under the purview of the audit committee?
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What is a key aspect of the external auditor's role?
What is a key aspect of the external auditor's role?
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Which action falls under the purview of the Audit Committee of the Board of Directors regarding Internal Audit (IA)?
Which action falls under the purview of the Audit Committee of the Board of Directors regarding Internal Audit (IA)?
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What is the primary goal of evaluating internal controls in the context of financial statement audits?
What is the primary goal of evaluating internal controls in the context of financial statement audits?
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Which of the following is primarily responsible for assessing the reliability of a client's IT systems during an audit?
Which of the following is primarily responsible for assessing the reliability of a client's IT systems during an audit?
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What is the 'attest function' primarily concerned with in the context of external audits?
What is the 'attest function' primarily concerned with in the context of external audits?
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Which factor contributed to the initial rise and importance of IT auditing?
Which factor contributed to the initial rise and importance of IT auditing?
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Why do corporate management emphasize the need for control and auditability of computer systems?
Why do corporate management emphasize the need for control and auditability of computer systems?
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What is a key role of an IT auditor in an advisory capacity?
What is a key role of an IT auditor in an advisory capacity?
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For an IT auditor to effectively perform their role, what combination of expertise is essential?
For an IT auditor to effectively perform their role, what combination of expertise is essential?
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What is the primary reason that IT auditing became an integral part of the overall audit function?
What is the primary reason that IT auditing became an integral part of the overall audit function?
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When an entity extensively uses IT in accounting estimates, which controls are LEAST likely to be identified under the control activities component?
When an entity extensively uses IT in accounting estimates, which controls are LEAST likely to be identified under the control activities component?
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What is a critical risk addressed by controls when diverse IT applications process complex transactions and lack automated interfaces?
What is a critical risk addressed by controls when diverse IT applications process complex transactions and lack automated interfaces?
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Which aspect of models used in accounting estimates should be periodically evaluated, according to the content?
Which aspect of models used in accounting estimates should be periodically evaluated, according to the content?
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What is the primary concern related to data extraction for accounting estimates from an entity’s records or external sources?
What is the primary concern related to data extraction for accounting estimates from an entity’s records or external sources?
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When using external information sources for accounting estimates, what specific data-related risks should be addressed?
When using external information sources for accounting estimates, what specific data-related risks should be addressed?
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What control objective is MOST important regarding access, change, and maintenance of individual models used in accounting estimates?
What control objective is MOST important regarding access, change, and maintenance of individual models used in accounting estimates?
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What is the primary control objective when transferring information relating to accounting estimates into the general ledger?
What is the primary control objective when transferring information relating to accounting estimates into the general ledger?
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Why is understanding an entity's IT environment relevant to the information system important for an auditor?
Why is understanding an entity's IT environment relevant to the information system important for an auditor?
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What is the central focus when an auditor seeks to understand an entity's utilization of Information Technology (IT)?
What is the central focus when an auditor seeks to understand an entity's utilization of Information Technology (IT)?
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How might changes in the flow of transactions or information within an information system occur?
How might changes in the flow of transactions or information within an information system occur?
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What is the definition of Business Ethics?
What is the definition of Business Ethics?
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Which of the following best describes the scope of computer ethics?
Which of the following best describes the scope of computer ethics?
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What is the definition of employee fraud?
What is the definition of employee fraud?
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What typically motivates management fraud?
What typically motivates management fraud?
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What is a key characteristic of fraud?
What is a key characteristic of fraud?
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When may an auditor identify IT applications and supporting IT infrastructure?
When may an auditor identify IT applications and supporting IT infrastructure?
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What is the primary goal of placing a strong emphasis on fraud prevention and deterrence?
What is the primary goal of placing a strong emphasis on fraud prevention and deterrence?
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Which action exemplifies oversight by those charged with governance in the context of financial reporting?
Which action exemplifies oversight by those charged with governance in the context of financial reporting?
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According to ISAs, what level of assurance does an auditor provide regarding material misstatements in financial statements?
According to ISAs, what level of assurance does an auditor provide regarding material misstatements in financial statements?
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Why is the risk of not detecting material misstatements due to fraud higher than that of errors?
Why is the risk of not detecting material misstatements due to fraud higher than that of errors?
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Which factor most significantly impairs an auditor's ability to detect fraud?
Which factor most significantly impairs an auditor's ability to detect fraud?
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Which of the following actions taken by management demonstrates a commitment to creating a culture of honesty and ethical behavior?
Which of the following actions taken by management demonstrates a commitment to creating a culture of honesty and ethical behavior?
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When performing an audit, what should an auditor do to detect and prevent earnings management?
When performing an audit, what should an auditor do to detect and prevent earnings management?
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Even with a properly planned and executed audit in accordance with ISAs, why is there an unavoidable risk of not detecting some material misstatements?
Even with a properly planned and executed audit in accordance with ISAs, why is there an unavoidable risk of not detecting some material misstatements?
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Why do auditors typically adopt a risk-based approach during an audit?
Why do auditors typically adopt a risk-based approach during an audit?
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What is the potential consequence of ineffective IT audit risk management?
What is the potential consequence of ineffective IT audit risk management?
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Which of the following best describes the purpose of an internal control system?
Which of the following best describes the purpose of an internal control system?
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According to the content provided, who bears the primary responsibility for establishing and maintaining a system of internal control?
According to the content provided, who bears the primary responsibility for establishing and maintaining a system of internal control?
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What level of assurance is provided by an effective internal control system?
What level of assurance is provided by an effective internal control system?
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An internal control designed to reduce the frequency of undesirable events is referred to as which type of control?
An internal control designed to reduce the frequency of undesirable events is referred to as which type of control?
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What should auditors focus on when utilizing a risk-based approach?
What should auditors focus on when utilizing a risk-based approach?
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What is a characteristic of 'preventive controls'?
What is a characteristic of 'preventive controls'?
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Flashcards
Internal Audit (IA) Function
Internal Audit (IA) Function
Ensures that management-approved controls are effectively applied and monitored.
Chief Audit Executive (CAE)
Chief Audit Executive (CAE)
Leads the IA department and reports to both the Audit Committee and CEO.
Audit Committee Responsibilities
Audit Committee Responsibilities
Oversees the internal audit function, including approvals and evaluations.
Risk Assessment
Risk Assessment
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Internal Audit Plan
Internal Audit Plan
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Executive Sessions
Executive Sessions
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Funding for Internal Audit
Funding for Internal Audit
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External Audit
External Audit
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Purpose of External Auditors
Purpose of External Auditors
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The Big Four
The Big Four
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External Auditor Responsibilities
External Auditor Responsibilities
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Attest Function
Attest Function
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Need for IT Audit
Need for IT Audit
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Impact of Computers on Auditing
Impact of Computers on Auditing
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Roles of IT Auditors
Roles of IT Auditors
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Integration of IT Auditing
Integration of IT Auditing
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General IT Controls
General IT Controls
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Information Processing Controls
Information Processing Controls
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Risk of Data Processing
Risk of Data Processing
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Reconciliations
Reconciliations
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Model Calibration
Model Calibration
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Data Extraction Accuracy
Data Extraction Accuracy
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Audit Trail
Audit Trail
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Control over Journal Entries
Control over Journal Entries
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IT Environment
IT Environment
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Changes in Transaction Flow
Changes in Transaction Flow
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Business Ethics
Business Ethics
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Computer Ethics
Computer Ethics
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Fraud
Fraud
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Employee Fraud
Employee Fraud
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Management Fraud
Management Fraud
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Internal Controls
Internal Controls
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Fraud Prevention
Fraud Prevention
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Fraud Deterrence
Fraud Deterrence
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Culture of Honesty
Culture of Honesty
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Oversight by Governance
Oversight by Governance
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Material Misstatement
Material Misstatement
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ISA 200
ISA 200
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Detecting Fraud Risk
Detecting Fraud Risk
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Collusion
Collusion
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Risk-Based Approach in Auditing
Risk-Based Approach in Auditing
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Statement of Comprehensive Income
Statement of Comprehensive Income
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Key Risks in Auditing
Key Risks in Auditing
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IT Audit Risks
IT Audit Risks
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Internal Control System
Internal Control System
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Management Responsibility
Management Responsibility
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Reasonable Assurance in Internal Controls
Reasonable Assurance in Internal Controls
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Preventive Controls
Preventive Controls
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Study Notes
Module I - Introduction to IT Auditing, Fraud, and Internal Controls
- Learning Objectives: Define basic auditing and IT terms, explain basic concepts and procedures, differentiate attest and advisory services related to info systems, discuss internal controls, describe the relationship among general/application controls & financial data integrity, identify business ethics issues, describe fraudulent behavior, discuss fraud schemes, explain fraud motivating forces, and explore fraud detection techniques.
The IT Environment and Basic Concepts
- IT Environment: Refers to the infrastructure, hardware, software, and systems a business uses daily with IT.
- Components:
- Hardware: Physical components like monitors, CPUs, keyboards, mice, personal computers, servers, and data centers.
- Software: Instructions that enable hardware to perform tasks, including web servers & applications.
- Networking: Interconnected computing devices that exchange data/share resources (e.g., routers, switches, hubs, firewalls, cables).
- Importance: Organizations must integrate IT with their business strategies to achieve objectives, obtain value from information, capitalize on available technology, address IT governance, security and privacy, and ensure control of public and organizational information.
- Organization Strategies: viewed as an enabler of their strategy, and now regarded as an integral part of that strategy in terms of profitability and service.
The Auditing Profession
- Financial Auditing: Examines financial statements to determine if they're fair. Scope encompasses equipment/procedures used in processing significant data.
- IT Auditing: Formal, objective examination of an organization's IT infrastructure. Focuses on verifying whether activities (procedures, controls) involved in data gathering, processing, storing, and distribution comply with guidelines, protect assets, maintain data integrity, and operate efficiently, to achieve organizational goals. Provides reasonable but not absolute assurance of accuracy/completeness of application-generated information.
Types of Audit Functions
- Internal Audit (IA): An independent, objective assurance and consulting activity. Improves operations, risk management, and governance. Plays a critical role in IT audits. Monitors IT activities (controls).
- External Audit: Evaluates systems controls, minimizes substantial auditing, and renders an opinion on financial statements, and the reliability of IT systems. Specialized experience/knowledge required. "Big Four" accounting firms often perform these audits.
Roles and Responsibilities of Audit Committees
- Audit Committees are responsible for approving audit charters, evaluating the internal audit function, setting compensation for the CAE/Chief Audit Executive, reviewing ongoing activities of the internal audit function, and providing a mechanism for escalation of findings. They also play a key role in control governance and ethics training.
Information Systems (IS) vs. Information Technology (IT)
- Information Systems (IS): The formal procedure for gathering, processing, and distributing data into information to users.
- Information Technology (IT): Involves integrating hardware, software, networking, or other facilities to support/manage data.
Information Systems Audit and Controls Association (ISACA)
- An international professional association focused on IT governance. Offers certifications like the Certified Information Systems Auditor (CISA).
International Standards of Auditing (ISA) 315
- IT in Accounting Estimates: Management's use of IT in making accounting estimates affects the design and implementation of IT controls.
- Risks: IT applications/environments may cause risks affecting the capability to process large data volumes, complex calculations, and the accuracy/extraction of data from systems and external sources.
- Significant Issues: Access, changing, and maintaining data models, transferring data accurately, and controls over journal entries for accounting estimates.
Business Ethics, Fraud and Internal Controls
- Ethics: Principles guide behavior in situations involving right/wrong conduct.
- Computer Ethics: Analysis of computer technology. Impacts of technology and policies for ethical computer use.
- Fraud: False representation of a material fact to induce reliance for personal benefit.
- Types of Fraud:
- Employee Fraud: Non-management employees directly misappropriating assets.
- Management Fraud: Deceptive practices to inflate earnings/conceal insolvency.
The Fraud Triangle
- Incentive: Motivation for committing fraud.
- Opportunity: Presence of conditions that facilitate fraud.
- Rationalization: Actions rationalized to justify fraud.
Concepts of Computer Fraud
- Computer Fraud: Theft, misuse, or misappropriation of assets, altering computer-readable records, illegally using computer-readable information, and intentional destruction of computer resources.
- Computer Crime: Illegal acts using computers.
- Examples involving computer fraud/crime include phishing, altering electronic data, spreading misinformation, unauthorized computer usage and botnet crimes.
Roles of an IT Auditor
- Counselor (Advisory): Assist organizations in developing policies, procedures, and standards, in safeguarding info assets.
- IT Auditor (Part of Senior Management): Provide independent assessments of IT decisions impact, evaluate solutions/alternatives and needs, provide verification that all risks have been assessed accurately, business requirements are met, costs are reasonable.
- Investigator: Specialist role in the field of computer forensics, which assists in understanding specific system or network related issues quickly.
Other Forms of Computer Crimes
- Business Email Compromise (BEC): Sophisticated scams targeting businesses.
- Ransomware: Malware that encrypts data.
- Tech Support Fraud: Fraudulent technical support claims.
- E-mail/Government Impersonation: Posing as government officials for theft of information.
- Intimidation/Extortion: Gaining assets and data using threats.
- Confidence/Romance Frauds: Scams that look for partnerships, friendships via online resources.
Responsibility for Fraud Prevention and Detection (ISA)
- Primary Responsibility: rests with both those charged with governance and entity management. They must place strong emphasis on fraud prevention and create a culture of honesty/ethical behavior.
Anti-Fraud Detection Techniques
- Traditional Methods: Rule-based systems, manual reviews. Inefficient/slow with evolving fraud. Generate many false alerts.
- Modern Methods: AI, machine learning, predictive analytics, and data modeling. More adaptable; detect anomalies in real-time.
Audit Risk
- Definition: Risk auditor expresses an inappropriate audit opinion when financial statements contain material misstatements.
- Material Misstatement/Detection Risk: A function of the risk.
- Importance: Auditors can't check every transaction. Hence the importance of the risk-based approach.
Risks Applicable to IT Audits
- IT System Risks: Probability of negative events, financial losses, and reputational damage. Arise from internal control weaknesses/inadequate/insufficient security measures and disaster recovery plans.
Concepts of Internal Controls
- Internal Control System (ICS): Policies a firm employs to safeguard assets, ensure accurate records, and promote efficiency.
- Objectives: Ensure accurate accounting, safeguard assets, promote efficiency, and compliance with policies.
- Modifying Assumptions: Management maintains responsibility/establishes & maintains the internal control system. Reasonable assurance (by the system) that the four broad objectives of internal control (above) are met cost-effectively.
Types of IT Controls
- General Controls (ITGC): Controls over the IT infrastructure, systems, and applications. (e.g., security, change management, and business continuity).
- Application Controls: Specific to a particular application. Verify data accuracy, completeness, and validity of the processing of transactions.
IT Entity-Level Controls
- Impact: Broad impact on the entire IT environment (not limited to a specific application).
- Management Oversight: Controls driven by management, setting standards.
- Components: Affect the entire control environment, risk assessment, control activities, information & communication, and monitoring (COSO framework).
- Examples: Access controls, change management, data backup & recovery, incident response plans, IT governance frameworks, etc.
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Description
This quiz focuses on the roles and responsibilities of the Internal Audit function and the Audit Committee within organizations. It covers key concepts such as reporting structures, internal controls, and the external auditor's role. Test your knowledge on the critical aspects of auditing and governance.
