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Questions and Answers
What is the primary purpose of a system of internal control?
What is the primary purpose of a system of internal control?
Internal control systems are designed to assist management in which of the following aspects?
Internal control systems are designed to assist management in which of the following aspects?
Which option best describes the role of internal control in an organization?
Which option best describes the role of internal control in an organization?
How does a system of internal control provide assurance to management?
How does a system of internal control provide assurance to management?
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Which statement is true regarding the effectiveness of internal control systems?
Which statement is true regarding the effectiveness of internal control systems?
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What is the primary focus of the auditor when assessing control risk?
What is the primary focus of the auditor when assessing control risk?
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Which action must an auditor take when determining if there are deficiencies in internal controls?
Which action must an auditor take when determining if there are deficiencies in internal controls?
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What do tests of controls specifically examine?
What do tests of controls specifically examine?
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In assessing control risk, which tool can the auditor use to evaluate the level of risk?
In assessing control risk, which tool can the auditor use to evaluate the level of risk?
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What might compensate for the absence of key internal controls?
What might compensate for the absence of key internal controls?
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What is the primary focus of the control environment in an entity?
What is the primary focus of the control environment in an entity?
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Which of the following is a key consideration in the risk assessment process?
Which of the following is a key consideration in the risk assessment process?
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Which of the following types of control activity helps ensure necessary actions are taken to address risks?
Which of the following types of control activity helps ensure necessary actions are taken to address risks?
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What is NOT a type of control activity mentioned?
What is NOT a type of control activity mentioned?
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Which of the following factors might be considered a material risk in a risk assessment?
Which of the following factors might be considered a material risk in a risk assessment?
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What is the primary responsibility of management regarding internal control?
What is the primary responsibility of management regarding internal control?
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Which of the following is NOT one of the internal control objectives of auditors?
Which of the following is NOT one of the internal control objectives of auditors?
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What does Management's design and implementation of internal controls aim to provide?
What does Management's design and implementation of internal controls aim to provide?
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What is comprised of controls and refers to an entity’s internal practices?
What is comprised of controls and refers to an entity’s internal practices?
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Which framework is widely accepted for internal control?
Which framework is widely accepted for internal control?
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What is an inherent limitation of internal control systems?
What is an inherent limitation of internal control systems?
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How do auditors assess control risk during an audit?
How do auditors assess control risk during an audit?
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What aspect of internal control is NOT included in management's objectives?
What aspect of internal control is NOT included in management's objectives?
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What is the primary purpose of an accounting information and communication system?
What is the primary purpose of an accounting information and communication system?
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What does monitoring activities in an internal control system assess?
What does monitoring activities in an internal control system assess?
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Why must auditors obtain and document an understanding of internal control?
Why must auditors obtain and document an understanding of internal control?
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Which action is NOT part of the process initiated by an accounting information system?
Which action is NOT part of the process initiated by an accounting information system?
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What is a key outcome intended by monitoring activities within internal controls?
What is a key outcome intended by monitoring activities within internal controls?
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What aspect of internal control is focused on by ongoing management assessments?
What aspect of internal control is focused on by ongoing management assessments?
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Which phase is NOT included in the functioning of an accounting information system as outlined?
Which phase is NOT included in the functioning of an accounting information system as outlined?
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What must be modified when internal controls are found to be ineffective?
What must be modified when internal controls are found to be ineffective?
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What is the primary purpose of examining documents, records, and reports during an audit?
What is the primary purpose of examining documents, records, and reports during an audit?
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What action is taken when auditors observe control-related activities?
What action is taken when auditors observe control-related activities?
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What is the sequence of steps an auditor follows after assessing control risk?
What is the sequence of steps an auditor follows after assessing control risk?
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Which of the following is NOT a part of the procedures for tests of controls?
Which of the following is NOT a part of the procedures for tests of controls?
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What does the planned detection risk relate to in the auditing process?
What does the planned detection risk relate to in the auditing process?
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What role do tests of controls play in the audit?
What role do tests of controls play in the audit?
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In planning detection risk, what is influenced by the results from tests of controls?
In planning detection risk, what is influenced by the results from tests of controls?
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What is implied by conducting inquiries of client personnel during the audit?
What is implied by conducting inquiries of client personnel during the audit?
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Study Notes
Internal Control
- A system of internal control comprises policies and procedures designed to give management reasonable assurance the company achieves goals and objectives.
- These policies and procedures are known as controls, collectively forming the entity's Internal Control.
Internal Control Objectives
- Management has three primary goals in designing an effective internal control system:
- Compliance with laws and regulations
- Reliability of financial reporting
- Efficiency and effectiveness of operations
- Auditors, unlike management, do not include efficiency and effectiveness of operations in their internal control objectives.
Responsibilities for Internal Control
- Management is responsible for establishing, maintaining, testing, and reporting on the operating effectiveness of the entity's internal control.
- Management's internal control design and implementation is based on reasonable assurance and inherent limitations.
- Auditors are responsible for understanding internal control, testing, and reporting on its operating effectiveness.
- Auditors assess control risk to design the nature, timing, and extent of further audit procedures.
Five Components of Internal Control (COSO Framework)
- Control Environment: Policies and procedures reflecting top management's attitude, directors', and owners' views about internal control and its value to the entity.
- Risk Assessment: Management's process for looking at how they assess material risks that may arise, evaluating their significance, and the likelihood of occurring, including rapid technological changes and new competitor entry.
- Control Activities: Policies and procedures to ensure necessary actions are taken to handle risks, including adequate separation of duties, proper authorization, appropriate documents/records, physical asset control, and independent checks on performance.
- Information and Communication: Purposeful accounting information and communication systems for initiating, recording, processing, reporting transactions and maintaining accountability for related assets.
- Monitoring: Ongoing and periodic assessment of internal control quality by management to ascertain whether controls work as intended and are modified if necessary.
Process for Understanding Internal Control and Assessing Control Risk
- Phase 1: Obtain and document an understanding of the internal control design and operation.
- Phase 2: Assess control risk.
- Phase 3: Design, perform, and evaluate tests of controls.
- Phase 4: Decide planned detection risk and design substantive tests.
Obtain and Document Understanding of Internal Control Design and Operation
- Auditing standards require auditors to obtain and document an understanding of internal control for each audit.
- Auditors must consider whether the designed controls are implemented in practice, in addition to the design.
Assess Control Risk
- Auditors evaluate if financial statements are auditable.
- Determine assessed control risk, assuming controls are operational.
- Use a control risk matrix to evaluate control risk.
Identification of Deficiencies and Material Weaknesses
- Auditors identify existing controls.
- Auditors identify the absence of key controls.
- Auditors consider compensating controls.
- Auditors decide whether there are significant deficiencies or material weaknesses.
- Auditors identify potential misstatements.
Tests of Controls
- Procedures to help test effectiveness of control in support of a reduced assessed control risk are called tests of controls.
Procedures for Tests of Controls
- Inquire of client personnel
- Reproform client procedures
- Examine documents, records, reports
- Observe control-related activities
Decide Planned Detection Risk and Design Substantive Tests
- The results of the control risk assessment process and tests of controls inform the planned detection risk and subsequent substantive tests.
Section 404 Reporting on Internal Control
- The scope of the auditor's report on internal controls is limited to obtaining reasonable assurance that material weaknesses in internal control are identified.
Types of Opinions
- Unqualified: No material weaknesses, no scope restrictions.
- Adverse: One or more material weaknesses.
- Qualified or Disclaimer: Scope limitation.
Communications to Those Charged with Governance
- Auditors must communicate significant deficiencies and material weaknesses in writing to the audit committee.
- Management letters from auditors contain less significant control weaknesses and ideas for operational improvements.
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Description
This quiz covers the fundamental concepts of internal control, including its objectives and the responsibilities of management and auditors. Test your knowledge on how these controls help organizations achieve their goals and ensure compliance.
