Internal Controls and Risk Management Quiz

Ethics, Fraud, and Internal Control

• Ethics in business are needed when conflicts arise, requiring choices.
• Conflicts in business arise between management and stakeholders, as well as employees.
• Litigation can result from ethical conflicts
• Business ethics can be categorized into four main areas: equity, rights, honesty, and corporate power.
• Executive salaries, comparable worth, product pricing, corporate due process, employee health screening, and sexual harassment fall under these categories.
• Other issues include diversity, equal employment opportunity, whistle-blowing, and conflicts of interest.
• Key elements of fraud include false representation, material fact, intent to deceive, justifiable reliance, and injury or loss.
• Studying fraud reveals that in 2002, fraud losses were estimated at 6% of revenue, approximately $600 billion.
• Fraud loss percentages vary by position in a company, with higher losses among managers and more experienced employees.
• Types of fraud include financial statement fraud, misappropriation of assets, concealment of material facts, illegal acts, bribery, conflicts of interest, and breach of fiduciary duty.
• Employee fraud typically involves non-management personnel taking company assets for personal gain.
• Management fraud involves higher levels of management using financial statements to mislead on the health and prosperity of an entity.

Moral Development

• Ethical principle orientation, social contract orientation, and authority orientation are key stages of moral development.
• Stages of behavioural moral development exhibit different behaviours in response to moral situations.

Computer Ethics

• Computer ethics concerns the social impact of computer technology including hardware, software, and telecommunications.
• Key computer ethics issues include privacy, security and accuracy, ownership of property, environmental issues, equity in access, artificial intelligence, unemployment and displacement, and computer misuse.

Internal Control Objectives

• Safeguarding assets, ensuring accuracy and reliability of accounting records, promoting efficiency of operations, and measuring compliance with policies are key internal control objectives.

Modifying Assumptions

• Management is responsible for establishing and maintaining a system of internal control.
• The cost of achieving internal control objectives should not outweigh the benefits.
• Internal control methods vary with different types of technology

Limitations of Internal Controls

• Internal controls are not foolproof because of honest errors, collusion, management overrides, and changing conditions.
• Colluding employees can bypass even the most robust controls.
• Cost-benefit analyses are often crucial in establishing internal controls.

Exposures of Weak Internal Controls (Risk)

• Weaknesses in internal controls expose organizations to risks such as destruction of assets, theft of assets, information corruption, and system disruption.

Weak Internal Controls Increasing Risk

• System breakdowns, erroneous management decisions, fraud, embezzlement, legal violations, substantial costs (higher expenses), and asset loss can arise from weak internal controls.

Internal Control Shield

• Internal control is a shield against undesirable events, including access, fraud, errors, and mischief.

Preventive, Detective, and Corrective Controls

• Internal controls operate on multiple levels: preventive, detective, and corrective, to minimize undesirable outcomes.

Auditing Standards

• Auditors adhere to Philippine Standards on Auditing (PSAs).

Relationship Between Internal Control, Auditor's Assessment, and Audit Procedures

• The internal control structure significantly influences the auditor's assessment of risk and, subsequently, the design of audit procedures.
• A weaker internal control structure results in a higher level of assessed risk, leading to increased audit procedures.

Five Internal Control Components

• The five components of internal control are: control environment, risk assessment, information and communication, monitoring, and control activities.

Control Environment

• Integrity and ethical values of management, organizational structure, role of the board of directors and audit committee, management policies, delegation of responsibilities, performance evaluation, external influences, and human resource policies and practices are key elements of the control environment.

Risk Assessment

• Identifying, analyzing, and managing risks relevant to financial reporting is vital. This includes changes in the external environment, risky foreign markets, significant growth, new product lines, restructuring, downsizing, and accounting policy changes.

Information and Communication

• The AIS produces high-quality information by identifying and recording valid transactions, providing timely information, classifying transactions properly, and measuring financial transaction value accurately.

Monitoring

• The process of assessing the quality of internal control design, feedback on quality, and separate procedures for internal auditors to test controls are necessary actions.

Control Activities

• Policies and procedures for appropriate actions in response to identified risks include performance reviews, information processing (general and application controls), segregation of duties, and physical controls.

Segregation of Duties

• Segregation is fundamental for both manual and computerized systems, preventing single-point failures and reducing fraud opportunities.

Physical Controls

• Physical controls like authorization, supervision, accounting records, access controls, and independent verification are crucial security protocols.

Internal Controls in CBIS

• Transaction authorization, segregation of duties, supervision, and accounting records are critical aspects of internal controls implemented in Computer-Based Information Systems (CBIS).
• Access controls are essential in environments with extensive data consolidation.
• Effective internal controls are not only about preventing but also about detecting and correcting any irregularities in a computer-based system.

Test your knowledge on internal control systems, including segregation of duties, physical controls, and risk assessment. This quiz covers key concepts and challenges associated with both manual and computerized internal control environments. Perfect for students and professionals interested in accounting and auditing practices.