Untitled Quiz

Control Activities

• Control activities are designed to reduce risk in an organization
• Segregation of Duties: Different tasks in a transaction should be divided among multiple employees. This helps to prevent fraud as no one person has complete control over a transaction.
• Isolation of Responsibility: Employees should be aware of their responsibilities and accountable for their actions.
• Physical and Logical Controls: These controls protect assets through policies and procedures, like security guards, CCTV cameras, and access restrictions. They aim to:
  • Prevent damage to physical assets
  • Prevent deterioration of physical and non-physical assets
  • Prevent unauthorized use, theft, or loss of physical and non-physical assets
• Reconciliation: Comparing data from different sources (internal data against external data, or against physical inventory) helps to identify errors and discrepancies.
• Verification: Comparing items to ensure accuracy and completeness. This can include comparing performance data, key performance indicators, and financial data across periods.
• Performance Reviews: Regular reviews of activities to identify weaknesses, unusual trends, and assess performance against plans, forecasts, and budgets.

Limitations of Internal Controls

• Internal controls provide reasonable assurance, not absolute assurance. This means that risks will always exist regardless of how well-designed and implemented the internal controls are.
• Human Judgement and Error
  • Misinterpretation: Controls may be designed incorrectly, implemented poorly, or reviewed ineffectively. This can be due to lack of understanding or clarity.
  • Cost Considerations: Organizations may choose to implement controls based on available resources, potentially leading to inadequate controls or oversights.
  • Carelessness and Mistakes: Human error, due to inattention, distraction, judgment errors, or misunderstandings, can lead to mistakes and circumvent controls.
  • Inadequate Controls: Existing controls might become ineffective due to changes in conditions or business practices, making them no longer suitable.
• Circumvention of Controls:
  • Collusion: Individuals might work together to overcome internal controls, hiding any inappropriate activities.
  • Management Override: Management may intentionally bypass internal controls to achieve goals, which can lead to significant risk.

Information Systems & Communication

• This area focuses on producing valid and accurate information, ensuring data integrity and proper record keeping.
• Procedures and Records:
  • Well-defined processes for all transactions, including initiating, recording, processing, and posting transactions.
• Books and Documents:
  • Ledgers, journals, and documents are used to support and track all transactions.
• Document Design:
  • Pre-printed: Uses pre-printed forms for efficiency and standardization.
  • Pre-numbered: Sequential numbering helps identify missing or duplicate documents.
  • Multiple Copies: Useful for record keeping and customer confirmations.
  • Logical and Simple: Simple and well-structured documents are easier to complete and understand.
  • Authorization and Approval: Blank spaces for sign-offs ensure authorization and accountability.
• Events and Conditions:
  • Includes events and conditions that are not directly related to transactions but require proper recording in the financial statements, such as depreciation and bad debt allowances.
• Journal Entries:
  • Journal entries help adjust general ledger balances.
  • Internal controls for journal entries: - Authorization: Senior employees approve journal entries to mitigate potential manipulation or fraud.
• Journal entries should be reviewed and balanced regularly.