Ch. 10: Internal controls

Question 1

policies and procedures implemented by the company to obtain Reasonable Assurance of achieving the following objectives:

Answer 1

internal controls

Question 2

how many objectives of interal controls

Answer 2

7

Question 3

what are the 7 objectives of internal controls

Answer 3

1. Assets (including data) are safeguarded
2. Records are maintained in sufficient detail to accurately value the assets
3. Accurate and reliable information is provided
4. Financial statements are prepared according to GAAP
5. Operational efficiency is encouraged and improved
6. Adherence to management policies is promoted
7. Organization is in compliance with all applicable lalws and regulations

Question 4

how many types of internal controls

Answer 4

3

Question 5

3 types of internal controls

Answer 5

1. Preventive controls
2. Detective controls
3. Corrective controls

Question 6

(which of the 3 types of internal controls is this)
designed to deter issues before they occure

Answer 6

preventive control

Question 7

(which of the 3 types of internal controls is this)
designed to discover issues quickly when they do happen

Answer 7

detective control

Question 8

(which of the 3 types of internal controls is this)
remedy the issue that did happen by correcting the error and modifying the system so the same error doesnt occur again

Answer 8

corrective control

Question 9

• point of the legislation was to make it illegal to bribe foreign officials to obtain business
• part of the law required companies to maintain ‘good’ internal control systems
• created in 1977

Answer 9

Foreign Corrupt Practices Act

Question 10

• happened in 2002
• created Public Company Accounting Oversight Board (PCAOB)

Answer 10

Sarbanes-Oxley Act

Question 11

governs the audit profession

Answer 11

Public Company Accounting Oversight Board (PCAOB)

Question 12

• happened in 1992
• publish Internal Controls - Integrated framework

Answer 12

Committee of Sponsoring Organizations (COSO)

Question 13

• happened in 2001
• Coso publishes this
• uses same internal control framework-integrated framework and adds to it how to assess and manage risk

Answer 13

Coso publishes Enterprise Risk Management Framework (ERM)

Question 14

how many components to the ERM framework

Answer 14

8

Question 15

8 components to the ERM framework

Answer 15

1. Internal Environement
2. Objective Setting
3. Event Identification
4. RIsk Assessment and Response
5. Control Activities
6. Information
7. Communication
8. Monitoring

Question 16

(which of the 8 componenets to the ERM framework is this)
- companys culture
- foundation for other components

Answer 16

Internal Environment

Question 17

how many factors impact the internal environment

Answer 17

7

Question 18

7 factors that impact the internal environment

Answer 18

1. Managements philosophy, operating procedures, and risk appetite
2. Board of directors
3. Companys committment to integrity, ethical behavior, and competence
4. Organizational Structure
5. Methods of assigning responsibility and accountability
6. Human Resource Standards
   7.External Factors

Question 19

the amount of risk the company is willing to except in order to meet its objectives

Answer 19

risk appetite

Question 20

should be active and engaged in monitoring management, majority of board should be independent

Answer 20

board of directors

Question 21

subject of board; should consist entirely of independent directors; internal audit should report directly to them

Answer 21

audit committee

Question 22

(which of the 7 factors that impact the interal enviroment is this)
have company manual describing ethical behavior

Answer 22

companys committment o integrity, ethical behavior, and competence

Question 23

(which of the 7 factors that impact the interal enviroment is this)
- more complex the orgchart, the greater the chance of errors/fraud

Answer 23

organizational structure

Question 24

(which of the 7 factors that impact the interal enviroment is this)
a. hiring (background checks)
b. training
c. compensation
d. promotions
e. terminations
f. mandotory vacations and rotation of duties

Answer 24

organizational structure

Question 25

(which of the 7 factors that impact the interal enviroment is this) outside organizations whos policies impact the company (SEC; FASB; PCAOB)

Answer 25

External factors

Question 26

risk that exists before management takes steps to control it

Answer 26

inherent risk

Question 27

risk that remains after management determines its response strategy

Answer 27

residual risk

Question 28

how many risk response strategies

Answer 28

4

Question 29

4 risk response strategies

Answer 29

1. Reduce the risk 2. Accept the risk 3. Share the risk 4. Avoid the risk

Question 30

(which of the 4 risk response strategies is this) done by implementing good internal controls

Answer 30

Reduce the risk

Question 31

(which of the 4 risk response strategies is this) do nothing

Answer 31

Accept the risk

Question 32

(which of the 4 risk response strategies is this) transfer some of the risk to another party

Answer 32

Share the risk (ex: insurance)

Question 33

(which of the 4 risk response strategies is this) dont engage in the activity that causes the risk

Answer 33

Avoid the risk

Question 34

5 steps to risk assessment & response

Answer 34

1. Identify events that lead to risk 2. Estimate the likelihood and impact of the risk 3. Identify controls that would reduce the risk 4. Estimate the cost and benefits associated with the controls 5. Select risk response strategy

Question 35

segregation of duties are examples of

Answer 35

control activities

Question 36

how many accounting duties that should be segregated

Answer 36

3

Question 37

3 accounting duties that should be segregated

Answer 37

1. Authorization 2. Recording 3. Custody

Question 38

(which of the 3 accounting duties that should be segregated is this) ability to approve documents & transactions

Answer 38

authorization

Question 39

(which of the 3 accounting duties that should be segregated is this) maintaining journals & ledgers, entering data into the database, prepare reconciliation

Answer 39

recording

Question 40

(which of the 3 accounting duties that should be segregated is this) physical 'ownership' of company assets

Answer 40

custody

Question 41

two parties work together to get around the internal controls

Answer 41

collusion

Question 42

communicate with employees information & expectations related to internal controls

Answer 42

information and communication

Question 43

continuously monitor the system and adjust when needed

Answer 43

monitoring