Evaluating Internal Controls

Question 1

What are the five components of the COSO Internal Control Framework?

Answer 1

1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring

Question 2

What factors influence the strength of a client’s control environment?

Answer 2

Integrity and ethical values
Board of directors
Management's philosophy and style
Organizational structure
Human resource practices

Question 3

What procedures are used most frequently to test whether a client’s internal controls are operating effectively?

Answer 3

Inquiry
Observation
Review of documents
Reperformance

Question 4

What are management’s responsibilities under Section 404 of the Sarbanes-Oxley Act?

Answer 4

1. Establish and maintain adequate internal controls over financial reporting.
2. Issue an annual statement assessing the effectiveness of the company’s internal controls over financial reporting.
3. Disclose any material internal control weaknesses existing at the balance sheet date.

Question 5

What are the key components of the auditor’s report on a client’s internal controls over financial reporting (ICoFR)?

Answer 5

1. Statements describing the auditor’s and management’s respective responsibilities.
2. A statement that the auditor complied with PCAOB standards.
3. The definition of ICoFR.
4. The inherent limitations of ICoFR
5. The auditor’s opinion on whether the client maintained effective ICoFR
6. Reference to the auditor’s report on the financial statements.

Question 6

What are four common types of control activities?

Answer 6

1. Procedures to ensure proper authorization and approval of transactions.
2. Procedures to protect assets and records from loss, damage, or alteration.
3. Segregation of duties
4. Periodic reconciliations