Internal Control 2

Question 1

primary objective of procedure to obtain understanding of internal control structure

Answer 1

to gain knowledge necessary for audit planning

Question 2

Documentation required for audit in accordance with GAAS

Answer 2

• written audit plan with evidence gathering procedures needed to accomplish auditor’s objectives
• reconciliation or agreement of the accounting records with the financial statements
• reconciliation or agreement of the accounting records with the financial statements
• understanding of entity internal control (NOT need to be flowchart)
• no single form is mandatory
• extent of documentation varies

Question 3

Flowchart

Answer 3

pictorial summary of auditor’s understanding of system

Question 4

Examples of Management control method to improve mgmt ability to supervise effectively

Answer 4

• Est budgets and forecasts to identify variances from expectations
• Important for successful operation (not Mgmt supervision): monitor compliance with regulatory req, limit access to assets, provide adequate support

Question 5

why evaluating the substance of internal control procedure is more important than the form

Answer 5

procedure may be est appropriately but not enforced/implemented (“substance”)

• eval design of internal control (“form”)

Question 6

Decision table

Answer 6

presents in table format the conditions and alternative actions. Emphasizes the relationship between conditions and actions

Question 7

In planning, auditor may skip certain procedure to obtain understanding of internal control structure because of

Answer 7

auditor’s judgment about materiality and assessment of inherent risk

Question 8

Primary consideration regarding internal control structure policies and procedures is

Answer 8

whether they affect FS assertions

Question 9

Compensating controls

Answer 9

used by organizational unit when adequate segregation of duties is not present
less desirable than segregation of duties internal control

Question 10

Batch processing of transaction

Answer 10

processed by type, not order

easier to follow audit trail

Question 11

Walk-through

Answer 11

approach tracing a transaction from its origination through information systems until reflected in financial report

Question 12

Computer sys supported by variety of utility software are important to auditor b/c

Answer 12

they may enable unauthorized changes to data files if not properly controlled

Question 13

Impact of Change in computer systems on audit program

Answer 13

alter part of audit trail

Question 14

relevance of various types of controls to a financial audit

Answer 14

Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit, but other controls may also be relevant

Question 15

An auditor should obtain sufficient knowledge of an entity’s information system to understand

Answer 15

financial reporting process used to prepare FS

• significant accounting estimates and disclosures
  (1) the entity’s classes of transactions
  (2) how transactions are initiated
  (3) the accounting records and support
  (4) the accounting processing involved from initiation of a transaction to its inclusion in the financial statements

Question 16

Control Risk

Answer 16

Assessing control risk and obtaining an understanding of an entity’s internal control structure may be performed concurrently

Question 17

Internal control structure

Answer 17

assessed level of control risk can never be sufficiently low as to eliminate all substantive tests on a significant account balance

primary criterion of any system of internal control is the cost-benefit relationship

Question 18

difficult internal control issue for an auditor to detect

Answer 18

An intentional circumvention of controls associated with collusion involving employees in different departments would be particularly difficult to detect

Question 19

After obtaining an understanding of internal control and assessing control risk, an auditor will perform tests of controls, if

Answer 19

it is believed that such performance will efficiently result in a reduction in planned substantive tests

Question 20

Test for Completeness of cash receipts for sales

Answer 20

observe consistency of employees’ use of cash registers and tapes

Question 21

when control risk assessed below max level, auditor documents

Answer 21

understanding of
- Entity’s control activities that help ensure management directives are carried out.

• Entity’s control environment factors that help the auditor plan the engagement