Internal control evidence

Question 1

Types of controls

Answer 1

• management controls (entity-level)
• process controls (process-level)

Question 2

internal controls (different types)

Answer 2

• segregation of duties (preventive, detective)
• performance reviews (detective, corrective)
• physical controls (preventive)
• processing controls (preventive, corrective)

Question 3

Test of controls

Answer 3

assess control risk (the risk that controls will not prevent or detect a misstatement). The test on the effectiveness of key controls reduces RMM. If control risk assessment is not supported –> increase sutstantive testing

Question 4

existence test of controls

Answer 4

• inquiry of client personnel including a walkthrough of at least one type of each significant transaction
• inspection of documents and reports indicating performance of controls done during walkthrough

Question 5

effectiveness test of controls

Answer 5

re-performance by auditor of controls to a sample of transactions or balances

Question 6

hypogeometric distribution (idea)

Answer 6

large populations probability of error of a specific sample size becomes independent from population size

Question 7

segregation of duties

Answer 7

an employee can not perpetrate and conceal fraud or theft and accidental errors are reduced if he/she does not have responsibility only one

Question 8

performance reviews

Answer 8

independent checks on performance by a third party not directly involved in the activity (internal varification)

Question 9

processing controls

Answer 9

ensure accuracy of input and processing, adequacy of documentation, and computer application controls

Question 10

compensating controls (whole process)

Answer 10

controls are not effective or not feasible in the organisation (small organisations)

Question 11

example entity levels of controls

Answer 11

• monitoring of competition
• operational effectiveness (risk on delivery, returns, processing errors)

Question 12

types of control tests

Answer 12

• existence
• effectiveness

Question 13

hypergeometric distribution

Answer 13

is a probability distribution for sampling with replacement from a population with finite size

Question 14

substantive testing: achieve

Answer 14

evidence on audit objective (completeness, accuracy) achieve allowance for sampling risk within materiality

Question 15

controls sampling: achieve

Answer 15

does a control work effectively achieve deviation rate does not exceed an acceptable level