Processes and Internal Control T3

Question 1

What is an internal control

Answer 1

A system designed, implemented and maintained by governance and management to provide assurance that the company is meeting their objectives regarding reliability of their financial reporting, efficiency of operations and compliance with regulation.

Question 2

Why we have internal controls

Answer 2

To Minimising the company’s business risk

Ensuring compliance with regulations

To continue effective functioning e.g helps financial statement preparation

Question 3

Components of internal control nmonic

Answer 3

CRIME

Question 4

C

Answer 4

Control activities

Policies and procedures to ensure managements instructions are carried out and risk addressed.

The purpose is to prevent, detect and correct errors and fraud

e.g
reconciliation
verification
Authorisation
Segregation of duties
Physical controls
reviews of performance

Question 5

R

Answer 5

Risk assessment of entity.

Assessing different risks to company

Question 6

I

Answer 6

Information system and communication.

Refers to business processes helping with financial reporting.

The systems identify info, record, and communicate too who is needed.

Some are manual while some are IT systems.

Examples
How staff are informed and how info moves through organisation

Quality and reliability of info

It systems recording transactions

Question 7

M

Answer 7

Monitoring the Internal control.

Ensure the controls are actually happening. e.g if say we will do a bank rec, will we actually do it.

Question 8

E

Answer 8

control Environment

Control environment refers to governance and management. The culture they create and attitudes helping to prevent fraud/ errors

Question 9

What is control environment

Answer 9

Focuses on the governance and management and how they create a culture and ethical behaviour prevent and detect errors/ fraud.

Question 10

How can directors create a strong environment

Answer 10

Use of training

Disciplinary process for those who break the rules.

Question 11

What does a board of directors consist of

Answer 11

Executive directors- Run the company

Non-executive directors- Not part of day to day management but do get involved in policies and planning.

Chairperson to run the board and direct activities between 2 types of directors.

Question 12

Audit committee

Answer 12

Subcommittee of the board of directors ( a committee composed of some members part of a larger committee), consisting of non- exec directors ONLY with a particular interest in the accounting and finance of the company.

The committee is part of the control environment and is a control.

Question 13

Audit committee roles

Answer 13

Monitor FS

Review internal controls

Monitor safeguarding of whistleblowing ( report of fraud)

External audit duties

Review service supplied by external audit.

monitor independence and objectivity of external auditor.

Approve remuneration/ engagement letter of external auditor

Recommend appointment/ removal of external auditor.

Question 14

Rules regarding need of an audit committee

Answer 14

All Uk listed companies need an audit committee and it is recommended for all large companies.

Question 15

What is the Risk assessment process (cRime)

Answer 15

Identify relevant business risks

Estimate the significance of the risks

Assess the likelihood of occurrence of risk

Decide upon the appropriate action e.g internal controls, insurance, change in operation.

Question 16

What is managements responsibility in the RAP

Answer 16

Ensure they have effective controls in place to identify risks and act upon those that impact Financial statements

Question 17

3 different business risks

Answer 17

Financial business risks e.g run out of money

Operating business risks
Product supply issues
Strikes of workforce

Regulatory business risk
Risk of not being able to comply with laws/ regulations.

Question 18

Consequence of a weak risk assessment e.g not identifying risks well/ creating internal controls

Answer 18

Increased control risk

Auditor may have to change approach and do more tests reducing detection risk

Question 19

What is a business risk

Answer 19

A risk that may affect a business to achieve its objectives.

Question 20

What is information processes and communication

Answer 20

Includes the main business processes relevant to financial reporting.

It includes manual processes and those generated by IT.

Question 21

What do information systems consist of

Answer 21

software, people, procedures and data.

It can be manual e.g using a spreadsheet or more automated.

Question 22

Are senior management in a position to override controls

Answer 22

Yes