Internal Control 2 Flashcards

1
Q

What is the relationship between Internal Control and Substantive Testing?

A

Inverse Relationship

  • Stronger Internal Controls - Less Testing needed
  • Weaker Internal Controls - More Testing Needed
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2
Q

If Internal Control is poor and a company’s accounting practices are sloppy - which risk is higher?

A

Control risk increases with poor Internal Controls and sloppy accounting practices

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3
Q

If Internal Control is poor - what is the effect on the audit?

A

Auditor will need to perform more testing and dig deeper into accounts in order to arrive at an opinion regarding the financial statements

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4
Q

What happens when Control Risk is below the maximum level?

A
  • Auditor MUST verify the effeciveness of the IC so that it can be relied upon
  • Identifying specific controls relevant to specific assertions,
  • Test of control will be performed
  • limited substantive tests may be performed
  • Weaker Internal Control - More substantive tests
  • Stronger Internal Control - Less substantive tests
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5
Q

What should an auditor understand with respect to Information and Communication on an audit?

A

Understand Client’s

  • Major transaction classes
  • Transaction initiation
  • Support records/documents
  • Transaction processing
  • Financial Statement internal reporting process
  • Financial Statement external reporting process
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6
Q

What does an auditor’s assessment of Detection Risk determine?

A

Detection Risk determines nature, timing, and extent of audit procedures.

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7
Q

What are the inherents limitations of IC ?

COCO

A
  • Controls can’t stop Collusion - segregation of duties
  • Management can Override controls
  • Competence - bad judgment in decision makin - Human errors and mistakes
  • Obscolescence - due to change in the company operation, size
  • Reasonalble assurrance - Cost > Benefit - relationship of Internal Control
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8
Q

What is required in an examination of Internal Control under Sarbanes-Oxley?

A
  • CEO/CFO must disclose Internal Control deficiencies
  • Management must provide assessment of Internal Control
  • Management must certify Financial Statements
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9
Q

What determines the acceptable level of Detection Risk?

A

Risk of material misstatement determines acceptable level of Detection Risk

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10
Q

What is the purpose of testing Internal Controls?

A

Auditor needs reasonable assurance that controls are functioning as designed and effective

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11
Q

When can controls tested by an auditor in a prior year be used in the current year’s audit assessment?

A

PCAOB ⇒ CAN NOT USE test every year

Audit Standard ⇒ Controls tested by auditor in a prior year can be used in the current year’s audit assuming they are re-tested every third year

Exception If the control has changed since the last audit

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12
Q

Internal Controls Deficiency

A

Deficiency in IC Exist when the design or operation of a control does not allow management or employees in the normal course of performing their assigned functions, to prevent, or detect and correct misstatement on a timely basis

  • When an auditor becomes aware of deficiencies in IC* , the auditor will evaluate them to determine if they amount to material weakness or significant deficiency - probality and magnitude
  • Control Risk increases
  • Scope of substantive procedures increases
  • Detection Risk decreases
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13
Q

What is a Material Weakness?

A

Material Weakness is Deficiency in IC such as there is a Reasonable possibility that a material misstatement in Financial Statements would not be found - and has more than a remote chance of occurrence

  • result to Adverse opinon on IC
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14
Q

According to AU-C 315.A69, risk assessment procedures to obtain audit evidence about the design and implementation of relevant controls include the following:

A

According to AU-C 315.A69, risk assessment procedures to obtain audit evidence about the design and implementation of relevant controls include the following:

  • Inquiry of entity personnel
  • Observing the application of specific controls
  • Inspecting documents and reports
  • Tracing transactions through the information system relevant to financial reporting.
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