Chapter 10 Audit Final

Front 1

A company has three broad objectives in designing an effective internal control system

Back 1

Reliability of financial reporting
Efficiency and effectiveness of operations
Compliance with laws and regulations

Front 2

Reliablity of financial reporting

Back 2

Management is responsible for preparing statements for investors, creditors, and other users. they must be fairly presented in accordance to GAAP.

Front 3

Efficiency and effectiveness of operations

Back 3

Controls within a company encourage efficient and effective use of its resources to optimize a companys goals. Accurate financial and nonfinancial information.

Front 4

Compliance with laws and regulations

Back 4

public, nonpublic, and not-for-profit organizations are required to follow many laws and regulations. Some relate to accounting onl indirectly, such as environmental protection and civil rights laws. others are closely related to accounting, such as income tax regulations and fraud.

Front 5

What is managements responsibility for the entity's internal controls?

Back 5

for establishing and maintaining

Front 6

What are the auditors responsibility over internal controls?

Back 6

understanding and testing internal control over financial reporting. To issue an audit report on managements assessment of its internal controls, including the auditors opinion on the operaint effectiveness of those controls.

Front 7

What 2 key conepts underlie management's design and implementation of internal control.

Back 7

Reasonable Assurance and Inherent Limitations

Front 8

Management's design and implementation of internal control-Reasonable assurance

Back 8

A company should develop internal contorls that provide reasonable, but not absolute assurance that the financial statements are fairly stated. Reasonable assurance allows for only a remote liklihood that materia misstatements will not be prevented or detected on a timely basis

Front 9

Managements designand implementation of internal control- Inherent Limitations

Back 9

Internal controls can never be completely effective, regardless of the care followed in their design and implementation.

Front 10

Collusion

Back 10

An act of two or more employees who conspire to steal assets or misstate records.

Front 11

Management must issue an internal control report, what is included in that report?

Back 11

1.A statement that management is responsible for establishing and maintaining internal controls for Financial reporting.
2. An Assessment of the effectiveness of the internal control structure and procedures for financial reporting as of the end of the company's fiscal year.
3. Management must also identify the framework used to evaluate the effectiveness of internal control.

Front 12

What are the 2 components of Managements Assessment of internal control over financial reporting

Back 12

1. Management must evaluate the design of internal control
2. Management must test the operating effectiveness of those controls.

Front 13

Design of Internal control.

Back 13

Management must evaluate whether the controls are designed and put in place to prevent or detect material misstatements in the financial statements. Managment's Focus is on controls over all relevent assertions for all significant accounts and disclosures in the finanial statements.

Front 14

Operating Effectiveness of those controls.

Back 14

to test if the controls are operating as desgned and whether the person performing the control possesses the necessary authority and qualifications to perform the control effectively.test results for m the basis for assertion. Mangement must disclose any material weakness.

Front 15

Whats included in the 10-K

Back 15

A report on internal control filed with the SEC

Front 16

Second GAAS fieldwork standard states

Back 16

The auditor must obtain a sufficient understanding of the entity and its environment, including its internal controls, to assess the risk of material misstatement of the financial statements whether due to error or fraud and to design the understanding of internal control to assess control risk in every audit .

Front 17

What Controls are the auditors concerned about?

Back 17

1.Controls over the reliability of Financial reporting
2. Controls over Classes of Transactions.

Front 18

auditing controls over the reliabiltiy of financial reporting.

Back 18

Auditor is less concerned with controls that affect the efficiency and effectiveness of company operations, because such controls may not influence the fiar presentation of financial statements.

Front 19

Controls affecting internal management information

Back 19

Budgets and internal performance reports. Important sources used by managment to run the business and can be important sources of evidence that help the auditor decide whether the financial statements are fairly presented.

Front 20

If the controls over the internal reports are inadequate..

Back 20

then the reports are not reliable for evidence.

Front 21

Why do auditors emphasize internal controls over classes of transactions rahter than account balances?

Back 21

Because the accuracy of accounting system outputs (account balances) depends heavily on the accuracy of inputs and pr

Front 22

What are the 5 Coso Internal control components

Back 22

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

Front 23

What serves as an umbrella for the other four components?

Back 23

the control environment.

Front 24

Why is the Control environment so important.

Back 24

Because it starts at the top at management. If the top management believes that control is important others in the organization will respond.

Front 25

The Control Environment

Back 25

Consists of the actions, policies and procedures that reflect the overall attitudes of top management, directors and owners of an entity about internal control and its importance to the entity.

Front 26

What are the most important control sub components?

Back 26

Integrity and Ethical Values
Commitment to Competence
Board of director or Audit Committe Participation
Management Philosophy and operating style
Organizational Structure
Human Resource Policies and Practices

Front 27

The components of control activities

Back 27

segregation of duties,
adequate documents and records, proper authorization of transactions and activities,
physical control over assets
independent checks on performance.

Front 28

4 guidelines for adequate Separation of Duties.

Back 28

1. Separation of the Custody of Assets from Accounting.
2. Separation of the Authorization of Transactions from the Custody of Related Assets.
3. Separation of Operational Responsibility from Record Keeping Responsibility.
Separation of IT Duties from User Departments.
4.

Front 29

Proper Authorization of Transactions and Activities.

Back 29

Every Transaction must be properly authorized. Authorization can be either general or specific.

Front 30

General authorization

Back 30

Management establishes policies and subordinates are instructed to implement these general authorizations by approving all transactions within the limits set by the policy.

Front 31

Specific Authorization

Back 31

Applies to individual transactions. For certain transactions managemnt perfers to authorize each transaction.

Front 32

Examples of General Authorization

Back 32

The issuance of fixed price lists for the sale of products, credit limits for customer, and fixed reorder points for making aquisitions

Front 33

Example of specific Authorization

Back 33

The authorizatoin of a sales transaction by the sales manager of a used-car company.

Front 34

Authorization

Back 34

a policy decision for either a general class of transactions or specific transactions.

Front 35

Approval

Back 35

implementation of management's general authorization decisions.

Front 36

Adequate documents and records

Back 36

Physical objects upon which transactions are entered and summarized.

Front 37

Examples of Adequate Documents and Records

Back 37

sales invoices, purchase orders, subsidiary records, sales journals and employee time cards.

Front 38

The proper design and use of documents and records include (4)

Back 38

1. Prenumbered Consecutively to facilitate control over missing documents
2.Prepared at the time a transaction takes place, or as soon as possible.
3. Designed for multiple use to minimize number of forms.
4.Constructed in a manner to encourage correct preparation.

Front 39

When entering transaction data into a computer the design of the input screen is made to facilitate what?

Back 39

to minimize errors and improve efficiencies in the input process.

Front 40

Physical Control over Assets and Records

Back 40

Assets and records must be protected. IF a company is highly computerized, computer equipment programs and data files must be protected.

Front 41

Physical precautions

Back 41

the most important type of protective measure for safeguarding assets and records.

Front 42

independent checks, or internal verification.

Back 42

The need for independent checks arises because internal control changes over time, unless there is frequent review.

Front 43

Who is responsible for performing internal verification procedures?

Back 43

Those independent from those who originally responsible for preparing the data.

Front 44

What is the least expensive means of internal verification

Back 44

the separation of duties .

Front 45

Information and communication

Back 45

To initiate, record, process, and report the entity's transactions and to maintain accountability for the related assets.

Front 46

To understand the design of the accounting information system the auditor determines (5things)

Back 46

1. major classes of transactions of the entity
2. how those transactions are initiated and recorded.
3. what accounting records exist and their nature;
4. how the system captures other events that are significant to the financial statements, such as declines in asset values.
5. the nature and details of the financial reporting process followed, including procedures to enter transactions and adjustments in the general ledger.

Front 47

Monitoring activities

Back 47

ongoing or periodic assessment of the quality of internal control by management to determine that controls are operating as intended and they are modified as appropriate for changes in conditions .
Some companies have an independed internal audit dept.

Front 48

what standareds require auditors to botain an understanding of internal control for every audit and document their understanding?

Back 48

SAS 109 and PCAOB Standard 2.

Front 49

What are some of the procedures auditors use to obtain an understanding of internal control

Back 49

gathering evidence about the design of internal controls and wheather they are implimented and uses that information as a basis for audit.

Front 50

What 4 types of evidence to obtain an undrstanding of the design and implimentation of controls?

Back 50

documentation, inquiry of entity personnel, observation of employees performing control processes, and reperformance by tracing one or a few transactions through the accounting system from start to finish.

Front 51

What three types of documents do auditors use to obtain and document their understanding of the design of internal control?

Back 51

Narratives, flowcharts and internal control questionairres.

Front 52

Narrative

Back 52

a written description of the clients internal controls. A proper narrative of an accounting system and related controls describes four things

Front 53

A proper narrative of an accountig system and related controls describe 4 things.

Back 53

1. The origin o fevery document and record in the system
2. All processing that takes place
3. the disposition of every document and record in the system
4. An indication of the controls relevant to the assessment of control risk.

Front 54

FlowChart

Back 54

A diagram of the clients documets and their sequential flow in the organization.

Front 55

Why are flowcharts advantageous

Back 55

provide a consie overview of the client's system, which helps auditors identify controls and dificiencies in the clients system

Front 56

what are the 2 advantages of flowcharts over narratives

Back 56

easier to read and update

Front 57

Internal control questionaire

Back 57

a series of questions about the contorls in each audit area as a means of identifying internal control deficiencies.

Front 58

What does a no response on a questionarire indicate

Back 58

potential internal control deficienceis.

Front 59

What are the 2 main dissadvantages of a quesionaire?

Back 59

the inability to provide an overview of the system and their inapplicability for some audits especially smaller ones.

Front 60

what are 5 ways that the auditor understand the design and implementation?

Back 60

1. Update and Evaluate auditors previous expierience with the entity
2.Make inquiries of client personnel
3. examine documents and records
4. observe entity activities and operations
5. Perform walkthroughs of the accounting system

Front 61

Walkthrough

Back 61

The auditor selects one or a few documents of a transaction type and traces them from initiation through the entire accounting process. At each stage auditor makes inquires, observes activites and examines completed documents and records. PCAOB S2 requires auditors to do this once for each major class of transactions.

Front 62

What must an auditors report on internal control include

Back 62

1. opinion on whether managment of the effectiveness of internal control over financial reporting is fairly stated, in all material respects.
2. the auditors opinion on whether the company maintained , in all material respects, effective internal control over financial reporting as of the specified date.

Front 63

The auditor will issue an unqualified opinion on internal control when what two conditions exist?

Back 63

There are no identified material weaknesses
There have been no restrictions on the scope of the auditors work.

Front 64

When material weaknesses exist, the auditor must express

Back 64

an adverse opinion on the effectiveness of internal control.

Front 65

What is the most common cause of an adverse opinion in the auditors report on internal control?

Back 65

When management identified a material weakness in its report.

Front 66

when there is ascope limitation present what type of opinion will an auditor express.

Back 66

a qualified opinion or disclaimer of opinion. a restriction on the scope will not let the auditor determine material weakness.

Front 67

What does Section 404 requires auditors to communicate with the audit committee ?

Back 67

all significant deficiencies and material weaknesses

Front 68

Why is the communication of significant deficiencies and material weaknesses done on a timely basis?

Back 68

so that the management can correct these deficiencies and weaknesses and unqualified opinion by both the management and auditors