Compare the obj. of the internal auditors w/ those of the independent auditors.
The primary objective of the internal auditor is to aid corporate management in efficient administration by
investigating and reporting upon compliance with company policies, reliability of accounting and statistical records and reports, adequacy of internal control, efficiency of operating procedures, and effectiveness of performance in all areas of operation.
The primary objective of the independent auditors is to determine whether the financial statements
fairly reflect the financial position, operating results, and cash flows of the business. The independent auditors have a responsibility to stockholders, creditors, and the public as well as to management
What is a mgmt. letter? what is the letters significance?
During their consideration of internal control, the auditors will inevitably encounter some deficiencies that
should be brought to the attention of management. A management letter is the written report to the client describing such deficiencies, along with the auditors' recommendations for corrective action. This report serves as a useful reference document for management in implementing improvements in internal control and may also serve to limit the auditors' liability to the client in the event the control deficiencies subsequently give rise to defalcations or other losses.
List the 5 major components of internal control
(1) The control environment.
(2) Risk assessment.
(3) The accounting information and communication system.
(4) Control activities.
Identify the major limitations of internal control
(1) Mistakes may be made in the performance of controls as a result of misunderstanding of
instructions, mistakes of judgments, carelessness, distraction, or fatigue.
(2) Top management can override internal control.
(3) Control activities dependent upon separation of duties may be circumvented by collusion
list of controls/internal control component
(2) Control environment—human resource policies and procedures.
(3) Control activities—application controls.
(4) Risk assessment.
(5) Monitoring—separate evaluations.
(6) Control environment—integrity and ethical values.
(7) Control activities—performance reviews.
(8) Accounting information and communication system.
(9) Control activities—physical controls.
(10) Control environment—organizational structure.
Which of the following would be least likely to be considered an obj. of internal control?
1. checking the accuracy and reliability of acct. data
2. detecting mgmt fraud
3. encouraging adherence to managerial policies
4. safeguarding assets
an entitys ongoing monitoring activites often include
mgmt review of weekly performance reports
a primary obj. of procedures performed to obtain an understanding of internal control to provide the auditors with
knowledge necessary to determine the nature, timing, and extent of audit procedures
an auditor may compensate for a weakness in internal control by increasin the extent of
substantive test of details
controls over finn. reporting are often classified as preventative, detective, or corrective. which of the follwing is and ex. of detective control?
preparing bank reconcilations
As part of understanding internal control in planning an audit of a nonissueser, and auditor is NOT req. to
obtain knowledge about the operation effectiveness of internal control
In an audit of finn. statements, an auditors primary consideration regarding a control is whether it
affects mgmts finn. statement assertions
Which of the following are considered control environment factors?
human resources polices and practices
Internal control is a function of mgmt, and effective control is based upon the concept of charge and discharge of responsibility and duty. Which of the following is one of the overriding principles of internal control?
responsibility for the performance of each duty must be fixed
The PCAOB's AS No. 5 states taht internal controls may be preventive or detective. Which of the following controls is preventive?
Req. 2 persons to open mail
Which of the follwing statements about internal control is true?
the cost-benefit relationships is a primary criterion that should be considered in designing internal control
The primary obj. of procedures performed to obtain an understanding of internal control in a finn. statement audit is to provide an auditor with
knowledge necessary to plan the audit
The ultimate purpose of understanding the client, its environment, and internal control is to contribute to the auditors evaluation of the risk that
material misstatements may exitst in the finn.statements
A CPA's consideration of internal control in a finn.statement audit of a nonissuer
is usually more limited that that made in connection w/ and engagement to report on mgmt's written assertion as to the effectiveness of internal control
A secondary result of the auditors consideration of internal control in an audit of a nonissuer's finn.statements is that the consideration may
bring to the auditors attention possible control deficiencies
which of the follwoing most likely would not be considered an inherent limitation of the potential effectiveness of an entity's internal control
internal control can provide only reasonable assurance of achieving entity control obj. one factor limiting the likelihood of achieving those obj. is taht
the cost of internal control should not exceed its benefits
Proper segregation of duties reduces the opportunites for persons to be in positions to both
perpetrate and conceal errors of fraud
it is important to the auditor to consider the competence of the audit clients employees b/c their competence bears directly and importantly upon the
achievement of the obj. of internal control
a proper segregation of duties req.
that an individual recording a transaction not compare the acct. record of the asset w/ the asset itself
audit evidence concerning segregation of duties ordinarily is best obtained by
observing the employees as they apply specific controls
when considering an entity's internal control, an auditor should concentrate on the substance of controls rather than their form b/c
mgmt. may est. appropriate controls but not act on them
which of the follwing is a step in an auditors decistion to rely on the internal controls
identify specific controls that are likely to detect or prevent material misstatements and perform test of controls
which of the follwing statements concerning control risk in a finn. statemtn audit is true
performing tests of controls and obtaining an understanding of an entity's internal control may be performed cocurrently
in obtaining an understanding of an entity's internal control in a finn. statement audit an auditor is not obligated to
search for significant deficiencies in the operation of internal control
The obj. of tests of details of transactions performed as tests of controls is to
evaluate wheter controls operated effectively
to test the effectiveness of controls an auditor ordinarily selects tests from a variety of techniques including
The independent auditor should understand the internal audit function as it relates to internal control b/c the
work performed by internal auditors may be a factor indetermining the nature, timing and extent of the independent auditors procedures
if the independent auditors decided that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing and extent of audit procedures they should assess the internal audtors'
competence and objectivitu
In assessing the competence and objectivity of entity's internal auditor, an independent auditor is least likely to consider info. obtained form
the results of analytical procedures
In assessing the competence of an internal auditor, an independent CPA most likely would obtain info. about the
quality of the internal auditors documentation
the auditors consideration of the clients internal control is documented to substantiate
compliance w/ auditing standards
when documenting the understanding of a clients internal control the independent auditor sometimes uses a systems flowchart which can best be described as a
symbolic representation of a system or series of sequential processes