Question 1

Describe the three key concepts (assumptions)in the study of internal control.

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Question 2

Three steps must be completed by the auditor before he or she can conclude that control risk is low.Discuss these three steps.

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Question 3

An effective accounting information and communication system must satisfy six transaction-related objectives.Identify the six objectives.

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Question 4

Why do the procedures used to gain an understanding of internal control and assess control risk vary for smaller clients?

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Question 5

There is a significant overlap between tests of controls and procedures to obtain an understanding of controls; however, discuss the main differences in the types of audit evidence.

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Question 6

Control activities are defined as 'the policies and procedures, in addition to those included in the other elements, that help ensure necessary actions are taken to address risks in the achievement of the entity's objectives.' Describe the five categories of control activities.

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Question 7

Procedures used to obtain an understanding of internal control are normally performed on fewer transactions than procedures used to test controls.

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This statement is true. Procedures used to obtain an understanding of internal control may involve interviewing personnel, reviewing documentation, and observing processes, but they do not typically involve testing a large number of transactions. The purpose of these procedures is to gain an overall understanding of the control environment and the processes in place to prevent or detect errors and fraud. In contrast, procedures used to test controls involve selecting and testing a larger number of transactions to determine whether the controls are operating effectively.

Question 8

List, in order, the steps in the auditor's process of understanding internal control and assessing control risk.

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Question 9

Match seven of the nine terms (a-i) with the seven definitions provided below (1-7):
a.	control environment
b.	control activities
c.	independent checks on performance
d.	internal control
e.	monitoring
f.	separation of duties
g.	general authorisation
h.	specific authorisation
i.	risk assessment

1.	management's ongoing and periodic assessment of the quality of internal control performance to determine that controls are operating as intended and modified when needed
2.	company-wide policies for the approval of all transactions within stated limits
3.	the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about control and its importance to the entity
4.	segregation of the following activities in an organisation: custody of assets, accounting, authorisation, and operational responsibility
5.	management's identification and analysis of risks relevant to the preparation of financial statements in accordance with applicable accounting standards
6.	policies and procedures that help ensure necessary actions are taken to address risks in the achievement of the entity's objective
7.	a process designed to provide reasonable assurance regarding the achievement of management's objectives in the following categories: (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations

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Question 10

Adequate documents and records are important for effective internal control.Discuss each of the five principles that dictate the proper design and use of documents and records.

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Question 11

Discuss what is meant by the term 'control environment' and identify four control environment subcomponents that the auditor should consider.

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Question 12

Discuss the objectives of internal control with which management are primarily concerned.

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Question 13

For IT equipment, there are three categories of controls related to safeguarding IT equipment, programs, and data files.Discuss the categories of IT-related controls, and for each category, give an example of a specific control.

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Question 14

Describe three inherent limitations of internal control.

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Question 15

For internal controls that leave no documentary evidence, the auditor observes their application at year-end.

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Auditors may observe the application of such controls at various times throughout the year, not just at year-end, to ensure they are consistently applied.

Question 16

Of the three broad objectives of management when designing an effective system of internal control, which is of most concern to the external auditor?

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Question 17

Discuss 'monitoring activities' and give an example.

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Question 18

Inquiry as a type of audit evidence is used extensively in procedures to gain an understanding of controls.

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Inquiry involves obtaining information from knowledgeable parties within the organization, and can be used to gain an understanding of internal controls, as well as to confirm other audit evidence obtained.

Question 19

Describe five common procedures an auditor can use to obtain an understanding of internal control design.

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Quiz 8: Internal control and control risk