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Exam 1 Chapter 5 Risk Assessment Internal Control Evaluation questions with answers.
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Exam 1 Chapter 5 Risk AssessmentInternal Control Evaluation questions
with answers.
Internal Control ANS - According to Committee of Sponsoring Organization (COSO), Internal control is a
process, effected by an entity's board of directors, management and other personnel, designed to
provide reasonable assurance regarding the achievement of objectives in the following three categories:
(1) Reliability of financial reporting
-Primary concern for auditors because it directly affects our ability to provide reasonable assurance
regarding the F/S
(2) Effectiveness and efficiency of operations
-May provide information relevant to external auditor with regard to particular assertions/accounts,
such as valuation of inventory
(3) Compliance with applicable laws and regulations
-Directly affects external auditors ability to provide reasonable assurance regarding the direct-effect
illegal acts
What are some Limitations of Internal Controls? ANS - Human error
-Errors in judgment
-Fatigue
-Carelessness
Collusion 공모 결탁
-People who are assumed to be independent can work together
Management override
, Cost/benefit analysis
-There is often a trade-off between the cost and the effectiveness of internal controls.
-The concept of reasonable assurance recognizes that the cost of an entity's internal control should not
exceed the benefits that are expected to be derived.
Who is Responsibility for Internal Controls? ANS - (1) Management's responsibility
- Responsibility for establishing and maintaining adequate internal control over financial reporting
-A statement identifying the framework used for evaluating the effectiveness of internal control (e.g.,
COSO)
-Assess and report on the effectiveness of internal control over financial reporting
(2) Auditors' responsibility
-For public companies, must audit and issue an opinion about the effectiveness of the internal control
over financial reporting
-For each fraud risk, must evaluate whether controls are in place to mitigate the fraud risk
-Must assess control risk to determine the nature, timing and extent of substantive procedures to be
performed
Relationship between internal control reliance and audit procedures ANS - Less Reliance on Internal
Control (higher control risk; lower detection risk)
-Nature = More effective tests (ex: use of direct external evidence)
-Timing = Testing performed at year-end
-Extent = Higher sample size
More Reliance on Internal Control (lower control risk; higher detection risk)
-Nature = Less effective tests (ex: use of internal evidence)
-Timing = Testing can be performed at Interim
-Extent = Lower sample size
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