Deck 8: Evaluating Internal Control Over Financial Reporting

Question 1

Describe the three possible levels at which the auditor might assess control risk.

Answer 1

a. Control risk is maximum: The auditor will not use evidence about internal control to reduce audit risk; therefore, detection risk must be reduced using very extensive substantive tests. However, the auditor will still need to gain sufficient knowledge of internal control to evaluate the design effectiveness of the control system.
b. Control risk is slightly reduced from maximum: Results from tests of control suggest the appropriateness of placing some reliance on controls. Although detection risk is allowed to rise slightly, extensive substantive tests will still be performed.
c. Control risk is reduced to a moderate or low level: The auditor will rely heavily on the quality of internal control to reduce audit risk and perform minimal substantive tests to reduce detection risk.

Question 2

Why are ledgers important for auditors?

Answer 2

Ledgers are important for auditors because financial reporting misstatements and fraud must be included in one or more the ledgers of the organization in order to affect the financial statements. Careful analysis of ledger activity is needed to understand the nature and effect of a misstatement or fraud in order to correct the problem prior to preparing the financial statements.

Question 3

Describe the financial accounting and reporting process.

Answer 3

The financial reporting (accounting) process comprises the set of activities used by an organization to capture and communicate financial and other information and to foster accountability within the organization. These processes are usually embedded within the overall processes of the organization.

Question 4

What kind of procedures do auditors perform to test the effectiveness of internal control? How many procedures should the auditor perform? Can auditors rely on the work of others?

Question 5

What is the primary purpose of the accounting system? Why is the quality of information and communication important?

Question 6

What approaches do auditors use for documenting the financial reporting process of an organization in order to determine what controls are in place to ensure that transactions, accounts, and disclosures are not materially misstated? Describe each approach.

Question 7

Describe the tests an auditor will perform to determine if there is adequate control over cash in the cashier's cash drawers in a grocery store.

Question 8

Describe the kinds of transactions and entries included in the financial reporting process.

Question 9

Internal control over financial reporting may involve control activities employed at multiple levels within an organization. Describe these different categories of controls over financial reporting.

Question 10

Why are auditors particularly concerned about transactions and estimates that are non-routine?

Question 11

Describe the four components found in all financial reporting systems.

Question 12

How does the degree of automation affect the auditor's examination and the knowledge needed to conduct the audit?

Question 13

Why are the financial statements of multi-unit organizations more difficult to audit?

Question 14

Which of the five components of internal control as defined by COSO are a major part of internal control over financial reporting?

Question 15

Why is the quality of personnel so important to the quality of the system of internal control?

Question 16

What are the auditor's basic steps for evaluating internal control?

Question 17

What are the similarities and differences of computerized and manual systems that the auditor must audit?

Question 18

What is difficult about creating the footnotes to the financial statements, relative to the statements themselves?

Question 19

In the United States, what does the PCAOB require of auditors with respect to evaluating company controls? How does this differ from the traditional audit?

Question 20

Management must design an effective system of internal frontal over financial reporting in order to minimize control deficiencies. What types of controls does management design to achieve this?