Question 1

Joan is the owner of a small manufacturing company. In prior years, your firm has conducted a review engagement of the company. However, this year, Joan obtained a loan from the federal business development bank and is required to have an audit of her financial statements. When you started asking about controls and procedures at the company, Joan got pretty upset.
"All you need to be concerned about is the numbers! Why are you asking all of these questions? It takes too much time away from my staff to answer these questions! Just check the numbers and let us get on with our work!"
You calmed her down a bit, and reminded her about the general discussion that occurred with the engagement letter. You have invited her for coffee to briefly explain the following items:
1. Why auditors are concerned about internal controls
2. Why auditors are required to be concerned about internal controls
3. What you need to do to understand internal controls
4. What you will do once you have documented your understanding of internal controls
Required:
Explain what you will say to Joan.

Accepted Answer

1.Auditors are concerned about internal controls because management uses internal controls to help ensure that business operations run in accordance with the goals and objectives of the company.The internal controls are also used to reduce the risk of fraud and illegal acts, and to help prevent and detect errors in the financial statements.
2.Auditors have rules, called generally accepted auditing standards (GAAS)that require them to understand and document internal controls so that they can plan the audit.It helps auditors to know that internal controls are in place to help prevent and detect errors, fraud, and illegal acts.
3.Interviews, walkthroughs and documentation examination will be used to document internal controls so that they can be evaluated for each major transaction cycle and audit objective (such as completeness and accuracy).This is done for control environment, general controls and procedures, accounting systems, and control procedures.
4.Once the internal controls have been documented, the auditor decides whether it is more efficient to test internal controls or to simply do tests of details ("looking at the numbers").Overall, enough evidence needs to be gathered to provide a high level of assurance on the financial statements.

Question 2

The board of directors is essential for effective corporate governance because it has ultimate responsibility to

Accepted Answer

The board of directors has the ultimate responsibility to make sure that management implements proper internal control and financial reporting processes to ensure the accuracy and reliability of financial statements. This is a key component of effective corporate governance. The other options are not the primary responsibility of the board of directors.

Question 3

It is important for the public accountant to consider the competence of the audit clients' employees because their competence bears directly and importantly upon the

Accepted Answer

The competence of the audit clients' employees directly affects the achievement of the objectives of the system of internal control. Competent employees will ensure that the internal controls are operating effectively, which in turn will reduce the risk of material misstatement in the financial statements. Therefore, the public accountant needs to evaluate the competence of the audit clients' employees to determine the reliance that can be placed on internal controls.

Question 4

The essence of an effectively controlled organization lies in the

Accepted Answer

The attitude of an organization's management is crucial in maintaining effective control. The tone set by management can either promote or discourage ethical behavior and adherence to controls throughout the organization.

Question 5

Which of the following is an example of a general authorization?

Accepted Answer

A general authorization sets a maximum limit, without further approval needed for individual transactions or events. In this case, the authorization sets the maximum credit limit for all accounts receivable.

Question 6

Management's objectives with respect to internal control include

Accepted Answer

Management's objectives with respect to internal control are not solely focused on financial reporting. They also include achieving operational goals and objectives that are important to the entity. Therefore, providing reasonable assurance that the goals and objectives important to the entity have been met is the best choice. Option A is partially correct but does not address non-financial goals, while options B and C are incorrect.

Question 7

The accuracy of the results of the accounting system (account balances) is heavily dependent upon the

Accepted Answer

The accuracy of the inputs and processing of transactions is critical to the accuracy of the accounting system's results. Errors in recording transactions or in processing data can result in inaccurate account balances, which can have a significant impact on financial reporting. While auditor knowledge and skills, entity-level controls, and personnel training are all important factors in maintaining the accuracy of the accounting system, they are not as directly tied to the accuracy of the account balances as the accuracy of the inputs and processing.

Question 8

Management safeguards assets by

Accepted Answer

Controlling access to assets and comparing physical items to records are effective ways for management to safeguard assets. Periodic counts by internal auditors and surprise audits by external auditors can also help, but they are not the primary responsibility of management for safeguarding assets. Signing a management representation letter is a required part of the audit process, but it does not directly safeguard assets.

Question 9

A) Describe the four broad objectives of management when designing an effective system of internal control.
B) Describe the aspect of internal control with which auditors are primarily concerned with for a financial statement audit.

Accepted Answer

The answer of A) Describe the four broad objectives of...

Question 10

A system of internal control consists of policies and procedures designed to provide management with

Accepted Answer

A system of internal control is designed to provide management with reasonable assurance that the company achieves its objectives. While it may also help prevent and detect fraud, its primary purpose is to ensure the effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations. Therefore, option A is the best choice.

Question 11

To help with corporate governance and a positive "tone at the top," the board of directors and its committees, such as the audit committee, should

Accepted Answer

The board of directors and its committees should take an active role in overseeing the company in order to promote good corporate governance and a positive tone at the top. Simply rubber-stamping financial statements, including all members of executive management on the board, or following policies and procedures approved by management, may not be enough to provide effective oversight and ensure the company is being run in the best interest of its stakeholders.

Question 12

A) Describe the three basic concepts (assumptions) underlying the study of internal control and assessment of control risk.
B) Describe the inherent limitations of internal control.

Accepted Answer

The answer of A) Describe the three basic concepts (assumptions)...

Question 13

Carrie is the manager of the Bay Street Pharmacy. Carrie is considering implementing a security tag system to reduce the losses related to stolen goods at their store. The system Carrie is looking at currently costs $60 000 and is expected to be effective for 5 years. In order to justify the implementation of the security tag system, average theft per year should be at least

Accepted Answer

To justify the implementation, the cost of implementing the system should be less than or equal to the cost savings due to theft prevention. If we assume that the cost of theft each year is greater than or equal to the cost of implementing the security tag system, then it would make sense to implement the system. Therefore, we need to find the minimum cost of theft per year over the next 5 years that justifies spending $60,000 on the system. $60,000/5=$12,000. So, the average theft per year should be at least $12,000 to justify implementing the security tag system.

Question 14

A well-designed organizational structure at an entity

Accepted Answer

A well-designed organizational structure should clearly define authority and responsibility assignments to avoid confusion and ensure that everyone knows who is responsible for what. Combining operations and programming personnel tasks is not necessarily a sign of a well-designed structure as it could lead to overlap or inefficiencies. Recording and tracking wage rates is important but not necessarily a defining characteristic of a well-designed structure. Similarly, while having the internal audit department report to the Chief Financial Officer can be useful for oversight and ensuring compliance, it is not the only way to structure an organization.

Question 15

To comply with auditing standards, the auditor need not be concerned with all areas of internal control that apply to management. The auditor's primary concerns are with the system's ability to

Accepted Answer

The answer of To comply with auditing standards, the auditor...

Question 16

Which of the following best describes the inherent limitations that should be recognized by an auditor when considering the potential effectiveness of an accounting system?

Accepted Answer

Choice A is the best answer because it addresses a specific limitation with accounting systems: that even when proper procedures are in place, collusion can undermine their effectiveness. Choices B, C, and D are either incorrect or incomplete when describing the limitations of accounting systems.

Question 17

Internal controls can never be regarded as completely effective. Even if systems personnel could design an ideal system, its effectiveness depends on the

Accepted Answer

The answer of Internal controls can never be regarded as...

Question 18

The control environment consists of actions, policies, and procedures that

Accepted Answer

The control environment refers to the tone set by the entity's leadership and is characterized by their attitudes towards control and its importance. The control environment includes various policies and procedures set by management to ensure the entity's compliance with regulations and to safeguard its assets. While choices B, C, and D reference policies and procedures, they do not reflect the overall attitudes of top management, the directors, and the owners of an entity about control and its importance.

Question 19

The methods that management uses to supervise the entity's activities are called

Accepted Answer

The term "management control methods" specifically refers to the methods used by management to monitor and regulate the activities of the entity. Personnel practices, methods of assigning authority and responsibility, and management's operating style may all be components of management control methods, but they do not encompass the full scope of these methods.

Question 20

An act of two or more employees to work together to misstate records is called

Accepted Answer

Collusion is an act of two or more individuals working together to deceive or cheat another person, organization, or government. In this case, the collusion is to misstate records, which can lead to fraud or other unethical behavior. Malfeasance refers to wrongful conduct or wrongdoing, defalcation is the misappropriation of funds, and a felony is a serious crime. However, collusion is the best choice for this specific scenario.

Quiz 8: Internal Controls and Control Risk