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Define Internal Control.: Activity Sheet - Module 6
Define Internal Control.: Activity Sheet - Module 6
accountability, and prevent fraud. Besides complying with laws and regulations and
preventing employees from stealing assets or committing fraud, internal controls can help
reporting.
reliability of financial reporting and the preparation of financial statements for external
purposes.
further its objectives. Internal controls function to minimize risks and protect assets,
Control Environment. The control environment is the attitude toward internal control
and control consciousness established and maintained by the management and the
control, providing discipline and structures. The primary responsibility for the prevention
and detection of fraud and error rests with both those charged with governance and the
Risk Assessment Process. The risk assessment process is the identification and analysis of
relevant risks to achievement of the objective, forming a basis for determining how the
risks should be managed. They ultimately impact an organization’s ability to accomplish its
mission. To have reasonable assurance that the organization will achieve its objectives,
Control Activities. Control activities are that help prevent or reduce the risks that can
information between and among people and organizations to support decisions and
management and other employees who need it in a form and within a time frame that helps
them to carry out their responsibilities. Communication also takes place with outside
parties such as customers, suppliers, and regulators. It is needed at all levels of the of an
organization to run business and move toward achievement of the entity’s objectives in all
departments.
internal control performance over time. It involves assessing the design and operation of
controls on a timely basis and taking necessary corrective actions. Its purpose is to ensure
5. What is the control environment? What are the elements that comprise the control
environment?
organization. It is the foundation for all other components of internal control, providing
discipline and structures. The elements of the control environment are the communication
Risk assessment process is the process for identifying and responding to business
risk and the results thereof. The process of identifying and analyzing risk is an ongoing
Management must focus carefully on risks at all levels of the entity and take the
control, analysis, and visualization in an organization. Information system are tools used
to support processes, operations, intelligence, and IT. Information system tools move data
and manage information. They produce data-driven reports that help businesses make the
Control activities are policies and procedures, which are the actions of the people
necessary to address risks are carried out. Control activities can be preventive or detective
activities. Control activities occur at all levels and functions of the agency. Management
should establish control activities that are effective and efficient. The commonly used
control activities are performance reviews, information processing, physical controls, and
segregation of duties. Control activities, no matter how well designed and executed, can
personnel at various levels are effectively pursuing the objectives of the organization. By
investigating the reasons for unexpected performance, management may make timely
information processing controls include general control activities, which apply to all
information processing procedures, and application control activities, which apply only
Physical Controls. These controls include those that provide physical security over both
records and other assets. Activities that safeguard records include maintaining control at
all times over unissued prenumbered documents, as well as other journal and ledgers, and
also to see the changes happening in your system that needs an update or adjustments. It
is also necessary to monitor your control to ensures that internal control continues to
operate effectively.
A system of controls does not provide absolute assurance that the control
limitations in any system that reduce the level of assurance. These inherent
watch over each other could instead collude to circumvent the system.
Human error. A person involved in a control system could simply make a mistake,
perhaps forgetting to use a control step. Or the person does not understand how a
control system is to be used or does not understand the instructions associated with
the system. This may be caused by the assignment of the wrong person to a task.
Management override. Someone on the management team who has the authority to do
so could override any aspect of a control system for his personal advantage.
Missing segregation of duties. A control system might have been designed with an
insufficient segregation of duties, so that one person can interfere with its proper
operation.
12. Enumerate, in chronological order, the steps followed in the study and evaluation of
Obtain an understanding of the client’s internal control. The auditor should obtain
Make a preliminary assessment of control risk. The assessment shall be the basis for
acceptable level, the auditor should determine overall responses to assessed risks at the
financial statement level and should design and perform further audit procedures to
are designed and operating as contemplated in the preliminary assessment of control risk.
Determine the nature, extent, and timing of substantive tests. The auditor should
design and preform substantive procedures for each material class of transactions,
system to gauge its reliability. A walk-through test traces a transaction step by step
through the accounting system from its inception to the final disposition. However, walk-
throughs are not required for accountants but can be instrumental in addressing weakness
and problems.
14. What are the different ways by which an understanding of controls is documented?
documented.
Flow Charts
Narrative descriptions
Sound documentation
15. When is the control risk assessment High? Less than high?
The control risk assessment is high when the entity does not have effective
internal controls to prevent fraud and misstatements. It is less than high when the entity
16. How does a high control risk assessment affect the planned audit approach?
A high control risk assessment increases the scope of audit in the planned audit
approach.
on-going procedures would help minimize the errors made and find more evidence.
Increase the scope of audit. Giving the auditor a larger access would help to detect more
18. What is the relationship of a less than high control risk assessment to the nature, extent,
The auditor’s risk assessment influences nature, extent, and timing of substantive
tests that the lower the assessed level of control risk, the less evidence the auditor needs
No, the assessed level of control risk cannot be sufficiently low to eliminate the
need to perform any substantive tests for all the financial statements assertions.
Consequently, regardless of the assessed levels of control risk, the auditor should perform
some substantive test for significant account balances and transaction classes.
20. How are audit matters related to internal control communicated to management and to
control and other deficiencies in internal control identified during the audit that have not