ACCT 5200 Quiz #4 || All Answers Are Correct 100%.
Internal control correct answers A process, effected by an entity's BOD, management, and other
personnel
Composed of policies and procedures designed to provide reasonable assurance that the company
achieves its objectives in following:
- Reliability of financial reporting
- Effectiveness/efficiency of operations
- Compliance with laws/regulations
Limitations of Internal Control correct answers Personnel errors - misunderstanding instructions,
being careless or fatigued
Management override (versus management intervention - Cause of management fraud
Collusion - Cause of employee defalcation and management fraud
Cost-benefit tradeoff
Limitations of Internal Control Example correct answers It may not pay for a company to install
sophisticated inventory controls to monitor levels of raw material if the cost of raw material used
in the production process is low, the materials are not perishable, a ready supply exists, and
storage space is plentiful.
Management responsibility for internal control correct answers For all companies: must establish
and maintain system of IC
For all public companies, must:
- Acknowledge in SEC filings they are responsible for establishing and maintaining IC system
for financial reporting (ICFR)
- Assess the effectiveness of the IC structure as of year end and certify this in filings
• Ability of design of ICs to prevent/detect material misstatement
• Operating effectiveness of ICs
Auditor responsibility for internal control correct answers For all clients: must understand IC
system well enough to plan and perform the audit
- Extent of understanding will vary
• For non-public and small public clients, may only learn enough to evaluate design & whether
implemented (D&I), will not test effectiveness of controls
For large public clients: must audit ICFR and issue audit opinion about effectiveness of ICFR
- Requires testing effectiveness of controls
- Issue adverse opinion if there is even one material weakness
• Deficiencies, significant deficiencies, material weaknesses
, *Note: Large public companies (i.e., accelerated filers) have market capitalizations > $75
million; small public companies (i.e., non-accelerated filers) have market capitalizations < $75
million
5 Components of Internal Control correct answers 1. Control environment
2. Risk assessment
3. Control activities
4. Information and communication
5. Monitoring
Control environment correct answers Sets the tone, influences control consciousness of its
people
The foundation for all other components of internal control, providing discipline and structure
- Integrity and ethical values (tone at the top)
- Commitment to competence
- BOD or audit committee participation
- Management's philosophy and operating style
- Organizational structure
- Assignment of authority and responsibility
- Human resources policies and practices
Risk assessment correct answers Entity's identification and analysis of relevance of risk to
achievement of objectives, forms basis for determining how the risks should be managed
Management's identification and analysis of risks relevant to the financial statements
Do they have a mechanism in place for identifying sources/changes to risk from:
- Changes in operating environment
- New personnel
- New/revamped info systems
- Rapid growth
- New technology
- New business models
- Corporate restructuring
- Expanded foreign operations
- New accounting pronouncements
Control activities correct answers Policies and procedures that help ensure management
directives are carried out
Help ensure that necessary actions are taken to address risks to achievement of the entity's
objectives
- Proper authorization of transactions
Internal control correct answers A process, effected by an entity's BOD, management, and other
personnel
Composed of policies and procedures designed to provide reasonable assurance that the company
achieves its objectives in following:
- Reliability of financial reporting
- Effectiveness/efficiency of operations
- Compliance with laws/regulations
Limitations of Internal Control correct answers Personnel errors - misunderstanding instructions,
being careless or fatigued
Management override (versus management intervention - Cause of management fraud
Collusion - Cause of employee defalcation and management fraud
Cost-benefit tradeoff
Limitations of Internal Control Example correct answers It may not pay for a company to install
sophisticated inventory controls to monitor levels of raw material if the cost of raw material used
in the production process is low, the materials are not perishable, a ready supply exists, and
storage space is plentiful.
Management responsibility for internal control correct answers For all companies: must establish
and maintain system of IC
For all public companies, must:
- Acknowledge in SEC filings they are responsible for establishing and maintaining IC system
for financial reporting (ICFR)
- Assess the effectiveness of the IC structure as of year end and certify this in filings
• Ability of design of ICs to prevent/detect material misstatement
• Operating effectiveness of ICs
Auditor responsibility for internal control correct answers For all clients: must understand IC
system well enough to plan and perform the audit
- Extent of understanding will vary
• For non-public and small public clients, may only learn enough to evaluate design & whether
implemented (D&I), will not test effectiveness of controls
For large public clients: must audit ICFR and issue audit opinion about effectiveness of ICFR
- Requires testing effectiveness of controls
- Issue adverse opinion if there is even one material weakness
• Deficiencies, significant deficiencies, material weaknesses
, *Note: Large public companies (i.e., accelerated filers) have market capitalizations > $75
million; small public companies (i.e., non-accelerated filers) have market capitalizations < $75
million
5 Components of Internal Control correct answers 1. Control environment
2. Risk assessment
3. Control activities
4. Information and communication
5. Monitoring
Control environment correct answers Sets the tone, influences control consciousness of its
people
The foundation for all other components of internal control, providing discipline and structure
- Integrity and ethical values (tone at the top)
- Commitment to competence
- BOD or audit committee participation
- Management's philosophy and operating style
- Organizational structure
- Assignment of authority and responsibility
- Human resources policies and practices
Risk assessment correct answers Entity's identification and analysis of relevance of risk to
achievement of objectives, forms basis for determining how the risks should be managed
Management's identification and analysis of risks relevant to the financial statements
Do they have a mechanism in place for identifying sources/changes to risk from:
- Changes in operating environment
- New personnel
- New/revamped info systems
- Rapid growth
- New technology
- New business models
- Corporate restructuring
- Expanded foreign operations
- New accounting pronouncements
Control activities correct answers Policies and procedures that help ensure management
directives are carried out
Help ensure that necessary actions are taken to address risks to achievement of the entity's
objectives
- Proper authorization of transactions
