Exam 8: Internal Controls and Control Risk

Dimple Leather is a chain of retail stores that sells leather clothing and accessories across Canada. Each store has point-of-sale equipment that is linked to a local server. At night, local accounting information is transmitted to the head office computer and any updates to prices or other adjustments are transferred to the local office. Required: Define the control environment. List the components of the control environment. For each component, provide an example of a control that might exist at Dimple Leather.

Which of the following duties would indicate a weakness in internal controls?

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

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.

The essence of an effectively controlled organization lies in the

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

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.

The Sarbanes Oxley Act has had consequences for many areas of corporate activities, including the following impact on the work of the auditor:

Why is it important to separate systems development (or acquisition) and program maintenance activities from accounting?

The procedures to test effectiveness of control policies and procedures in support of a reduced assessed control risk are called

Management safeguards assets by

When a compensating control exists, a weakness in the system

Paul is in the process of performing procedures to obtain the necessary understanding of the client's internal controls. As part of this process, Paul received from the client completed narratives, flowcharts, and internal control questionnaires. Paul can use this information from the client

A secondary objective of the auditor's study and evaluation of internal control is that the study and evaluation provide

Jenny is the information technology support manager at CMH. Jenny is considered to be a super-user at CMH since she can circumvent normal controls. In order to address the risk of super-users, management should

Which one of the following is an example of a specific authorization?

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

An important type of protective measure for safeguarding assets and records is

If an external auditor's client has used a service organization during the year for some of its payroll processing and accounting, which of the following steps should the external auditor take if he or she decides to use the service organization auditor's report as audit evidence that the entity's controls are operating effectively for certain assertions?

You have just finished documenting your understanding of cycle controls at an audit engagement. Required: A) Explain how you will identify the controls that will be tested. B) What process will you follow for weakness in internal controls?