Question

1. Define internal control.

2. Internal control provides reasonable assurance. Explain.

3. What are the objectives of a system of internal control?

4. Enumerate, and explain briefly, the components of an internal control.

5. What is the control environment? What are the elements that comprise the control environment?

6. What is meant by risk assessment process?

7. What is an information system?

8. What are control activities?

9. Give the different types of control activities.

10. Why is it necessary to monitor controls?

11. What are the inherent limitations of internal controls?

12. Enumerate, in chronological order, the steps followed in the study and evaluation of internal controls. Explain each step briefly.

13. What is a transaction walkthrough?

14. What are the different ways by which an understanding of controls is documented?

15. When is the control risk assessment High? Less than high?

16. How does a high control risk assessment affect the planned audit approach?

17. Give examples of responses to the assessed risk of material misstatement.

18. What is the relationship of a less than high control risk assessment to the nature, extent, and timing of substantive tests?

19. May substantive tests be eliminated?

20. How are audit matters related to internal control communicated to management and to those charged with governance?

Answer 1

1. Internal controls are group of those policies and procedures which implemented by a company to ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.

2. Yes, Internal control provides reasonable assurance by designing, performance and reporting structure to fulfil following objectives-

i. Effectiveness and efficiency of regular and other operations of the organization.

ii. That information is reliable, accurate, and maintained in time.

iii. That it is compliance with applicable laws, contracts, regulations, policies and procedures.

iv. That the financial reporting is reliable.

3. The objectives of a system of internal control are-

i. To the achievement of objectives in several overlapping categories.

ii. To provide only reasonable assurance to management regarding achievement of operational, financial reporting, and compliance objectives.

iii. To compare the assets in the record with that of the existing ones at regular intervals and report to the those charged with governance, in case any difference is found.

iv. To review the working of the organization and the loopholes in the operations and take necessary steps for its correction.

v. To provide security to the company’s assets from unauthorised use. For this purpose, physical security systems are used to provide protection such as security guards, anti-theft devices, surveillance cameras, etc.

4. The components of an internal control are-

i. Control Environment- It is an attitude toward internal control and control consciousness established and maintained by the internal stakeholders of an organization. It is a result of management’s philosophy, style and supportive attitude, as well as the competence, ethical values, integrity, and morale of the organization’s people. The organization structure and accountability relationships are key factors in the control environment.

ii. Communication -It is the exchange of useful information among people and organizations to support decisions and coordinate activities. Within an organization, information must be provided to carry out responsibilities of managers and other employees. Communication should be also maintained with customers, suppliers and regulators etc.

ii. Risk Assessment-Risks are threats of accomplishment of objectives of the organization. At every level within an organization there are both internal and external risks that could prevent the accomplishment of established objectives. Ideally, management should minimize the levels of risk. Having reasonable assurance with objectives, management should ensure that risk is properly assessed and handled properly.

iv. Control Activities -Control activities are manual or automated tools which help to prevent the risks of accomplishment of the organization’s objectives. Management should establish control activities to effectively and efficiently accomplish the organization’s objectives.

v. Monitoring-Monitoring is the review of activities and transactions of an organization’s to assess the quality of performance over time and to determine whether controls are effective and working properly. Management should use monitoring efforts on internal control to achieve organization objectives. Objectives, and responsibilities and risk bearing level must be cleared to each employee and manager of the organization for effective monitoring.