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Study and Evaluation of Internal Control I.SHORT ANSWER QUESTIONS: 1. Briefly describe the responsibilities of management and external auditors for internal controls. 2. List the

Study and Evaluation of Internal Control

I.SHORT ANSWER QUESTIONS:

1. Briefly describe the responsibilities of management and external auditors for internal controls.

2. List the tools that can document the understanding of internal control.

3. Describe the auditor's responsibilities related to communications regarding internal control matters.

4.What is meant by the concept of reasonable assurance in terms of internal control?

5.What audit work is required for an auditor to assess low control risk?

II.TRUE OR FALSE: Write the word TRUE for each correct statement; otherwise, write FALSE.

1.__________ If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably set a high assessment of control risk.

2. __________ When internal controls are effective, then substantive audit tests are more reliable; thus, the extent of substantive tests should be reduced.

3. __________ When a company designs and implements internal controls, cost of the controls is not a valid consideration.

4. __________ For proper internal control, there should be adequate separation of duties. However, the extent of separation of duties considered "adequate" depends heavily on the size of the organization.

5. __________ When internal controls over a given financial statement account are assessed as highly effective, the auditor need not obtain audit evidence for that account beyond testing the controls.

6.__________ Procedures used to obtain an understanding of internal control are normally performed on fewer transactions than procedures used to test controls.

7. __________ There is a direct relationship between an entity's objectives and the controls it implements to provide reasonable assurance about their achievement.

8.__________ Internal control that is relevant in the audit pertains to reliability of financial information.

9.__________ In a financial statement audit, CPAs are required to assess the operating effectiveness of most significant accounting-oriented controls.

10.__________ Well-designed internal control will prevent all fraud by top management.

III.SITUATIONAL PROBLEM

1.The COSO framework consists of five elements of control: the control environment, risk assessment, control activities, information and communication, and monitoring.

The owner of Austin Powers has approached the managing partner of a CPA firm about conducting a first-time independent audit. While discussing the nature and scope of the audit, the owner of Austin Powers asks if it is really necessary for the auditor to gain an understanding of Austin Powers' system of internal control.

What will be the appropriate response to this client?

2.The following list presents various internal controls that may be found in your audit client's revenues and cash collection processes. Identify if it is considered as a (S) Strength or (W) Weakness.

_____Credit is authorized by the credit manager.

_____ A cash receipts journal is prepared by the Treasurer's department.

_____ Collections received by check are received by the company receptionist, who has no additional recordkeeping responsibilities.

_____ Collections received by check are immediately forwarded unopened to the accounting Department _____ A bank reconciliation is prepared on a monthly basis by the Treasurer's department.

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