CHAPTER 10UNDERSTANDING INTERNAL

CONTROL

I Putu Wibaksha Aditya P. 125020307121027Putri Ayu Dwi Lestari 125020307121011

Chapter 10 Overview

Components of Internal Control

• Control Environment

• Risk Assessment

• Control Activities

• Information and Communication

• Monitoring

Entity Objectives with Internal Control• Reliability of financial information

• Compliance with applicable laws and regulations

• Effectiveness and efficiency of operations

Limitations of Internal Control

• Mistakes in Judgment

• Breakdowns

• Collusion

• Management Override

• Cost versus Benefits

Roles and Responsibilities• Management

• Board of Directors and Audit Committee

• Internal Auditors

Roles and Responsibilities (cont.)

• Other Entity Personnel

• Independent Auditors

• Other External Parties

Study Break1. _____ is a process that assesses the quality of internal

control performance over time. A. Control activitiesB. Risk assessmentC. Information and communicationD. Monitoring

D. Monitoring

Study Break

2. This limitation of an entity’s internal controls occurs when two or more individuals act together to perpetrate and conceal fraud.

A. BreakdownsB. CollusionC. Management overrideD. Mistakes in judgment

B. Collusion

Components of Internal Control

Control Environment• Integrity and Ethical Values

• Commitment to Competence

• Board of Directors and Audit Committee

• Organizational Structure

• Human Resource Policies and Practices

Risk Assessment Process

Information and Communication

• Information• Transactions• Audit Trail or Transaction Trail• Documents• Records

Control Activities• Authorization Controls

• Segregation of Duties

Segregation of Duties

Control Activities (cont.)• Information Processing Controls• General Controls

• Computer Application Controls

• Controls over the Financial Reporting Process

Computer Application Controls

• Input Controls

• Processing Controls

• Output Controls

Controls over the Financial Reporting Process

Antifraud Programs and Controls

Study Break

3. Which of the following does not influence the control environment?

A. Management’s PhilosophyB. Adequate TrainingC. Hiring ProcessesD. All of the above influence the control

environment

D. All of the above influence the control environment

Study Break

4. This component of control activities ensures that every transaction is authorized by management acting within the scope of their authority.

A. Authorization ControlsB. Segregation of DutiesC. Information Processing ControlsD. All of the above

A. Authorization Controls

Study Break

5. This computer application control is designed to ensure that the processing results are correct and only authorized personnel receive the information.

A. Input ControlsB. Processing ControlsC. Output ControlsD. Data Controls

C. Output Controls

Understanding Internal Control

Must perform procedures to:

• Understand design of policies and procedures

• Determine whether the policies and procedures are operating

Understanding Internal Control

Auditor uses the understanding to:

• Identify types of potential misstatements

• Understand factors affecting risk of material misstatement

• Design further audit procedures

Documenting the Understanding

• Questionnaires

• Flowcharts

• Decision Tables

• Narrative Memoranda

Questionnaire

Decision Table

Narrative Memoranda

Study Break

6. All of the following are procedures used to obtain an understanding of internal controls except:

A. Inspecting documentsB. Inquiries of client’s customersC. Inquiries of managementD. All of the above procedures are used

B. Inquiries of client’s customers

Study Break

7. This form of documentation is a diagram that uses symbols to identify the steps involved in processing information through the accounting system.

A. QuestionnaireB. FlowchartC. Decision TableD. Narrative Memoranda

B. Flowchart

T H E E N D LET’S CONTINUE TO CHAPTER 11