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Auditing Homework - Chapter 7-9

Auditing Homework - Chapter 7-9 - Auditing Chapter 7...

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Auditing Chapter 7 Homework 7-1 What is internal control? Internal control is a process or a means to an end. This process is affected by individuals, not just policies, procedures and forms. It provided the concept of Reasonable Assurance because no internal control is absolute. Internal control encompasses the objectives of financial reporting, operations, and compliances which top management delegates’ authority and assigns responsibility for various functions. Three areas of internal control are 1) financial reporting 2) operations and 3) compliance to applicable laws and regulations. 7-2 Identify the five components of an organization’s internal control ? 1) Control environment 2) Risk assessment 3) control activities 4) accounting information system and 5) monitoring of controls 7-3 List the factors that make up an organization’s control environment. The control environment consists of integrity and ethical values, commitment to competence, board of directors, or audit committee, management’s philosophy and operational style, organizational structure, assignment of authority and responsibility and human resource policies and practices. 7-4 How does separation of the record keeping function from custody of assets contribute to internal control ? This separation provides for independent records to be maintained that can be reviewed independently or collectively to reconcile assets on hand. This provides accountability over assets and provides the information necessary for financial reports. The accounting department maintains the independent records and the reconciliation is performed by the operations control group. 7-12 What are the purposes of the consideration of internal control required by generally accepted auditing standards? The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. This is because it gives the auditors quality that is much more effective in controlling the audit environment. 7-17 How is the auditors understanding of the client’s internal control documented in the audit working papers? This is typically in the form of flowcharts, questionnaires or written narratives of internal control.
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7-26 As a part of obtaining an understanding of the client and its environment, the auditors must obtain an understanding of each of the components of an entity’s internal controls. In additional they assess control risk for the assertions embodies in the account balances, class of the transaction type, and disclosure components of the financial statement .
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