Internal Controls and Auditing: Terms and Concepts, Quizzes of Auditing

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TERM 1 Internal Controls DEFINITION 1 A process, affected by an entity's BOD, mgt, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Reliability of financial reporting Effectiveness and efficiency of operations Compliance with applicable laws and regulations TERM 2 MGT's responsibility to assess effectiveness of IC DEFINITION 2 Accept responsibility Evaluate effectiveness of IC over financial reporting Support with documentation Present written assessment as year end Report to accompany the F/S TERM 3 Auditors responsibilityAUDIT IC (provides more assurance than a F/S audit on its own) DEFINITION 3 F/S to express opinion and provide reasonable assurance on the financial statements ** search for material misstatements IC to express opinion on the effectiveness of IC over financial reporting ** search for material control weaknesses TERM 4 Audits post SOX 404 DEFINITION 4 The audit of IC has to be approved by audit committee Auditors can use the work of others (internal auditors) Auditors can obtain evidence on IC operating effectiveness at any point of time but have to update them before issuing the report Auditors MUST include transactions testing throughout the year TERM 5 Regulatory base for auditing IC DEFINITION 5 SOX 404 PCAOB AS 5- An audit of IC over financial reporting that is integrated with an audit of financial statments, supersedes AS 2 AS 4- Reporting on whether a previously reported material weakness continues to exist TERM 6 Auditors- post SOX 404 DEFINITION 6 Should evaluate mgt's assessment process Obtain understanding of IC Test both operating ( how well are controls working/ operating as designed) and design effectiveness (are the controls designed effectively) of IC TERM 7 Plan the audit- IC DEFINITION 7 Gain understanding of client's processes and IC -> flowcharts, narratives, questionaires Assess control risk Identify significant accounts and assertions for each significant account TERM 8 Perform audit - IC DEFINITION 8 Identify points where errors/frauds can occur Identify significant processes and existing internal controls Use of control risk matrix-- key controls? Identify key controls to test TERM 9 Sampling DEFINITION 9 Investigating the entire population of control activities, transactions, or account details by examining only some of the items TERM 10 Statistical Sampling DEFINITION 10 with firm rules TERM 21 Control Environment DEFINITION 21 the set of factors in an org's operating environment that separately and together set the tone of the organization in regards to its awareness of, and attitudes towards, control objectives. TERM 22 1. Integrity and ethical values DEFINITION 22 Mgt's ex (attitude) Moral guidance (rules, code of conduct) Incentive structure (fair compensation, punishment, expectations, pressure to meet goals) Address deviations TERM 23 2.Commitment to competence DEFINITION 23 Hiring Train/instruction Reward good work TERM 24 3. Corporate governance DEFINITION 24 Board of directors Audit commitee owner oversight TERM 25 4. Mgt philosophy/operating style DEFINITION 25 Attitudes towards accting/ IC Attitudes towards risk Attitudes towards ethic/laws TERM 26 5. Org structure DEFINITION 26 Automation Assignment of responsibility/authority Facilitation of communication/action Employee knowledge of entity's objectives TERM 27 6. Human resource policies/ practices DEFINITION 27 Hiring/ training/ firing Outside problems-- unions Compensation/ promotion/ rotation TERM 28 Accounting system DEFINITION 28 identifying, recording, processing, summarizing, and reporting information regarding economic states and events TERM 29 Non-accounting information DEFINITION 29 demographic, economy, competition, market, global economy, regulatory TERM 30 Relevance DEFINITION 30 Qualitative Predictive value Feedback value Timeliness Usefulness? TERM 31 Reliability DEFINITION 31 Qualitative Verifiability Representational faithfulness Neutral Dependability? TERM 32 Risk assessment DEFINITION 32 The set of processes/ mechanisms designed to establish objectives for financial reporting, operations, and compliance - and to identify, analyze, and manage the risks of not reaching them (them = objectives). TERM 33 Risk map DEFINITION 33 High significance, low likelihood, medium risk --> mitigateLow significance & likelihood, low risk --> ignoreHigh significance & likelihood, high risk --> mitigate or eliminateLow significance & high likelihood, medium risk --> mitigate TERM 34 Segregation of duties DEFINITION 34 Access vs Authorization vs AccountingDesign vs Operations vs Data control TERM 35 Performance reviews DEFINITION 35 actual vs budget TERM 46 ARACR DEFINITION 46 Acceptable risk TERM 47 EPER DEFINITION 47 Expected deviation (based on last years deviation) TERM 48 Control deficiency DEFINITION 48 deficiency on controls such that they do not prevent/detect misstatementsIf likelihood is more than remote is considered deficiency TERM 49 Inconsequential DEFINITION 49 A reasonable person would conclude, after considering the possibility of further undetected misstatements, that the misstatement, either individually or when aggregated with other misstatements, would be clearly immaterial to the F/SUnqualified (clean) opinion TERM 50 Consequential DEFINITION 50 a misstatement which is more that inconsequential but less than material will not be prevent or detected by IC TERM 51 Material DEFINITION 51 material misstatement will not be prevented or detected by ICAdverse opinion/ qualified TERM 52 Significant deficiency DEFINITION 52 1 or more control deficiencies exist that result on more than remote likelihood that a misstatement that is more than inconsequential will not be prevented or detectedUnqualified (clean) opinion TERM 53 Material weakness DEFINITION 53 One or more significant deficiencies exist that result in more than a remote likelihood that internal controls will not prevent or detect a material misstatement TERM 54 Explanatory paragraph DEFINITION 54 Mgt's report is incomplete or inappropriate TERM 55 Adverse Report DEFINITION 55 Mgt's report does not include existing material weakness TERM 56 Disclaim opinion or withdraw DEFINITION 56 Severe limitation TERM 57 AS 5 DEFINITION 57 The auditor must communicate in writing to mgt and the audit committee all significant deficiencies and material weaknesses identified during the audit TERM 58 Internal audit DEFINITION 58 Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.It helps an organization accomplish its objectives by bringing systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes TERM 59 IA-Operational audit DEFINITION 59 Purpose of Audit- Emphasis effectiveness and efficiency of operations Distributions of Reports- Management is primary user Inclusion of non-financial areas TERM 60 IA- F/S audit DEFINITION 60 Purpose of audit - Emphasize whether historical financial information is correctly recorded Distribution of reports - External users of F/S Does not include non-financial areas TERM 71 Fiduciary Duty DEFINITION 71 Being trustworthy and acting in the best interest if the shareholders whom the director represents2 components:integrity and competence TERM 72 Duty of loyalty DEFINITION 72 Duty of Loyalty is a term used in corporation law to describe a fiduciaries' "conflicts of interest and requires fiduciaries to put the corporation's interests ahead of their own." "Corporate fiduciaries breach their duty of loyalty when they divert corporate assets, opportunities, or information for personal gain." TERM 73 Fair deals DEFINITION 73 all transactions must be handled in forthright and open manner that is fair to the interest of the corporation TERM 74 Duty of Care DEFINITION 74 act in the best interest of the corporation and with the care reasonably expected of an ordinary prudent person TERM 75 duty not to entrench DEFINITION 75 To not block a change-of-control transactions (either through a sale of the company or in a proxy fight TERM 76 small boards DEFINITION 76 Pros: more involved and focused, easier to collaborate Cons: easier to manipulate by dominant personality TERM 77 large board DEFINITION 77 Pros: more talent Cons: harder to work efficiently as a team TERM 78 Executive committee DEFINITION 78 coordinate activities, act as a backup when quorum is not reached, senior board to view issues prior to discussion of the full board TERM 79 Committee of outside directors DEFINITION 79 Meet at the end of the board meeting w/o the CEO and inside members present Discussion issues: CEO performance, company's oprating results, disagreements among directors with CEO positions TERM 80 Compensation committee DEFINITION 80 Should be composed of independent directors Design compensation plans for key executives TERM 81 Audit committee DEFINITION 81 Overseeing the accounting and fin. reporting process and audits of the F/S TERM 82 Nominating (governance) committee DEFINITION 82 To identify and recruit new memebers of the board Could also administer director compensation Overseeing goernance practices and process Ensuring compliance with bylaws