ch7 quiz questions and solutions

Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 12.1 EyeMax Corporation . . Evaluation of Audit Differences

Moreover, the auditor should preform test for effectiveness of internal controls. He may interview management by asking questions on the process of the transactions and operational activities. He may discuss with management the process of some transactions from beginning to end and then test it by using sample testing. Also he/she should make sure that there is proper control of activities; policies and procedures for adequate segregation of duties are met.

Having internal controls is one thing, but how the company evaluates that control is a matter all by itself. Being an independent auditor, it is our job to understand an entity and

The most important aspect in the financial statement is to follow and regulate the internal control system of the organization. This is the most important point in this act as it detects that the internal control system of the corporations is sound or not. It wants to report about the internal control system of the organization so that the actual picture of the organization

Use of due professional care, that is, whether the internal audit group has effective quality control

Auditors have the responsibilities as well as management to report internal controls. The auditors must examine closely management’s claim of effectiveness and also physically test the controls. After the examination, the auditors should express their opinion and any recommendations to fix any internal control weaknesses.

The purpose of internal controls is to eliminate the potential fraud that could take place within a company. In this case the client that Damian services has been losing money and their financial reports are not matching with the reports conducted by Damian services. The cash flow problem is reoccurring when auditing reports for each quarter in order to pay the company’s taxes to the federal government. This is due to there not being enough revenue to cover the company’s debt. This is also bad for shareholders and investors when it comes to the review of the company and its assets versus its liabilities. The company is showing that they are currently unable to handle their debts based on the financial reports analyzed.

An assessment of inherent risk is important for determining the possibility of material misstatement before considering internal control effectiveness (259). Obtaining an understanding of internal control is the basis for determining control risk (410). This understanding helps the auditor determine areas of weakness, which may require more attention. Analytical procedures indicate possible misstatements and unusual fluctuations requiring substantive tests of transactions or tests of details of balances for proof of misstatement occurrence. Substantive analytical procedures can also help reduce the sample sizes needed or certain tests of details of balances (406). Assessment of planned detection risk is the risk that material misstatements will not be discovered by the audit as planned and involves either disregarding internal control in the substantive approach resulting in more evidence being gathered or considering internal control in the reducing risk approach resulting in less evidence being gathered. Performing tests of controls is only necessary if one is following a reducing control risk approach. If following a substantive approach, the auditor can ignore testing controls

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal

The auditor’s responsibility is to express an opinion on the fairness of the presentation of the financials, and an opinion on the effectiveness of internal control of financial reporting, including an opinion on whether management’s assessment of internal control is fairly stated.

The final responsibility for the integrity of an SEC registrant’s internal controls lies on the management team. U.S. companies need to refer to a comprehensive framework of internal control when assessing the quality of financial reporting to determine that financial statements are being presented under General Accepted Accounting Principles, GAAP. The widely used framework is referred as COSO, Committee of Sponsoring Organizations of the Treadway Commission, sponsored by the following organizations American Accounting Association, the American Institute of CPA’s, Financial Executives International, the Institute of Internal Auditors, and the Institute of Management Accountants. COSO’s defines internal control as:

Does the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control?

Section 404 requires public companies to establish internal controls and report annually on their effectiveness over financial reporting. The CFO and CEO are held personally responsible for the internal controls via the requirement to sign a statement certifying the adequacy of the internal control system (Moffett and Grant, 2011, p. 3). Additionally, the company’s independent auditor must issue an attestation regarding management’s assessment of the internal structure as part of the company’s annual report (Bloch, 2003, p. 68).

The role of internal audit is to provide independent declaration that an organization’s threatadministration, governance and internal control processes are functioning effectively. Internal auditors deal with concerns that are essentially important to the existence and success of any organization. Unlike external auditors, they aspect beyond financial possibilities and statements to reflect wider problems such as the organization’s reputation, development, its power on the location and the approach it treats its organizations.In summary, internal accountantssupport organizations to thrive.

3) To what level do you believe that the work done by the internal Audit improves the overall internal control of the organization?