7-1 7-2 and 7-9 Written narrative of internal control (268) A written summary of
ID: 2590913 • Letter: 7
Question
7-1 7-2 and 7-9
Written narrative of internal control (268) A written summary of internal control for inc audit working papers. Written narratives are more flexible than questionnaires, but by t practical only for describing relatively small, simple systems. Ives are 7-1. What is internal control? 7-2. Identify the five components of an organization's internal control. 7-3. List the principles related to an organization's control environment. 7-4. How does separation of the record keeping function from custody of assets contribute to inter- nal control? through embezzlement. Describe what is meant by the risk assessment component of internal control and how it con- tributes to internal control. 7-6. 7-7. Describe the two types of monitoring and provide an example of each. 7-8. Identify the four types of control activities and describe how each type contributes to effective internal control. 7-9. One basic concept of internal control is that no one employee should handle all aspects of a transaction. Assuming that a general category of transactions has been authorized by top man- agement, how many employees (or departments) should participate in each transaction, as a minimum, to achieve strong internal control? Explain in general terms the function of each of these employees.Explanation / Answer
1. Internal controls are methods that a company puts in place to ensure organization's objectives in operatinal effectivenss and efficiency are achieved, financial reporting is reliable and the applicable laws and regulations are complied with.
2. The five components of an organization's internal controls are: the control environment, the entity's risk assessment process, the information system, the control activities and the monitoring of controls.
3. The principles related to an organization's control environment are:integrity and ethics, oversight responsibility, responsibility/authority, competence, enforces accountability.
4. Separating the record keeping function from custody of assets ensures that no individual has complete control over the task from its beginning til its completion. Thus, the chances of the assets being prone to frauds are lessened.
5. Three important factors are controlling cash receipts, using informal audits, physical controls and seggregation of duties.
6. The ris assessment component basically helps assess the risk that might arise. In other words, risk is anticipated in advance and this helps the organization to be prepared with how the situation is to be dealt in case the assessed risk is materialised. The organization does not necesarily wait til the misstatement arises.
7. Monitoring can be either ongoing or it can be performed on a separate evaluation basis. Example of an ongoing monitoring is the presence of a continuous monitoring software that flags invalid transactions in real time.A software that periodically performs integrated checks is an example of a separate evaluation.
8.The four types of control activities are : Performance reviews that provide the organization with the information about the personnela t various levelss if they are pursuing the objectives of the organization. Seggregation of duties that help prevent fraud and theft. Physical control includes physical security of both records and assets. Information processing controls that ensure that all the transactions are properly authorised.
9. Atleast 3 employees or departments should paricipate in a transaction in order to achieve strong internal control, considering the assumption that the transactions are authorised by the top management. One employee approves the transaction, another employee records the transaction in the accounting records and the third employee executes teh transaction.
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