Rabago, Hannah Kathrynne P.
Mngt 221N
MWF 9:30-10:30 3/16/20
Overview of Internal Control
1. What is meant by the control environment? What are the factors the auditor must
evaluate to understand it?
Control Environment is the set of standards, processes, and structures that provide the
basis for carrying out internal control across the organization. The control environment
consists of the actions, policies, and procedures that reflect the overall attitudes of top
management, directors, and owners of an entity about IC are the factors the auditor
must evaluate to understand. The control environment serves as the umbrella for the
other four components.
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2. What is the relationship among five components of internal control?
The control environment serves as the umbrella for the other four components (risk
assessment, control activities, information and communication, and monitoring). Without
an effective control environment, the other four are unlikely to result in effective internal
control, regardless of their quality. Though, all five components are necessary for
effectively designed and implemented internal control.
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3. The separation of operational responsibility from record keeping is meant to prevent
different types of misstatements than the separation of the custody of assets from
accounting. Explain the difference in the purposes of these two types of separation of
duties.
Separation of duties involves splitting responsibility for bookkeeping, deposits, reporting
and auditing. The further duties are separated, the less chance any single employee
has of committing fraudulent acts. For small businesses with only a few accounting
employees, sharing responsibilities between two or more people or requiring critical
tasks to be reviewed by co-workers can serve the same purpose. Standardizing
documents, on the other hand, used for financial transactions, such as invoices, internal
materials requests, inventory receipts and travel expense reports, can help to maintain
consistency in record keeping over time. Using standard document formats can make it
easier to review past records when searching for the source of a discrepancy in the
system. A lack of standardization can cause items to be overlooked or misinterpreted in
such a review.
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4. For each of the following, give an example of a physical control the client can use to
protect each of the following assets or records is:
o Petty cash should be kept locked in a fireproof safe.
o Cash received by retail clerks should be entered into a cash register to record all
cash received.
o Accounts receivable records should be stored in a locked, fireproof safe.
Adequate backup copies of computerized records should be maintained and access
to the master files should be restricted via passwords.
o Raw material inventory should be retained in a locked storeroom with a reliable
and competent employee controlling access.
o Perishable tools should be stored in a locked storeroom under control of a reliable
employee.
o Manufacturing equipment should be kept in an area protected by burglar alarms
and fire alarms and kept locked when not in use.
o Marketable securities should be stored in a safety deposit vault.
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