Internal Controls

For financial statement audits, auditors need to understand controls that are relevant to the audit in order to

• identify and assess the risks of material misstatements

• perform preliminary analytical procedures

• detect fraud

• assess inherent risk

Narratives, flowcharts, and internal control questionnaires are three common methods of

• testing the internal controls

• designing the audit manual and procedures

• documenting the auditor's understanding of internal controls

• documenting the auditor's understanding of a client's organizational structure

Which type of evidence is not used by the auditor to obtain an understanding of the design and implementation of internal control?

• inquiry

• confirmation

• inspection

• observation

Walkthroughs combine observation, inspection, and inquiry to assure that the controls designed by management have been implemented.

• True

• False

Flowcharts have two advantages over narratives: typically, they are easier to read and easier to update.

• True

• False

You are performing the audit of internal control for Clifton Company. Which of the following would represent a material weakness in internal control?

• The company's audit committee has experienced an unusual turnover of members

• The company's CFO was indicted for embezzling from the company

• Bank reconciliations are done monthly

• The CEO retired after twenty years of service to the company

The employee in charge of authorizing credit to the company's customers does not fully understand the concept of credit risk. This lack of knowledge would

• constitute a deficiency of management

• constitute a deficiency in operation of internal controls

• constitute a deficiency in design of internal controls

• not constitute a deficiency