Internal Control & Deficiency

These flashcards cover key concepts related to Internal Control, different types of deficiencies, and testing methods used to evaluate controls in a financial context.

Internal Control

A process designed to ensure reliable financial reporting, compliance with laws/regulations, and efficient operations.

Control Deficiency

A flaw in a control that prevents it from working effectively, which may not cause material misstatements.

Significant Deficiency

An important deficiency that is less severe than a material weakness but could affect financial reporting.

Material Weakness

A deficiency that could reasonably lead to a material misstatement in financial statements, with significant impact.

Preventive Control

A type of internal control that stops errors before they happen, such as approvals and segregation of duties.

Detective Control

A type of internal control that finds errors after they occur, such as reconciliations and variance analysis.

Test of Design (TOD)

Determines whether a control is properly designed to prevent or detect errors/fraud.

Test of Operating Effectiveness (TOE)

Determines whether a control actually works as intended in practice.

Impact of Control Deficiency

Minor; may not cause material misstatements.

Impact of Significant Deficiency

Could affect financial reporting but is unlikely to be material.

Impact of Material Weakness

Most serious; can affect audit opinion.

Memory Tip for Design

Design = Blueprint; Is the control built right?

Memory Tip for Operating Effectiveness

Operating Effectiveness = Functioning; Does it actually work?