Internal Controls and Control Risk

These flashcards cover key vocabulary and concepts related to internal controls and control risk in auditing.

Control Risk

The risk that a material misstatement could occur in an assertion and not be prevented or detected by the client's internal controls.

Inherent Risk

The likelihood of material misstatements existing before considering the client's internal controls.

Audit Risk Model

A model used to determine the acceptable risk that an auditor is willing to tolerate when issuing an audit opinion.

Material Weakness

A deficiency in internal control over financial reporting such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis.

Significant Deficiency

An internal control deficiency that is less severe than a material weakness but important enough to merit attention by those charged with governance.

Tests of Controls (TOC)

Procedures to determine whether key controls are operating effectively and as designed.

Preventative Controls

Controls designed to prevent errors or fraud from occurring.

Detective Controls

Controls designed to identify errors or fraud that have already occurred.

Substantive Procedures

Audit procedures that are designed to detect material misstatements at the assertion level.

Documenting Understanding of Internal Controls

Using narratives, flowcharts, or questionnaires to convey how internal controls are designed and operate.