Internal Control in a Financial Statement Audit

These flashcards cover key concepts related to internal control in financial statement audits, including principles, processes, and responsibilities within an audit context.

Principles Underlying an Audit

Key principles that govern how auditors conduct audits, including expressing opinions based on management-prepared financial statements.

1. Define Objective

Determine what risk or assertion is being evaluated.

Collect Data:

Extract relevant financial or operational data.

Clean Data:

Remove errors, duplicates, and inconsistencies.

Analyze Data:

Use software or spreadsheets to identify anomalies, trends, or patterns.

Interpret Results:

Decide whether exceptions indicate a risk or control issue.

Document and Report:

Record your findings and use them to guide audit procedures.

Revenue Testing:

Identifying unusual spikes or dips in sales.

Journal Entries:

Flagging entries with unusual amounts, times, or approvers.

Trend Analysis:

Spotting abnormal trends in expenses or payroll.

Descriptive Analytics

Summarizes past data (e.g., total sales per month, number of invoices).

Diagnostic Analytics

Explains why something happened (e.g., spikes in vendor payments).

Predictive Analytics

Uses historical patterns to forecast future trends

Prescriptive Analytics

Suggests actions or controls to prevent future issues.

Duplicate Payments in Auditing

Detecting duplicate invoices or payments.

GAAS

Generally Accepted Auditing Standards, which provide a framework for conducting audits.

Control Environment

The set of standards, processes, and structures that provide the basis for carrying out internal control.

Risk Assessment

The process of identifying and analyzing risks to achieving an organization's objectives.

Control Activities

Actions established by policies and procedures to help ensure that management directives are carried out.

Segregation of Duties

A control activity designed to minimize fraud and errors by separating responsibilities across different personnel.

Monitoring of Controls

The process that assesses the quality of internal control performance over time.

COSO Framework

A widely used framework for internal control that emphasizes the importance of an integrated approach to managing risks.

Material Misstatement

A misstatement in financial statements that could influence the economic decisions of users.

Substantive Procedures

Detailed tests performed by auditors to gather evidence about specific assertions in the financial statements.

Auditor’s Responsibilities

Responsibilities include obtaining an understanding of internal control and assessing control risk.

Assertions

Claims made by management regarding the accuracy and completeness of financial statement information.

Ongoing Evaluations

Continuous assessments used to ascertain if internal control components are functioning effectively.

Information and Communication

The necessity for relevant, quality information to support the functioning of internal control.

Professional Skepticism

An attitude that includes a questioning mind and a critical assessment of audit evidence.

Audit Evidence

Information used by auditors to determine whether the financial statements are free from material misstatement.