Scribd
Upload
415 views2 pages

Chapter 13

The control environment refers to management's attitude towards internal controls and how it affects the effectiveness of specific control procedures. Key factors the auditor evaluates are the board's oversight functions, management's philosophy and organizational structure, and internal controls like segregation of duties. The control environment is the broadest component of internal control and influences the other four components: risk assessment, control activities, information and communication, and monitoring activities. Separation of operational and record keeping duties prevents biased information, while separation of asset custody and accounting prevents theft. Physical controls that can protect assets and records include using a safe for petty cash and securities, a cash register for cash receipts, locked file drawers for accounts receivable, and locked rooms for inventory,

Uploaded by

Jomer Fernandez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
415 views2 pages

Chapter 13

The control environment refers to management's attitude towards internal controls and how it affects the effectiveness of specific control procedures. Key factors the auditor evaluates are the board's oversight functions, management's philosophy and organizational structure, and internal controls like segregation of duties. The control environment is the broadest component of internal control and influences the other four components: risk assessment, control activities, information and communication, and monitoring activities. Separation of operational and record keeping duties prevents biased information, while separation of asset custody and accounting prevents theft. Physical controls that can protect assets and records include using a safe for petty cash and securities, a cash register for cash receipts, locked file drawers for accounts receivable, and locked rooms for inventory,

Uploaded by

Jomer Fernandez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

1. What is meant by the control environment?

Control environment means the overall attitude, awareness and actions of


directors and management regarding the internal control system and its importance in the
entity. The control environment has an effect on the effectiveness of the specific control
procedures. A strong control environment can significantly complement specific control
procedures.

What are the factors the auditor must evaluate to understand it?
o The function of the board of directors and its committees
o The management’s philosophy and operating cycle
o The entity’s organizational structure and methods of assigning authority and
responsibility
o Management’s control system including the internal audit function, personal
policies and procedures and segregation of duties.

2. What is the relationship among the five components of internal control?


Of the five components, the control environment is the broadest and deals
primarily with the way management implements its attitude about internal controls. The
other four components are closely related to the control environment. Risk assessment is
management's identification and analysis of risks relevant to the preparation of financial
statements. Management implements control activities and createsthe accounting
information and communication system in response to risks identified as part of its risk
assessment. Finally, management monitors the quality of internal control performance by
determining if controls are operating as intended and that they are modified if needed.

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 purpose of these two types of
separation duties.
Operational responsibility from record keeping responsibility: risk = biased
information while the separation of the Custody of Assets from Accounting: theft

4. For each of the following give an example of a physical control the client can use to
protect the asset or record:
a. Petty cash – A safe
b. Cash received by retail clerks – Cash register
c. Accounts receivable records – Locked file drawer
d. Raw materials inventory – Locked room
e. Perishable tools – Locked room
f. Manufacturing equipment – Locked room
g. Marketable securities – A safe

You might also like