ABA Internal Controls & Risk Management Flashcards

What is 'inherent risk' in risk management?

Answer: The natural risk of error or fraud before any controls are applied

Inherent risk is the susceptibility of an activity or assertion to material misstatement assuming no related controls are in place.

What does a risk assessment involve in internal control planning?

Answer: Identifying and evaluating risks that could prevent organizational objectives

Risk assessment involves identifying potential risks to achieving organizational objectives and evaluating their likelihood and potential impact.

Which of the following is an example of a preventive internal control?

Answer: Requiring purchase orders before any inventory purchase

Requiring purchase orders before inventory purchases is a preventive control because it stops unauthorized purchases from occurring in the first place.

What is 'control risk' in the context of internal auditing?

Answer: The risk that internal controls will fail to prevent or detect a material misstatement

Control risk is the risk that a company's internal controls will fail to prevent or detect a material misstatement in the financial statements.

What is the purpose of a whistleblower policy in internal controls?

Answer: To provide a safe channel for reporting suspected fraud or misconduct

A whistleblower policy establishes a confidential process for employees to report suspected fraud, misconduct, or ethics violations without fear of retaliation.

In a small business with limited staff, which compensating control can substitute for full segregation of duties?

Answer: Owner or manager review of transactions and reconciliations

When segregation of duties is impractical, having the owner or manager independently review transactions and reconciliations serves as a compensating control.