Auditing and Internal Controls Flashcards

Under the IIA Three Lines Model, which function provides independent and objective assurance to the governing body?

Answer: Internal audit

Internal audit is the third line, providing independent assurance and advice.

Strong internal controls most directly reduce which element of the fraud triangle?

Answer: Opportunity

Internal controls limit the perceived opportunity to commit and conceal fraud.

A fraud examiner expresses each income statement line item as a percentage of net sales for the same year. This technique is called:

Answer: Vertical analysis

Vertical analysis states each line item as a percentage of a base figure within one period.

Which control is most effective at uncovering an ongoing lapping scheme in accounts receivable?

Answer: Mandatory vacations and job rotation for the receivables clerk

Lapping requires constant manipulation, so a substitute performing the clerk's duties is likely to expose it.

Which control best helps prevent or detect ghost employee schemes?

Answer: Distributing paychecks through someone independent of hiring and payroll preparation

Independent paycheck distribution exposes checks with no actual employee to claim them.

Under U.S. auditing standards, what level of assurance does a financial statement auditor provide regarding fraud?

Answer: Reasonable assurance that the statements are free of material misstatement, whether caused by error or fraud

Auditors obtain reasonable, not absolute, assurance that statements are free of material misstatement from error or fraud.

To address the risk of management override of controls, AU-C 240 requires auditors to perform which procedure on every audit?

Answer: Test the appropriateness of journal entries and other adjustments

Journal entry testing is required because management override often uses improper entries.