Internal Control Evaluation Flashcards

Which of the following best describes a 'detective control'?

Answer: A monthly inventory count that identifies unexplained shortages after the fact

Detective controls identify problems or irregularities after they have occurred, such as inventory counts that reveal unexplained discrepancies.

An organization's internal audit function reports directly to the CFO. What is the primary concern with this reporting structure?

Answer: The CFO could influence or suppress audit findings related to the finance function

Independence is compromised when internal audit reports to a function it is supposed to oversee, as the CFO can restrict scope or suppress findings.

Which approach to evaluating internal controls involves testing a sample of transactions to determine if a control actually operated as designed throughout the period?

Answer: Test of operating effectiveness

Testing operating effectiveness involves sampling transactions to verify that a control functioned consistently as intended over the review period.

A company implements data analytics to continuously monitor all journal entries for unusual characteristics such as round-dollar amounts, weekend postings, and entries made by senior accountants. This is an example of:

Answer: A continuous monitoring control that enhances detection capabilities

Continuous monitoring using data analytics is a detective control that flags unusual journal entry patterns for follow-up in near-real time.

Which of the following best represents an 'entity-level control' within the COSO framework?

Answer: The board's audit committee oversight of financial reporting integrity

Entity-level controls, like audit committee oversight, operate across the entire organization and set the tone for all other controls.

A fraud examiner is assessing whether internal controls over expense reimbursements are adequate. Which combination of control gaps creates the highest fraud risk?

Answer: The same employee submits, approves, and processes their own expense reports with no independent review

When one employee controls all phases of the expense process — submission, approval, and payment — there is no independent check, creating an ideal opportunity for fraudulent reimbursements.

Which statement about the limitations of internal controls is MOST accurate?

Answer: Collusion between two or more individuals can override many controls that would stop a single person acting alone

Collusion is a key limitation of internal controls because controls designed around a single point of failure can be defeated when two or more people cooperate to circumvent them.