Internal Controls & Audit Processes Flashcards

In SOX compliance, which section requires management to assess and report on internal controls over financial reporting?

Answer: Section 404

SOX Section 404 mandates that management assess the effectiveness of internal controls over financial reporting annually.

What is the primary purpose of a 'compensating control'?

Answer: To mitigate a risk when a primary control cannot be implemented

A compensating control provides alternative risk mitigation when the ideal primary control is not feasible.

Which audit opinion indicates that financial statements are presented fairly in all material respects?

Answer: Unmodified (clean) opinion

An unmodified or clean opinion means the auditor found no material misstatements and statements conform to GAAP.

The concept of 'materiality' in auditing refers to:

Answer: The significance of an error or misstatement that could influence users' decisions

Materiality defines the threshold above which misstatements could reasonably influence decisions of financial statement users.

Which of the following is an example of an application control?

Answer: Automated input validation that rejects non-numeric values in a numeric field

Application controls are automated controls built into software, such as input validation routines.

What is the role of an 'engagement letter' in an external audit?

Answer: To formally document the terms, objectives, and responsibilities of the audit engagement

An engagement letter establishes the agreement between the auditor and client regarding scope, timing, and responsibilities.

Which internal control principle requires that no single individual can initiate, approve, and record a transaction?

Answer: Segregation of duties

Segregation of duties (SoD) divides critical tasks among multiple people to prevent fraud and errors.