ADDIS ABABA UNIVERSTY COLLEGE OF BSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

1. D

2. D

3. D

4. A

5. C

6. D

7. A

8. B

9. B

10. A

Part two: short answer questions

1. Describe each of the three broad objectives management typically has for internal

control. With which of these objectives is the auditor primarily concerned?

Internal controls refer to the procedures and methods implemented by the organization to ensure

that no fraudulent activities are happening. These controls also ensure that the organization

complies with the relevant laws.

The three broad objectives for internal controls of the management are:

1) The internal controls are implemented by the management to ensure

that the financial statements are reliable. The management needs to

make sure that the financial statements are reported as per the

relevant standards and principles.

The internal control system communicates all significant information

both down and up the organization, and communicates information to appropriate external parties as
well
2) Internal controls are implemented to make certain that the organization is operating efficiently and
effectively.

3) The internal controls ensure that the organization is operating in

compliance with the required laws and regulations. These laws and

regulations can be in relation to accounting, civil rights, or environmental laws

Examples of such standards and laws include environmental regulations, contract terms, labor laws,
safety regulations, and generally accepted

accounting principles (GAAP) or International financial reporting standards (IFRS).

The auditor is primarily concerned with the first objective, the reliability of financial reporting. The
auditor's main role is to provide an opinion on the fairness of the financial statements based on their
examination of the organization's financial records and internal controls. The auditor3will also assess the
internal controls in place to make sure that the financial statements are accurate and reliable.

2. The internal control element ISA 315 identifies includes five components of internal control. Discuss
each of these five components ?

Components of Internal Control System

 Controlling the environment

The control environment is the basis of other elements of all other components of the internal control
system. Moral values, managerial skills, employee honesty, managerial direction, etc., are included in
the controlling environment.

 This is the overall attitude, awareness, and actions of an organization's management and employees
regarding internal control. It includes the tone set by top management,

 Risk assessment After setting up the objective of the business, external and internal risks are to be
assessed. The management determines risk-controlling means after examining the risk related to every
objective.

 This component involves identifying and assessing the potential risks to the organization's financial
reporting.

 Control activities The management establishes a controlling activities system to prevent risk associated
with every objective. These controlling activities include all those measures that are to be followed by
the employees.
 This includes both preventive and detective controls, such as segregation of duties, authorizations and
approvals, and physical controls

 Information and communicationRelevant information for making decision are to be collected and
reported in proper time. The events that yield data may originate from internal or external sources.
Communication is very important for achieving management goals. The employees are to realize what is
expected of them and how their responsibilities are related to the activities of others. Communication of
the owners with outside parties’ like’s suppliers is also very important.

4 It includes the process of capturing, processing, and reporting financial and operational information

 Monitoring When the internal control system is in practice, the organization monitors its effectiveness
to bring necessary changes if any serious problem arises.

 This includes regular management and internal audit reviews, as well as monitoring the results of
control activities and risk management

3. Discuss what is meant by the term control environment and identify four control environment
subcomponents that the auditor should consider?

The control environment is the comprehensive set of actions taken by management that set the tone for
how employees engage in their day-to-day activities. The control environment is comprised of all
policies and procedures, the actions taken by management to deal with issues, and the values they
espouse

There are four subcomponents of the control environment that an auditor should consider:

1. Integrity and ethical values: The organization's commitment to integrity and ethical values,

as well as the actions of its management and employees plays a significant role in the control
environment.

2. Board of Directors or equivalent: The role and actions of the board of directors or

equivalent governing body in the oversight of the organization's internal control system.

3. Management's operating style: The management's approach to running the organization and its
attitude towards internal control.

4. Organizational structure: The design and structure of the organization, including the assignment of
authority and responsibility, which can affect the control environment.
# 4. Adequate separation of duties is an important control activity. Discuss the four general guidelines
for separation of duties to prevent both intentional and unintentional misstatement that are of
significance to auditors?

: Separation of duties is a control activity that is implemented to prevent both intentional and
unintentional misstatements by ensuring that no single individual has complete control over a5financial
transaction from inception to completion. The four general guidelines for separation of duties that are
of significance to auditors are:

1. Authorization: This involves ensuring that transactions are only authorized by individuals who have
the appropriate level of authority and are not involved in other aspects of the transaction.

2. Record Keeping: This involves separating the duties of recording transactions from those of
authorizing and processing them. This can be achieved by having different individuals responsible for
maintaining different types of financial records.

3. Physical Custody: This involves separating the duties of physically holding assets from those of
recording and reconciling them. This can be achieved by having different individuals responsible for
different types of assets

 By implementing these general guidelines for separation of duties, organizations can prevent both
intentional and unintentional misstatements and improve the overall integrity of their financial records

Question no 5 auditor must document their understanding and evaluation of the internal

control system. Identify and briefly describe the three most commonly used methods for such
documentation ?

There are several commonly used methods for documenting an auditor's understanding and

evaluation of an organization's internal control system, including:

1. Flowcharts: These diagrams visually depict the flow of transactions and information

within a system, and can help the auditor to understand how controls are implemented and how they
interact with one another.

2. Narrative descriptions: These written explanations provide detailed information about the design and
operation of the internal control system, including how controls are implemented, who is responsible
for them, and how they are monitored.

3. Control matrices: These tables summarize the controls in place for specific financial statement
assertions or business processes, and can be used to quickly assess the effectiveness of the internal
control system.
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