Principle of Internal Control
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CPA Auditing and Attestation (AUD) › Principle of Internal Control
The Committee on Sponsoring Organizations prepared the Internal Control-Integrated Framework:
To compliment the overarching concepts of the ERM framework
To respond to the internal control assessment requirements of the SOX Act of 2002
To help businesses assess internal control
As a part of the Congressional task force known as the Treadway Commission
Explanation
This was the primary focus of the Internal Control-Integrated Framework established in 1992.
An entity that maintains a strong internal audit function that reports directly to the Board of Directors is applying the ideas from which principle of effective internal control over financial reporting?
Board of Directors
Authority and responsibility
Human Resources
Organizational structure
Explanation
The principle of organizational structure states that reporting relationships should not undermine the commitment to effective financial reporting and internal control.
According to COSO, an executive's deliberate misrepresentation to a banker who is considering whether to make a loan to an enterprise is an example of which of the following internal control limitations?
Breakdown
Collusion
Management override
Costs vs benefits
Explanation
In this example, the internal control put in place was overridden by the executive's deliberate behavior.
Which of the following is a violation of segregation of duties in internal control? An employee:
enters and approves purchase orders.
matches invoices to purchase orders and receiving reports.
adds vendors and makes changes to a vendor master file.
receives goods from vendors and signs off on the deliveries.
Explanation
Regarding segregation of duties, authority needs to be separated from control. Entering and approving need to be separated for effective internal control.
Which of the following roles would not be performed by a single individual in a company with the best segregation of duties in place?
Custody of signed checks yet to be mailed and maintaining depreciation schedules.
Approving sales returns on customer accounts and depositing customer checks in the bank.
Preparing monthly customer statements and maintaining the A/P subsidiary ledger.
Posting A/P transactions and entering additions and terminations to payroll.
Explanation
One individual in charge of approving sales returns and depositing customer checks would create significant risk.
Issuers are generally prohibited from making personal loans to directors or executive officers:
Never
Without exception
Except in the ordinary course of business
Except when required by law
Explanation
The only time an issuer can issue a personal loan to a director or key officer is when it is part of the ordinary course of business.