Management is responsible for designing and maintaining its organization’s internal control.
In designing internal control, management must consider controls related to each of the five major internal control components: the control environment, risk assessment, the accounting information system, control activities, and monitoring.
a. Management is considering controls for the following three control environment factors. For each, describe how the factor contributes to effective internal control.
(1) Integrity and ethical values.
(2) Commitment to competence.
(3) Board of directors or audit committee.
b. Explain how risk assessment contributes to effective internal control, and identify four factors that result in increased financial reporting risk.
c. Identify the five major objectives of an accounting information system.
d. Describe the purpose of the following two types of control activities.
(1) Performance reviews.
(2) Information processing.
e. Explain the two types of monitoring and provide an example of each.