Week 4 Internal Cotrols lecture part 2

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Part 2 of our discussion of Internal Controls.

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Auditor Focus – Risk Assessment:

Auditor Focus – Risk Assessment Should examine management’s process for: Assessing risks relevant to financial reporting objectives, including fraud risk Assessing the likelihood and significance of risk of misstatements due to fraud Deciding about actions to address these risks 5- 1

Risk Assessment:

Risk Assessment

Risk Assessment (cont.):

Risk Assessment (cont.)

Control Activities:

Control Activities The policies and procedures that help ensure management directives are carried out. Physical controls over the security of assets Separation of duties Information Processing Approvals and authorization Verifications and reconciliations Performance reviews Preventive controls vs. detective controls 5- 4

Principles of control activities:

Principles of control activities Information technology Level of integration with their risk assessment process Selection and development of control activities Policies and procedures 5- 5

Control Activities:

Control Activities

Exhibit 5.7 Information Processing Controls and Financial Statement Assertions:

Exhibit 5.7 Information Processing Controls and Financial Statement Assertions 5- 7

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Exhibit 5.5 – Risks, Controls and Testing of Controls 5- 8

Why Separate Duties??:

Why Separate Duties?? Combining duties allows a single person to create and conceal errors and frauds. Segregating duties forces people to commit fraud through collusion—a much harder task! 5- 9

Exhibit 5.6 Separation of Duties:

Exhibit 5.6 Separation of Duties 5- 10

Information and Communication :

Information and Communication

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