Week 4 Internal Cotrols lecture part 3

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Presentation Description

Part 3 of our discussion of internal controls from Chapter 5.

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Presentation Transcript

Monitoring Activities:

Monitoring Activities

Internal Control Evaluation:

Internal Control Evaluation Phase 1: Understand and document Understand the client’s internal control Document the understanding of internal control Internal Control questionnaire Narrative Accounting and control system flowcharts Phase 2: Assess control risk (Preliminary) Consider cost effectiveness of reliance/testing. Phase 3: Identify Controls to Test and Perform Test of Controls Perform test of controls audit procedures Re-assess control risk 5- 2

Documenting Internal Control Understanding:

Documenting Internal Control Understanding An auditor must document their understanding of internal control on every audit. Can be documented with: Questionnaires Narratives Flowcharts 5- 3

Should Test of Controls Be Completed?:

Should Test of Controls Be Completed? An auditor may choose not to test controls for one of two reasons: Internal control system is too ineffective in preventing or detecting misstatements to rely upon to justify reductions in substantive testing It may take more time to test controls than it would to just perform more substantive testing to provide evidence needed to conclude about a financial statement assertion For public company audits, an auditor MUST test controls 5- 4

Exhibit 5.12 Payroll System Flowchart:

Exhibit 5.12 Payroll System Flowchart 5- 5

Exhibit 5.13 Bridge Workpaper:

Exhibit 5.13 Bridge Workpaper 5- 6

Tests of Controls:

Tests of Controls After identifying specific control activities that can be relied on to reduce substantive testing for a financial statement assertion, must test the control Procedures used from the least persuasive to the most persuasive form of evidence: Inquiry Observation Inspection Reperformance Direction of test does matter 5- 7

Step 1: Planning the engagement:

Step 1: Planning the engagement Consider knowledge of industry Consider knowledge of business Consider extent of changes in operations Consider extent of changes in internal control Evaluate controls for all relevant assertions for all significant accounts or disclosures . 5- 8

Step 2: Using a top-down approach:

Step 2: Using a top-down approach Identify entity-level controls Perform walkthroughs Auditor must perform work related to: Company-wide anti-fraud programs Controls that have a pervasive effect Auditor but can incorporate work of internal auditors and others Must obtain “principal evidence” for opinion on their own Must assess competence and objectivity Limited reliance Can’t reduce work on control environment 5- 9

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