Chapter 8: Internal Control and its Role in F/S Audits Flashcards
What is the role of internal control?
minimize risk of material misstatement and helping to plan audit tests
What is the relationship between internal control and control risk?
when internal control is strong, control risk is low
Evidence collecting strategies
Reliance and Substantive
How is the choice between what evidence collecting strategy to use made?
Depends on the strength of IC and cost of strategy
What strategy is used when controls are weak?
Substantive Strategy
Reliance Strategy
auditor places some reliance on ICs to help ensure the assertions are accurate (CR < 100%)
When is a reliance strategy acceptable?
when ICs are deemed to be adequate
Substantive Strategy
auditor decides not to place any reliance on ICs to help ensure assertion is correct (CR = 100%)
Reasons for employing a substantive strategy
1) CR is high, 2) Cheaper
COSO
primary framework used in US to understand and evaluate IC
Internal Control (COSO definition)
process effected by personnel that is designed to provide reasonable assurance regarding achievement of objectives
Objectives of Internal Controls
1) reliability of financial reporting, 2) Compliance with laws and regulations, 3) Effectiveness and Efficiency of operations, 4) Safeguarding of Assets
Internal Controls (Simple Definition)
processes, policies, devices, and organizational structures implemented by organization to mitigate threats
What is the primary purpose of financial reporting process?
to accurately identify, record, classify, aggregate and report transaction information and supporting information in compliance with GAAP
Four components of financial reporting system
1) Source documents, 2) Journals, 3) General and Subsidiary Ledgers, 4) Financial Statements
Source Documents
documents generated when transaction takes place, byproduct of transaction that provide information about transaction
Journals
where transactions are recorded and summarized
General Journals
used to record any transaction
Specialized Journals
used for specific types of transactions