Internal Control 1 Flashcards
Definiton and objective of Internal Control
AU-C 315 - in the Internal Control - Integrated framework publish by COSO
IC is a process designed to provides reasonable assurance that certains objective are achieved: ACE
- Accurates & Reliable financial reporting
- Compliance with laws and regulations
- Effectiveness and Efficiency of operations
The auditor’s responsibility with respect to safeguarding of assets is limited to those relevant to the reliability of financial reporting
What are the 3 objectives of Internal Control?
ACE
- Accurates & Reliable financial reporting
- Compliance with laws and regulations
- Effectiveness and Efficiency of operations
What are the 5 components of Internal Control?
AU-C 315 - in the Internal Control - Integrated framework publish by COSO
CRIME
- Control Environment
- Risk Assessment
- Control Activities
- Information and Communication
- Monitoring
What is the purpose for a Control Environment assessment?
Sets tone for the entire company
What are the components of the Control Environment?
CHOPPER
- Commitment to competence
- Human resource policies & practices
- Organizational Structure
- Participation of those charged with Governance (audit committee or BOD)
- Philosophy of the management and operating style
- Ethics values & Integrity
- Responsibility assignment
What are the goal of risk assessment procedures?
The knowledge obtained through risk assessment procedures is used to:
- Identify the types of potential misstatement (errors/frauds)
- Considered factors that affect the RMM
- Design test of control and substantive procedures
Note:understanding doesn’t require evaluating their operating effectiveness
Describe policies and procedures included in Control Activities
PIPS
Control Activities includes policies and procedure that helps to ensure that management directives are carried out:
PIPS
- Performance reviews
- Information processing
- Physical controls
- Segregation of duties (ARCC’s: Authorization of transactions, Recording of transactions, Custody of assets and Comparisons)
What are the steps the auditor should performed to obtain an understanding of IC?
UPDATED
UPDATED
- Obtain Understanding of the design of CRIME (perform RMM procedures)
- Document the understanding of IC
- Assess RMM
- Perform Test of Control (TFC)
- Reasses RMM and Evaluate results
- Document conclusions and complete the planned substantive procedures
What are the Risk Assessment procedures
AIIO/PIIO
Risk Assessment procedures includes: AIIO/PIIO
- Analytical Procedure / Prior audits
- Inquiry
- Inspection
- Obervation (to determine if the control have been implemented in practice)
How can an auditor document understanding of Internal Control?
FIND
FIND
- Flowchart: a symbolic representation of a system of sequential processes
- Internal control questionnaire ICQ
- Narative or Memorandum
- Decision table/tree
Effect of reliance on IC and Assessing RMM
Intent to Rely on IC
-
NO reliance IC:
- (1) IC does NOT opperate effectively,
- (2) cost/benefit of substantive procedure vs. Test of control -
- RRM is ↑ ⇒ Substantive approach alone provide cost benefit
-
YES reliance IC:
- (1) IC does opperate effectively or
- (2) substantive procedure alone does not provide sufficent audit evidence -
- RRM is ↓⇒ Combined approach (test of control & substantive test)
What questions should be asked to determine the risk of material misstatement?
- Were all transactions recorded?
- Were they timely?
- Measured appropriately?
- Recorded in correct period?
- Presented and disclosed properly?
- Did Management communicate their responsibilities?
the purpose of tests of controls
is to provide reasonable assurance that the internal control procedures are designed and operating effectively
Type of Test of control is RIIO
4 procedures of Test of Control
RIIO
Noah build an ARCC’s to go to RIIO
- Reperfomance of the control by the auditor (when evaluating operation)
- Inspection of documents and reports
- Inquiries of appropriate personnel
- Observation of the application of controls - most effective
look at frequency or percentage for tes of control
Materiality
Materiality:
- is a concept that recognizes that some matters, individually or in the aggregate, are important for fair presentation of financial statements in conformity with generally accepted accounting principles.
- The auditor’s opinion that the financial statements are presented fairly in all material respects is for the financial statements as a whole, so materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.
- is a matter of professional judgment influenced by the auditor’s perception of the needs of users of the financial statements.
- involves both quantitative and qualitative considerations.
