Internal Control Concepts 2 Flashcards
What is the Preliminary Evaluation of Internal Control?
It’s when the auditor initially considers whether reliance on certain specific internal control strengths is appropriate. Decides if internal controls are effective or ineffective
What does effective mean?
When the auditor may consider assessing control risk at less than the maximum level (effective)
What does ineffective mean?
When the auditor would assess control risk at the maximum level
What should be considered in the Preliminary Evaluation of Internal Controls?
1 Consider the apparent adequacy of controls (regarding design effectiveness)
2 Consider cost-benefit trade-offs
When should the auditor document the effectiveness?
The auditor should document the basis for conclusions about internal control either way, whether internal control is perceived to be effective or ineffective
What is Perform tests of controls?
When substantive procedures alone do not provide sufficient appropriate audit evidence at the relevant assertion level
What is the purpose of Performing test of controls?
To verify that the controls that looked good on paper (design effectiveness) were actually working as intended throughout the period (operating effectiveness)
What are Circumstances that warrant performing tests of control?
1 When the auditor’s risk assessment includes an expectation regarding the operating effectiveness of controls
2 When the performance of substantive procedures alone do not limit audit risk to an acceptably low level.
What goes into developing a detailed audit plan (aka audit program)?
It should specify the nature, timing, and extent of further audit procedures to be performed and document the conclusions about control risk in planning the audit
What does wholly substantive audit approach mean?
It means no reliance on internal control (which means the same thing as assessing control risk at the maximum level). In other words, the auditor plans to meet the audit risk objectives by performing only substantive audit procedures without any expectation about the operating effectiveness of internal control
Meaning of Substantive audit (procedures)
Are those activities performed by the auditor to detect material misstatement or fraud at the assertion level
NOTE
Auditors may base their audit conclusions on both tests of controls and substantive audit procedures, although the auditor must always perform substantive procedures to some extent (i.e., the auditor cannot rely entirely on the operating effectiveness of internal control as a sole basis for conclusions), related to detection risk in the audit risk model
What is an inherent limitation?
Faulty human judgment is an inherent limitation of any system of internal control. Humans are subject to judgment errors which can create weaknesses in an otherwise strong internal control system
