Lecture 4 - Planning, risk assessment and internal controls (1)

Question 1

Why do we need audit documentation?

Answer 1

Audit documentation supports the opinion of the 
auditor. It is required by the International Standards 
on Auditing (ISAs)

Question 2

The auditor should be able to understand the following from the audit documentation:

Answer 2

-The nature, timing and extent of the procedures to
comply with ISAs and legal and regulatory
requirements.
-The results of the procedures and evidence
gathered
-The conclusions reached on significant matters.

Question 3

Audit documents - Permanent files are….

Answer 3

Files containing historical data of continuing relevance

Question 4

Audit documents - Current files are…..

Answer 4

Files that relate specifically to the current year’s

audit, both interim and final.

Question 5

Examples of permanent files include:

Answer 5

• Memorandum and articles of association
• Organisation charts
• Lease or purchase documents
• Accounting manual
• Control system flowcharts.

Question 6

Examples of current files include:

Answer 6

• Financial statements and the auditor’s report
• Audit strategy and audit plan
• Working trial balance
• Adjustments to trial balance
• Working papers to support the above

Question 7

Documentation ownership belongs to….

Answer 7

Audit documents are the property of the auditor.
BUT they must not be shown to anyone without the
client’s consent, except under specific ethical
circumstances

Question 8

What are internal controls?

Answer 8

Internal controls are designed by management or those
charged with governance to either prevent material
misstatements or detect in good time for remedial actions to be taken.

Question 9

Internal controls are rules, policies and procedures set in place by those controlling the client to ensure business is:

Answer 9

1. Operating effectively and efficiently
2. Complying with all relevant laws & regulations
3. Providing reliable financial reporting

Question 10

Who is responsible for internal controls?

Answer 10

It is the responsibility of ‘those charged with governance, management, and other personnel’ (ISA
315) to design, implement and monitor internal controls

Question 11

ISA 315 defines five key components of internal

controls (CRICM):

Answer 11

i. Control environment
ii. Risk assessment procedures
iii. Information system relevant to financial reporting
and communication
iv. Control activities
v. Monitoring of controls

Question 12

The control environment relates to….

Answer 12

The culture and tone of the organisation, and depends on (ISA 315):

• Communication and enforcement of integrity and ethical values
• Commitment to competence
• Participation by those charged with governance
• Management’s philosophy and operating style
• Organisational structure
• Assignment of authority & responsibility
• Human resource policy & practices

Question 13

The risk assessment process involves:

Answer 13

The client’s process for identifying and 
responding to business risks and the results 
thereof. Examples include:
-Changes in operating environment
-New personnel
-Rapid growth
-New or revamped information systems
-Corporate restructuring

Question 14

The ‘information system’ means…..

Answer 14

The infrastructure (physical and hardware), software, people, procedures and data.

Question 15

‘Relevant to financial reporting’ means…..

Answer 15

Sufficient to prepare the financial statements and allow relevant and reliable decision making.

Question 16

‘Communication’ means…..

Answer 16

How well people understand their roles, and can include training and policy manuals, and open
channels of communication.

Question 17

(iv) Control activities are….

Answer 17

‘The policies and procedures that help ensure that
management directives are carried out’ (ISPP):
1. Information processing - General IT & application
controls
2. Segregation of duties
3. Physical controls
4. Performance reviews - often by management

Question 18

(v) Monitoring of controls by management…..

Answer 18

Through routine checks and supervision; should be timely and accurate.

Question 19

(v) Monitoring of controls by internal auditors…..

Answer 19

Who often focus on the internal controls.

Question 20

(v) Monitoring of controls by third parties….

Answer 20

E.g. regulators; and others, e.g. customers, who implicitly agree to invoices by paying for them