Lecture 5 - Internal controls (2)

Question 1

Why are internal controls important?…..

Answer 1

The auditor needs to express an opinion on the
truth and fairness of the financial statements. To
do this auditors need to understand:
-Whether the system is reliable as a basis for the
preparation of financial statements
-Whether any controls within the system can be relied
upon
-How to design effective, efficient tests of both the
controls and the underlying details

Question 2

How does an auditor identify the internal controls?

Answer 2

Through enquiry of management and
previous audit team, observation and
documentation of the controls.
-The controls are then tested for effectiveness

Question 3

The effectiveness of internal controls can be tested through….

Answer 3

-Inquiry - often needs corroboration
-Observation - many physical controls such as
security of assets are best tested by observation
-Walk-through – E.g. tracing a transaction from
origination through to appearing in the financial
statements
-Inspection of relevant documents – e.g. board
papers for authorisation levels

Question 4

How can we document internal controls?

Answer 4

This is often done as part of the risk assessment
procedure, during the ‘know your client’ stage.
Documentation can include:
-Flowcharts
-Short notes (if systems are simple)
-Questionnaires

Question 5

Manual control systems are prone to….

Answer 5

Errors and mistakes therefore auditors work on the negative assumption that something will go wrong unless the controls prevent it/correct it.

Question 6

IT system controls are….

Answer 6

Generally automated and can assume things will go right, unless there is a specific threat.

Question 7

Benefits of an IT system:

Answer 7

• Can process large volumes of data consistently and accurately
• Enhance the timeliness and availability of data
• Facilitate additional analysis of information
• Reduces risk of control circumvention
• Enhances effective segregation of duties

Question 8

Risks of IT systems:

Answer 8

• Reliance on systems processing inaccurate data, inaccurately processing data, or both
• Risk of unauthorized changes to data/systems/master files
• Failure to update systems
• Potential loss of data or inability to access data.

Question 9

Manual system benefits:

Answer 9

• Ideal where judgement or discretion required
• For large, unusual or non-recurring items
• Where errors are difficult to define or predict
• Where circumstances are changing quickly
• In monitoring the effectiveness of internal controls

Question 10

Manual system risks:

Answer 10

• Can be more easily bypassed, ignored, or overridden
• Prone to simple errors and mistakes
• Consistency cannot be assumed
• Not good for high volume or recurring transactions.

Question 11

Financial statement assertions are….

Answer 11

Attributes which accounting items need
to have to be correctly accounted for/disclosed in
the financial statements including: