INTERNAL CONTROL STRUCTURE

1
(No Transcript)
2
GOOD MORNING/AFTERNOON
3
(No Transcript)
4
INTERNAL CONTROL

• Policies and Procedures for Assuring Achievement
  of Entity Objectives
• Five Elements
• Control Environment
• Risk Assessment
• Information and Accounting System
• Control Activities
• Monitoring

5
AUDITOR RESPONSIBILITYINTERNAL CONTROL

• Required to Obtain an Understanding to
• Determine if an Audit Can Be Conducted
• Determine Potential Types of Misstatements
• Determine Nature and Amount of Evidence

6
CONTROL ENVIRONMENT

• Integrity and Ethical Values
• Managements Philosophy and Operating Style
• Board of Directors/Audit Committee
• Commitment to Competence
• Organizational Structure
• Assignment of Authority and Responsibility
• Human Resource Policies and Practices

7
RISK ASSESSMENT

• Process Used by Management to Identify Risks
  Related to Information Reported in the Financial
  Statements
• Must Consider
• External Risks
• Internal Risks

8
INFORMATION AND ACCOUNTING SYSTEM

• Significant Classes of Transactions
• How Transactions are Initiated
• Accounting Processing Involved From Initiation of
  Transactions to Inclusion in Financial Statements
• Accounting Records and Supporting Documents
• Financial Reporting Process, Including Estimates
  and Disclosures

9
CONTROL ACTIVITIES

• Segregation of Duties
• Physical Control Over Assets and Records
• Information Processing
• Proper Authorization of Transactions Activities
• Adequate Documents and Records
• Independent Checks
• Performance Reviews

10
MONITORING

• Periodic Assessment of Internal Control Structure
• Assessment May Be Performed
• Internally (Internal Audit Department)
• Externally (CPA Firm)

11
RELATIONSHIP OF CONTROL ELEMENTS TO AUDITS

• Must Evaluate Design and Operation of
• Control Environment
• Risk Assessment
• Monitoring System
• Accounting System
• Substantive Testing Can Be Eliminated or Reduced
  for an Assertion by Evaluating Effectiveness of
• Control Activities

12
CONTROL RISK (CR)

• Probability That Material Misstatements Will Not
  Be Prevented or Detected By The Internal Controls
• Assessed at Assertion Level
• Control Activities Must Be Tested to Reduce
  Assertion Control Risk Assessment
• All Control Activities Required to Reduce The
  Assertion Control Risk Assessment Should Be Tested

13
FACTORS AFFECTINGCONTROL RISK ASSESSMENT

• Control Environment
• General Controls
• Design and Operation of Control Activities
• Competence of Tests of Controls
• Extent of Tests of Controls
• Cost/Benefit of Tests of Controls

14
PROCEDURES TO OBTAIN AN UNDERSTANDING OF INTERNAL
CONTROL

• Review Prior Year Information
• Read Clients Policy and Systems Manuals
• Make Inquiries of Client Personnel
• Observe Activities of Client Personnel
• Examine Documents and Records
• Re-perform Client Procedures

15
TESTS OF CONTROLS

• Make Inquiries of Client Personnel
• Observe Activities of Client Personnel
• Examine Documents and Records
• Re-perform Client Procedures

16
LIMITATIONS OFINTERNAL CONTROL

• May Break Down Due to
• Carelessness
• Collusion
• Misunderstandings
• Mistakes of Judgment
• Management Override

17
(No Transcript)