Chapter 7 Book Notes - Know:.11 Internal Control Until...

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Know: INTEGRATED AUDIT FOR EXAM Look at Figure 7.11.  Internal Control Until early 1900s, many people interpreted the term internal control as: the steps taken by a business to prevent fraud (both misappropriation of assets and fraudulent financial reporting). Or, that it had an equal role in assuring control for over manufacturing and other processes. Treadway Commission: Study casual factors associated with fraud reporting and make recommendations to reduce the incidence of fraudulent reporting Made a number of recommendations that directly addressed internal control o Ex) competent and involved audit committee and an active and objective internal audit function o prevent fraud practices COSO (Committee of Sponsoring Organizations) commissioned a study to: Establish common definition of internal control to serve the needs of different parties Provide a standard against which businesses and other entities can assess their control systems and determine how to improve them. *this definition of internal control developed by the Committee of Sponsoring Organizations (COSO) is recognized in the Statements on Auditing Standards. The study done by COSO, titled Internal Control – Integrated Framework defines internal control as: A process , effected by the entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: o Reliability of financial reporting o Effectiveness and efficiency of operations o Compliance with applicable laws and regulations This internal control definition emphasizes it’s a process, not a means to an end, and it is effected by individuals not policy manuals. It provides reasonable assurance, not absolute assurance. And it is comprehensive in that it addresses the achievement of objectives. In the 3 areas of internal control (financial reporting, operations, and compliance), COSO states that series of control objectives and subobjectives exists. Ex) at the top level, the overall objective is to prepare and issue reliable FS. At the detailed level as applied to A/R, COSO has the following control objectives: o All goods shipped are accurately billed in proper period. o Invoices accurately recorded for all and only authorized shipments. These control objectives are similar to management assertions since overall objective in internal control over financial reporting is to prepare financial statements in accordance with GAAP. The control objectives are a series of assertions that underlie the financial statements. Major difference between control objectives and assertions: Control objectives are broader in that they relate to no only financial reporting, but also to operations and compliance.
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Generally, the controls relevant to an audit pertain to the reliability of financial reporting, however, other controls may be relevant if they affect the reliability of data the auditors use to perform auditing procedures.
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