Chapter 10 Instructor's Guide

Chapter 10 Instructor's Guide - Chapter 10 Section 404...

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Chapter 10 Section 404 Audits of Internal Control and Control Risk This chapter illustrates the auditor’s responsibilities related to internal control required by Section 404 of the Sarbanes - Oxley Act and PCAOB Standard 2. The requirements for an integrated audit of financial statements and an audit of internal control over financial reporting have had the most significant effect on the auditing profession as anything in several decades. This chapter outlines management’s and the auditor’s responsibilities related to documentation, assessment, and reporting on the operating effectiveness of internal control over financial reporting required by Section 404. This chapter also highlights the key components of COSO’s Internal Control – Integrated Framework , which is the framework being used by public companies to assess the operating effectiveness of internal control. The chapter concludes by contrasting the auditor’s responsibilities related to internal control in audits of public and nonpublic companies. We spend three to four hours on this important chapter. Our greatest concern is for students to understand the public company auditor’s testing and reporting responsibilities and to see the interrelationship of internal control with the rest of the audit. It is also important for them to develop a strong understanding of key internal control concepts and to develop skills in identifying controls and deficiencies in internal control. The following are the major topics we cover: Chapter opening vignette Relationship with the rest of the audit Internal control objectives Management’s responsibilities for internal control Auditor responsibilities for understanding, testing and reporting on internal control Transaction-related audit objectives COSO components of internal control · The control environment · Risk assessment · Control activities · Information and communication · Monitoring Obtain and document an understanding of internal control Assess control risk Identify controls and deficiencies Tests of controls Practical application Section 404 reporting on internal control Evaluating, reporting, and testing internal control for nonpublic companies Other homework problems 10-1
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Chapter Opening Vignette – “Good Internal Control Prevents More Embezzlements than Good Auditors Find” It is important for students to understand several important things that are highlighted in this vignette. First, defalcations do occur, and they can be significant in amount. Embezzlements in the millions of dollars are common even in small companies. Second, auditors' detailed procedures are limited in their scope and tend to focus on larger transactions and events. Audit procedures are designed to provide reasonable, not absolute, assurance that material misstatements due to fraud are detected. Third, although auditors of both public and nonpublic companies gain an understanding of their clients' internal control, clients are a primary source for most
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Chapter 10 Instructor's Guide - Chapter 10 Section 404...

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