Audit- Module 6 Notes.pdf - Internal Control-Concepts...

This preview shows page 1 - 2 out of 17 pages.

Internal Control-Concepts & Standards -Obtaining and Understanding of Internal Control Review Phase The auditor should obtain an initial understanding of internal controls and document that understanding. A. The auditor obtains an understanding of internal control and the flow of documents related to the entity's transactions primarily through: 1. Inquiry of appropriate personnel 2. Observation of client activities 3. Review of documentation The auditor reviews relevant documentation, including the client's accounting manuals, prior-year's audit documentation (working papers), etc. B. The auditor's internal control analysis tends to focus on the entity's major transaction cycles. C. Transaction Cycle Defined to be a group of essentially homogeneous transactions, that is, transactions of the same type. D. Implication A specific transaction cycle is the highest level of aggregation about which meaningful generalizations of control risk can be made, since control risk is constant within that transaction cycle. Each transaction within a specific transaction cycle is captured, processed, and recorded subject to the same set of internal control policies and procedures. E. Examples of Typical Transaction Cycles Typical examples, include the following: 1. Revenue/receipts 2. Expenditures/disbursements 3. Payroll 4. Financing/investing activities 5. Inventory, especially if inventory is manufactured, rather than purchased F. Document the Auditor's Understanding The auditor should document that understanding of internal control. The extensiveness of the review and documentation varies with the circumstances (e.g., the emphasis on understanding internal controls increases if reliance on internal control is planned): 1. Flow charts of transaction cycles A graphical depiction of the client's accounting systems for major categories of transactions with emphasis on the origination, processing, and distribution of important underlying accounting documents. a. Advantages A fairly systematic approach that is unlikely to overlook important considerations; tailored to client-specific circumstances; fairly easy for others to review and understand; and fairly easy to update from year to year. b. Disadvantages Can be rather tedious and time consuming to prepare initially although available commercial software today may eliminate much of that difficulty; the auditor might fail to recognize relevant internal control deficiencies by getting too absorbed in the details of documenting the client's system.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture