brear0606 - assurance For students taking CAT Paper 8...

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46 student accountant June/July 2006 technical assurance For students taking CAT Paper 8, Implementing Auditing Procedures , internal control is generally examinable as part of Question 1. It is often very poorly answered, despite previous articles having stressed that the principles of control and the identification of control objectives are a key topic in this paper. The purpose of this article is to improve the understanding of internal control, so that students are better equipped to answer questions on the subject in future exams. WHAT DO WE MEAN BY INTERNAL CONTROL? Internal control is the process designed and implemented by the senior managers of an organisation who are charged by the shareholders with effectively managing the organisation on their behalf. In undertaking these responsibilities, managers need to ensure that there is strong corporate governance, so that they can obtain reasonable assurance that the company is performing in accordance with agreed strategy – the purpose the business exists for. For example, there is a requirement to ensure that: there is reliability of financial reporting processes are operating efficiently and effectively service levels are being achieved all legal and regulatory requirements are being complied with. As such, the internal controls are designed to minimise the risks that the company is exposed to and which, if those risks arose, could prevent the company from meeting its strategic objectives. For example, in a shop where cash sales take place, controls will be put in place to ensure that money is received prior to the sale being made, and that the risk of cash being misappropriated is minimised. ISA 315, Obtaining an understanding of the entity and its environment and assessing the risks of material misstatement deals with the whole area of controls, and requires that the internal control relevant to CAT Scheme Paper 8 auditor obtains an understanding of the entity’s internal control environment. ISA 315 states that internal control has five components: a the control environment b the entity’s risk assessment process c the information system (including related business processes and communications) d control activities e the monitoring of controls. To gain an understanding of the entity, the auditor will need to review both the design of internal controls to ensure they are effective in preventing and/or detecting material misstatement, and also implementation of the control activities to ensure that they have been correctly operating throughout the period. Let us now look at each of these five components of internal control in more detail. The control environment The control environment includes the attitude, awareness, and actions of the board, management, owners, and employees within the company. In understanding the entity, and assessing the risk of material misstatement, the auditor will need to consider issues such as: What importance is placed on internal controls?
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