ACCT58-ch5-reading - 1. Distinguish between managements and...

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1. Distinguish between management’s and auditors’ responsibilities regarding an entity’s internal control. Management is responsible for establishing a control environment, assessing risks it wished to control, specifying information and communication channels and content, designing and implementing control activities and monitoring, supervising and maintaining the controls. They can estimate benefits and weigh them against costs. Sarbanes –Oxley requires management to asses and report on entity’s internal control over financial reporting. Management also must disclose any material weaknesses in internal control. To asses control risk auditors must evaluate existing control activities and asses the control risk for the period under audit. In addition, specific controls related to misstatement due to fraud must be evaluated including: control over unusual transactions, control over period-end journal entries, control over related party transactions, controls related to significant estimates, control related to areas where management has incentives and pressures to manipulate financial statements. 2. Define and describe internal control, and explain the limitations. Internal control is the process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of the following three categories: Reliability of financial reporting Effectiveness and efficiency of operations Compliance with applicable laws and regulations. Internal control can help prevent and detect many errors, but it cannot guarantee that they will never happen. Human error due to judgment, fatigue, and carelessness can still occur. Other limitations include deliberate circumvention, management override, and improper collusion. 3. Define and describe the five basic components of internal control, and specify some of their characteristics. 1. Control Environment- factors include the integrity, ethical values, board of directors, management ‘s philosophy and operating style, organizational structure, finance reporting competencies, authority and responsibility, human resources. Most important feature of the control environment is the people who make the system work. The entity’s audit committee is a key factor in the control environment. 2. Risk assessment- Management should take steps to identify risks, estimate their significance and likelihood, and consider hoe to manage the risks. Te following principles
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of risk assessment related to financial reporting are of greatest interest to auditors: financial reporting objectives, financial reporting risks and fraud risk. 3. Control Activities- specific actions taken by client’s management and employees to
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This note was uploaded on 06/03/2010 for the course ACC 64 taught by Professor Kwak during the Spring '10 term at DeAnza College.

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ACCT58-ch5-reading - 1. Distinguish between managements and...

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