Chapter 7 - Outlines Chapter 7-1 CONSIDERATION OF INTERNAL...

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Outlines Chapter 7 -1 CONSIDERATION OF INTERNAL CONTROL IN A FINANCIAL STATEMENT AUDIT (Chapter 7) 2009 A. Background Why do auditors consider internal control? Second Standard of Field Work— The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financials statements whether due to error or fraud to design the nature, timing and extent of further audit procedures. Third Standard of Field Work —The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. Purposes of auditors consideration of internal control (and of obtaining an understanding of the client) 1. To assess the risk of material misstatement 2. To design the nature, timing, and extent of further audit procedures. Recall the audit risk model: Audit Risk = Inherent risk * Control Risk * Detection Risk B. Defining Internal control 1. Internal control (IC) — 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: Reliability of financial reporting. Effectiveness and efficiency of operations. Compliance with applicable laws and regulations. Source of definition : Committee of Sponsoring Organizations (COSO). Portion of IC relevant to audits —Set of policies and procedures that pertain to the entity's ability to record, process, summarize and report financial data consistent with the assertions in the financial statements . This is primarily the internal control over financial reporting . Sarbanes-Oxley Act of 2002 —Requires public reports on internal control by management and the auditor. COSO has gained in importance since it in general
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Outlines Chapter 7 -2 will supply the internal control criteria on which management and the auditors base their reports. 2. 5 components of IC – (1) control environment, (2) risk assessment, (3) accounting information and communication system; (4) control activities, (5) monitoring Control activities —Additional procedures P - Performance reviews (e.g., compare actual to budget) I - Information processing (general controls v. application controls; general authorization v. specific authorization) P - Physical controls (control over records and assets) S - Segregation of duties (authorization, recording, custody) C. The Auditors' Consideration of Internal Control— Obtain an understanding of the IC to plan the audit 1. Level of understanding needed a. Required— Design of structure and whether it has been implemented (previously referred to as placed in operation). This means the entity is using the control. In planning the audit, such knowledge should be used to:
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This note was uploaded on 09/08/2010 for the course BUS 129A at San Jose State University .

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Chapter 7 - Outlines Chapter 7-1 CONSIDERATION OF INTERNAL...

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