Chapter 5 - Chapter 5 Internal Control Evaluation:...

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Unformatted text preview: Chapter 5 Internal Control Evaluation: Assessing Control Risk If everything seems under control, you're just not going fast enough.-- Mario Andretti, Race car driver Chapter 5 Objectives Distinguish between managements and auditors responsibilities regarding an entitys internal control. Define and describe internal control . Define and describe the five basic components of internal control and specify some of their characteristics. Explain the phases of an evaluation of control and risk assessment and the documentation and extent of audit work required. Describe additional responsibilities for management and auditors of public companies required by Sarbanes-Oxley and Auditing Standard No. 5 . List the major components of the auditors report on internal control over financial reporting. Describe situations in which the auditors report on internal control over financial reporting would be modified. Explain the communication of internal control deficiencies to those charged with governance such as the audit committee and other key management personnel. Explain the limitations of all internal control systems. 5-2 Responsibility for Internal Control Management responsibility Management has primary responsibility for internal control Sarbanes-Oxley Act of 2002 (publicly traded companies) Auditor responsibility Second standard of fieldwork PCAOB Auditing Standard No. 5 ( AS 5 ): An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements 5-3 Managements Responsibility for Internal Control (Sarbanes-Oxley) In addition to certifying the companys financial statements ( Section 302 ), management must also report on the companys internal control over financial reporting ( Section 404 ). 5-4 Managements Responsibility for Internal Control (Sarbanes-Oxley) Specifically, the companys annual report must include: A statement that management is responsible for establishing and maintaining adequate internal control over financial reporting. A statement identifying the framework (usually COSO) management uses to evaluate the effectiveness of the companys internal control. A statement providing management's assessment of the effectiveness of the companys internal control. AS 5 : An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements Auditors must provide their opinion on the effectiveness of clients internal control. Not a separate engagement Integrated audit of internal control and financial statements 5-6 COSO C ommittee o f S ponsoring O rganizations of the National Commission of Fraudulent Financial Reporting (Treadway Commission) FEI, AAA, IIA, IMA, AICPA 5-7 Why Assess Control Risk?...
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Chapter 5 - Chapter 5 Internal Control Evaluation:...

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