ACT 4497 Lecture ch10

ACT 4497 Lecture ch10 - Assurance Services and the...

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Unformatted text preview: Assurance Services and the Integrity of th Modern Auditing: Modern Auditing: Financial Reporting, 8 Edition California Polytechnic State University at San Luis Obispo William C. Boynton Portland State University Raymond N. Johnson Chapter 10 – Understanding Internal Control Fundamental Concepts of Internal Fundamental Concepts of Internal Controls • Process integrated with an entity’s infrastructure • People implement internal control • Can only provide reasonable assurance • Achieve objectives in financial reporting, compliance, and operations Limitations of Internal Control Limitations of Internal Control • Mistakes in Judgment • Breakdowns • Collusion • Management Override • Cost versus Benefits Roles and Responsibilities Roles and Responsibilities • Management • Board of Directors and Audit Committee • Internal Auditors Roles and Responsibilities (cont.) Roles and Responsibilities (cont.) • Other Entity Personnel • Independent Auditors • Other External Parties Components of Internal Control Components of Internal Control Control Environment Control Environment • Integrity and Ethical Values • Commitment to Competence • Board of Directors and Audit Committee • Management’s Philosophy and Operating Style Control Environment (cont.) Control Environment (cont.) • Organizational Structure • Assignment of Authority and Responsibility • Human Resource Policies and Practices Risk Assessment Process Risk Assessment Process Information and Communication Information and Communication • Information – – – – Transactions Audit Trail or Transaction Trail Documents Records • Communication Control Activities Control Activities • Authorization Controls • Segregation of Duties – Transaction authorization – Custody of assets – Recorded accountability in accounting records Segregation of Duties Segregation of Duties Control Activities (cont.) Control Activities (cont.) • Information Processing Controls – General Controls – Computer Application Controls – Controls over the Financial Reporting Process General Controls General Controls • Organization and Operation Controls • Systems Development and Documentation Controls • Hardware and Systems Software Controls • Access Controls • Data and Procedural Controls Computer Application Controls Computer Application Controls • Input Controls • Processing Controls • Output Controls Controls over the Financial Reporting Controls over the Financial Reporting Process Control Activities (cont.) Control Activities (cont.) • Physical Controls • Performance Reviews • Controls over Management Discretion in Financial Reporting Control Activities (cont.) Control Activities (cont.) • Monitoring – Ongoing monitoring programs – Separate evaluations – Element of reporting deficiencies to the audit committee Antifraud Programs and Controls Antifraud Programs and Controls Understanding Internal Control Understanding Internal Control Must perform procedures to: • Understand design of policies and procedures • Determine whether the policies and procedures are operating Understanding Internal Control Understanding Internal Control Auditor uses the understanding to: • Identify types of potential misstatements • Understand factors affecting risk of material misstatement • Design further audit procedures Effects of Preliminary Audit Strategies Effects of Preliminary Audit Strategies • Control Environment • Risk Assessment • Information and Communication • Control Activities • Monitoring Procedures to Obtain an Understanding Procedures to Obtain an Understanding • Review previous experience with the client • Inquire management, supervisory, and staff personnel • Inspect documents and records • Observe activities and operations • Trace transactions through system Documenting the Understanding Documenting the Understanding • Questionnaires • Flowcharts • Decision Tables • Narrative Memoranda Questionnaire Questionnaire Decision Table Decision Table Narrative Memoranda Narrative Memoranda ...
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  • Spring '11
  • control activities, Portland State University, Internal  Fundamental Concepts of Internal  Controls, Communication Information and Communication

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