07 - Chapter 7 Understanding Internal Control over...

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Chapter 7 Understanding Internal Control over Financial Reporting and Auditing Design Effectiveness
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Learning Objectives 1. Understand the value of effective internal control. 2. Learn the components and mechanisms of internal control. 3. Describe the internal control-related requirements imposed on management of public companies. 4. Analyze the relationship between management’s assertions, ICFR, and activities of an integrated audit. 5. Explain the approach and steps an auditor uses to understand a company’s ICFR and assess its
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Audit Planning and Risk Assessment Exhibit 7-1
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Authoritative Sources for this Chapter Sarbanes Oxley Act (SOX) Securities and Exchange Commission (SEC) Public Company Accounting Oversight Board (PCAOB) American Institute of CPAs (AICPA) Statements on Auditing Standards (SAS) International Auditing and Assurance Standards Board (IAASB) International Standards on Auditing (ISA) Committee of Sponsoring Organizations (COSO)
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Auditors and ICFR Auditor has to understand the client’s Internal Control over Financial Reporting and assess the effectiveness of its design: An important part of planning To be able to select which controls to test in the audit and plan substantive audit procedures
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Corporate Accountants and ICFR Accountants inside a company need to understand Internal Control over Financial Reporting because good ICFR helps the company: use cost effective procedures manage costs of processing accounting information manage productivity of the company’s financial functions maintain an effective financial control system
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Definition of Internal Control over Financial Reporting Internal control over financial reporting is a subset of the entire system of internal control Two important sources of definitions PCAOB’s definition in AS 5 COSO’s definition in Internal Control Framework The COSO definition is broader than the PCAOB’s definition …this makes sense because the PCAOB defines the target of an audit, while COSO’s Internal Control Framework is for more general use
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PCAOB AS 5, Definition of Internal Control Internal control over financial reporting is a process designed by , or under the supervision of, the company’s principal executive and principal financial officers , or persons performing similar functions, and effected by the company’s board of directors, management and other personnel , to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those
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PCAOB AS 5 Definition (continued) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
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07 - Chapter 7 Understanding Internal Control over...

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