6InternalControl_Class

6InternalControl_Class - InternalControls (HallCh.3)

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Internal Controls (Hall Ch. 3)
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Definition of internal control Common elements: Managing the risks of the firm Internal control is a process Designed to provide reasonable assurance
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Exposure Quantification of risk: “An exposure consists of the possible financial effect of an event multiplied by its probability of occurrence”
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Probability of Occurrence Size of Potential Impact High Low Small Large Exposure (materiality of risk) Exposure to Risk
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The Committee of  Sponsoring Organizations  of the Treadway Commission 5 organizations formed a committee to study issues surrounding internal control American Institute of CPAs American Accounting Association Institute of Internal Auditors Institute of Management Accountants Financial Executives Institute
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Internal Control Objectives According to  AICPA SAS 1. Safeguard assets of the firm 2. Ensure accuracy and reliability of accounting records and information 3. Promote efficiency of the firm’s operations 4. Measure compliance with management’s prescribed policies and procedures 6
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Modifying Assumptions to the  Internal Control Objectives Management Responsibility The establishment and maintenance of a system of internal control is the responsibility of management. Reasonable Assurance The cost of achieving the objectives of internal control should not outweigh its benefits. Methods of Data Processing The techniques of achieving the objectives will vary with different types of technology. 7
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Limitations of Internal Controls Possibility of honest errors Circumvention via collusion Management override Changing conditions--especially in companies with high growth 8
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Exposures of Weak Internal Controls  (Risk) Destruction of an asset Theft of an asset Corruption of information Disruption of the information system 9
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The Internal Controls Shield 10
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Preventive, Detective, and Corrective  Controls 11 Figure 3-3 Figure 3-3
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SAS 78 / COSO Describes the relationship between the firm’s… internal control structure, auditor’s assessment of risk, and the planning of audit procedures How do these three interrelate? 12
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This note was uploaded on 07/08/2011 for the course ACG 3481 taught by Professor Dickinson during the Fall '08 term at University of Florida.

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6InternalControl_Class - InternalControls (HallCh.3)

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