lecture_08 4240

lecture_08 4240 - ACCT 4240 - Auditing Internal Control...

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ACCT 4240 - Auditing Internal Control Evaluation: Assessing Control Risk
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Major Components of an Audit: The Audit Risk Model Plan  the  Audit Evaluate  Controls Evaluate Tests  of Balances Issue the  Audit  Report Evidence Gathering
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Consideration of Internal Controls in a Financial Statement Audit Required by the second standard of field work: A sufficient understanding of the internal  control structure is to be obtained to plan the  audit and to determine the nature, timing,  and extent of tests to be performed
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Relationship of Control Risk and Detection Risk Audit risk assumed Allowable  detection  risk Estimated  inherent and  control risk 100% 100% assurance 0 Low High Strength of control structure Desired level  of assurance DR CR IR AR = APR TDR
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Relationship of Detection Risk and Testing of Financial Statement Balances Audit risk assumed Allowable  detection  risk Extent of testing of  financial statement  balances 100% 100% assurance 0 Low High Strength of control structure Desired level  of assurance
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Assessment of Control  Risk The higher the  control risk The lower the  control risk the lower the  detection risk the higher the  detection risk and the more  extensive the  substantive tests  of financial  statement  balances and the less  extensive the  substantive tests  of financial  statement  balances
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Internal Control Internal control is a process, effected by an entity’s board of directors, management, and other personnel, which is designed to provide reasonable assurance regarding the achievement of objectives in one or more categories: Effectiveness and efficiency of operations Reliability of financial information Compliance with applicable laws and regulations Safe-guarding assets
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Assessing Control Risk Management has three concerns in designing an effective control system Reliability of financial reporting Efficiency and effectiveness of operations Compliance with applicable laws and regulations
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Key Control Concepts Controls are the responsibility of management Controls provide reasonable, but not absolute, assurance Internal controls have inherent limitations Misunderstandings by employees Management override Collusion Cost/Benefit
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Components of Internal Control
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The Control Environment The actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about control and its importance to the entity
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The Control Environment Integrity and ethical values Commitment to competence Board of Directors or Audit Committee participation Management’s philosophy and operating style Organizational structure Assignment of authority and responsibility Human resource policies and procedures
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Risk Assessment Changes in regulatory or operating environment
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This note was uploaded on 03/08/2012 for the course ACCT 4240 taught by Professor Staff during the Spring '08 term at U. Memphis.

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lecture_08 4240 - ACCT 4240 - Auditing Internal Control...

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