InternalControls-Handout

Auditing and Assurance Services

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Internal Controls Management is responsible for establishing and maintaining a system of controls. They help lead to a well run organization maximizing profit potential & minimizing risks to an acceptable level.
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Internal Controls What are internal controls? DYNAMIC process effected by an entity’s board of directors, management & other personnel, designed to provide REASONABLE assurance regarding the achievement of OBJECTIVES.
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Internal Controls Effective & Efficient Operations Reliable Financial Reporting Compliance with Laws & Regulations Internal control is a management process designed to achieve:
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What are the limitations of internal controls? Breakdowns can occur: Human error, deliberate circumvention, mgmt override, & improper collusion among people who are supposed to act independently Internal controls can help prevent & detect these people-caused failures, but it cannot guarantee that they will never happen.
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1. Assess the control risk to give the auditors a basis for planning the audit and determining the nature, timing & extent of audit procedures. 2. Audit of internal control over financial reporting. IC: What are the Auditor’s Responsibilities? Public Public  Private
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Evaluating Internal Controls Understand & Document Assess Control Risk Test Controls Re- evaluate Control Risk
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1. Obtain an Understanding The auditor should obtain an understanding of each of the components of internal control in order to plan the audit. This knowledge is used to: Identify types of potential misstatements Consider factors that affect the risk of material misstatement Design tests of controls
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1. Understand & Document Typical types of audit evidence used o Observation o Inquires of client o Documentation o Re-performance Documentation of understanding o Narrative o Flowchart o Internal Control Questionnaire
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COSO Framework for IC Control Environment Risk Assessment Monitoring Control Activities Information & Communication
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Internal Controls What are key areas to consider in assessing the control environment ? Integrity & ethical values Commitment to competence BOD and/or audit committee participation Management’s philosophy & operating style Organizational Structure Assignment of authority & responsibility Human resources policies & practices
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