Chapter 10 - Auditing Internal Controls

Employees to find out about managements values n

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employees to find out about management’s values n Commitment to competence n Examine job descriptions, required knowledge skills, resumes, training logs n Organizational structure n Discuss with employees the structure, their knowledge of immediate superior, complaint department, etc. n Risk assessment
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+ Audit of Internal Controls n Purpose? n to find MATERIAL CONTROL WEAKNESSES n What is a control deficiency? n deficiency in controls such that they do not prevent/detect misstatements n Could be design or operating deficiency n How do we know when a deficiency becomes a material weakness?
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+ What is a Material Weakness? Material Consequential Inconsequential Remote More than remote Material weakness Significant deficiency Control deficiency L I K E L I H O O D M A G N I T U D E
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+ Likelihood of Control Deficiency n Remote . The chance of the future events or events occurring is slight. n Reasonably Possible . The chance of the future event or events occurring is more than remote but less than likely. n Probable . The future event or events are likely to occur. **Anything above remote will automatically result in a deficiency**
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+ Magnitude of Control Deficiency n Inconsequential. A misstatement is inconsequential if a reasonable person would conclude, after considering the possibility of further undetected misstatements, that the misstatement, either individually or when aggregated with other misstatements, would clearly be immaterial to the financial statements. If a reasonable person could not reach such a conclusion regarding a particular misstatement, that misstatement is more than inconsequential . (no material impact) n Consequential . A misstatement which is more than inconsequential but less than material will not be prevented or detected by IC. n Material . Material misstatement will not be prevented or detected by IC.
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+ Control Deficiencies n Significant Deficiency n One or more control deficiencies exist that result in more than remote likelihood that a misstatement that is more than inconsequential will not be prevented or detected. n Material Weakness n One or more significant deficiencies exist that result in more than a remote likelihood that internal controls will not prevent or detect a material misstatement.
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+ Internal Control Reporting n The auditor’s report could contain opinions on two separate items: (1) management’s report on the effectiveness of internal control over financial reporting. n Management’s report is incomplete or inappropriate n REPORT INCLUDES EXPLANATORY PARAGRAPH n Management’s report does not include existing material weakness n ADVERSE REPORT (2) the effectiveness of internal control over financial reporting based on the auditor’s independent audit work.
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+ Public Reporting Report Modification Based on Control Deficiencies Report Modification Based on Control Deficiencies Type of Audit Report Inconsequential deficiency Significant deficiency Material weakness Unqualified opinion Adverse opinion
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+ Public Reporting Report Modification Based on Scope Limitation Reason for Scope Limitation Type of Audit Report Minor effect Management imposed/ more than minor effect Severe limitation Unqualified opinion Disclaimer opinion or withdraw Qualified opinion
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