Chapter 10 - Auditing Internal Controls

The control testing impacts the planned substantive

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internal control and the financial statements. The control testing impacts the planned substantive procedures. Also, the results of the substantive procedures are considered in the evaluation of internal control. Tests of internal control Substantive audit procedures
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+ Integrated Audit n Audit of IC n More than just F/S audit – higher assurance n All audits use reliance strategy even when not called for by cost/benefit analysis n In some cases substantive strategy is required but IC is still tested n Audit of F/S n Material misstatement – means automatic material weakness n Absence of material misstatement – does not mean lack of material weakness
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+ Integrated Audit Report - Example In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NIKE, Inc. and its subsidiaries at May 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the appendix appearing under Item 15(a)(2) presents fairly in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements… Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits.
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+ Concluding Comments n Only applicable for public companies. n Very expensive. n Management has to make an assessment n Audit more costly – because of expansion n Unknown how it will affect fraud. n Unintended consequences. n Companies going private n Companies not going public n Cross listed companies discontinuing listing on US stock exchanges n Non-Big 4 receiving a lot of new clients because Big 4 unable to serve all their clients
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