Internal control

Topics: Auditing, Financial audit, Risk Pages: 5 (935 words) Published: May 17, 2014
Chapter 7 – Internal control
Internal control – steps taken by business to prevent fraud – misappropriation of assets and fraudulent financial reporting, COSO defines IC as means to an end Achievements of objectives in the area of financial reporting, operations, compliance with law and regulations Foreign corrupt practices act: Transactions authorized with the knowledge of and authorization of management Means of achieving internal control – preventive control – prevents fraud ex: segregation of duties and approval of period-ending journal entries, detective control - discover misstatements monthly misstatements and corrective control – remedy the situation (maintain key copies of transaction and transaction files for corrections) Functions are complementary to achieve the same objective, redundant – same financial statement assertion Compensating – reduces the risk that an existing /potential control weakness will result in misstatement Internal control of an organization is viewed including 5 components 1. The control environment

2. Risk assessment process
3. Control activities
4. Information system relevant to reporting
5. Monitoring of controls
Control environment
1. Integrity and ethical values
2. Commitment to competence
3. Management philosophy and operating style
4. Organizational structure- provides basis for planning, directing and controlling operations 5. Assignment of authority and responsibility
6. Human resources policy and procedure – fidelity bonds – form of insurance in which the bonding company agrees to reimburse within limits for losses attributable to theft and embezzlement by bonded employees. Risk assessment

Management process of identifying, analyzing and responding to risks Control activities
Relevant control activities to an audit of organizational structure 1. Performance reviews – personal at different levels are effectively carrying out the objectives of an organization 2. Information processing controls - general control activities – all information processing procedures and application control activities – one type of activity Check completeness, accuracy and authorization of transactions 3. Physical controls – person A maintains asset , Person B records asset , Person C – reconciles 4. Segregation of duties – goal is not to have individual have incompatible duties Accounting Information Systems

1. Identify and record all valid transactions
2. Describe on timely basis the transactions to properly classify the transactions for financial reporting 3. Measure value of transactions to record proper monetary value in financial statements 4. Time period of transactions

5. Properly present the transactions and related disclosures of financial transactions Monitoring of controls
Ongoing monitoring – routine basis
Separate evaluations – non- routine basis
Internal audit function – internal auditors – investigate and appraise efficiency with which various units are performing their function and report to audit committee and management Limitations – cost and human errors made in designing the control and performance of control Enterprise Risk Management

1. Aligning risk appetite and strategy
2. Enhancing risk response decisions by focusing on best techniques in managing risk 3. Reducing operational surprises and losses
4. Identifying and managing multiple and cross – enterprise risk 5. Seizing opportunities
6. Deployment of capital
Financial statement audits : Role of Internal Control
2. obtain an understanding of the client and its environment 3. assess risk of misstatement and design further audit procedures 4. perform further audit procedures
Risk assessment procedure – to obtain an understanding of internal control this allows to assess risk of misstatement Risk of misstatement – 1. Inherent risk 2. Control risk Further audit procedures – test of controls and substantive procedures Understanding client and its environment and IC – identify types of...
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