Chapter 7 internal control assessment of control risk
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CHAPTER 7 Internal Control: Assessment of Control Risk. What are the components of internal control?. the control environment. risk assessment. information and communication. control activities. monitoring. Control Examina- tion Overview. Obtain an understanding

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CHAPTER 7 Internal Control: Assessment of Control Risk

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Chapter 7 internal control assessment of control risk

CHAPTER 7Internal Control: Assessment of Control Risk


What are the components of internal control

What are the components of internal control?

the control

environment

risk

assessment

information and

communication

control

activities

monitoring


Chapter 7 internal control assessment of control risk

Control

Examina-

tion

Overview

Obtain an understanding

of internal control.

HOW?


Chapter 7 internal control assessment of control risk

Control

Examina-

tion

Overview

Obtain an understanding

of internal control.

- review prior year

workpapers

- interview prior year

auditors

- interview client

personnel

- study client policies and

procedures

- study client documents,

records, information and

communication system


Chapter 7 internal control assessment of control risk

How do auditors

document their under-

standing of internal

control?

Control

Examina-

tion

Overview

- narratives

- flowcharts

- internal control

questionnaires

What is an

internal control

questionnaire?


Internal control questionnaire

What are the

advantages provided by

an IC questionnaire?

Internal Control Questionnaire

- a series of questions about internal

controls and their application to groups

of accounts and cycles

- generally, a “no” answer indicates an

internal control weakness


Internal control questionnaire1

What are the

advantages provided by

an IC questionnaire?

Internal Control Questionnaire

- can be designed to cover most aspects

of internal control

- is relatively applicable from one en-

gagement to another

- when complete, can be quickly re-

viewed for weaknesses


Internal control questionnaire2

What are the

disadvantages of using

an IC questionnaire?

Internal Control Questionnaire

- concentrates on pieces of internal con-

trol rather than the system as a whole

- has questionable reliability; oral cli-

ent responses should be supported

by other evidence

- may be too standardized for some

clients, especially smaller clients


Chapter 7 internal control assessment of control risk

Control

Examina-

tion

Overview

Are

financial statements

auditable?

When would the

answer be NO?

- management lacks

integrity

- significantly deficient

accounting records or

internal controls


Chapter 7 internal control assessment of control risk

Control

Examina-

tion

Overview

Assess control risk, based

on understanding.


Chapter 7 internal control assessment of control risk

Control

Examina-

tion

Overview

Assess the cost/benefit of

further enhancing under-

standing of internal control.


Chapter 7 internal control assessment of control risk

Control

Examina-

tion

Overview

Assess

control

risk.

high

medium

low


Chapter 7 internal control assessment of control risk

Control

Examina-

tion

Overview

Assess

control

risk.

high

medium

low

- high:

poor controls indicate

a very risky situation


Chapter 7 internal control assessment of control risk

Assess

control

risk.

Control

Examina-

tion

Overview

- high:

poor controls indicate

a very risky situation

- medium:

mix of effective and in-

effective controls indi-

cate a moderate level

of risk

high

medium

low


Chapter 7 internal control assessment of control risk

Assess

control

risk.

Control

Examina-

tion

Overview

- medium:

mix of effective and in-

effective controls indi-

cate a moderate level

of risk

- low:

effective controls indi-

cate a low level of risk

high

medium

low


Chapter 7 internal control assessment of control risk

Control

Examina-

tion

Overview

Perform tests of controls.


Chapter 7 internal control assessment of control risk

Control

Examina-

tion

Overview

Decide

whether the initial

internal control assessment

was appropriate.


Chapter 7 internal control assessment of control risk

Control

Examina-

tion

Overview

Based on appropriate

level of detection risk,

perform substantive tests.


What are reportable conditions

What are reportable conditions?

Reportable conditions are signifi-

cant internal control deficiencies

which adversely affect financial

data (AU 325).


Chapter 7 internal control assessment of control risk

Reportable conditions are signifi-

cant internal control deficiencies

which adversely affect financial

data (AU 325).

AU 325

requires the auditor to com-

municate (oral or written)

with the audit committee

regarding the reportable

conditions.


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