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CHAPTER 7 Internal Control: Assessment of Control Risk

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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  1. CHAPTER 7Internal Control: Assessment of Control Risk

  2. What are the components of internal control? the control environment risk assessment information and communication control activities monitoring

  3. Control Examina- tion Overview Obtain an understanding of internal control. HOW?

  4. 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

  5. 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?

  6. 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

  7. 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

  8. 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

  9. Control Examina- tion Overview Are financial statements auditable? When would the answer be NO? - management lacks integrity - significantly deficient accounting records or internal controls

  10. Control Examina- tion Overview Assess control risk, based on understanding.

  11. Control Examina- tion Overview Assess the cost/benefit of further enhancing under- standing of internal control.

  12. Control Examina- tion Overview Assess control risk. high medium low

  13. Control Examina- tion Overview Assess control risk. high medium low - high: poor controls indicate a very risky situation

  14. 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

  15. 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

  16. Control Examina- tion Overview Perform tests of controls.

  17. Control Examina- tion Overview Decide whether the initial internal control assessment was appropriate.

  18. Control Examina- tion Overview Based on appropriate level of detection risk, perform substantive tests.

  19. What are reportable conditions? Reportable conditions are signifi- cant internal control deficiencies which adversely affect financial data (AU 325).

  20. 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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