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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
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


Control

Examina-

tion

Overview

Obtain an understanding

of internal control.

HOW?


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


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


Control

Examina-

tion

Overview

Are

financial statements

auditable?

When would the

answer be NO?

- management lacks

integrity

- significantly deficient

accounting records or

internal controls


Control

Examina-

tion

Overview

Assess control risk, based

on understanding.


Control

Examina-

tion

Overview

Assess the cost/benefit of

further enhancing under-

standing of internal control.


Control

Examina-

tion

Overview

Assess

control

risk.

high

medium

low


Control

Examina-

tion

Overview

Assess

control

risk.

high

medium

low

- high:

poor controls indicate

a very risky situation


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


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


Control

Examina-

tion

Overview

Perform tests of controls.


Control

Examina-

tion

Overview

Decide

whether the initial

internal control assessment

was appropriate.


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).


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.