audit lesson 3

What are the five components of ICFR?

Control environment; Risk assessment; Information and communication system; Monitoring; Control activities

ICFR component: control environment

Tone at the top

ICFR component: risk assessment

Allows the organization to identify potential risks to financial reporting (need to know what the risks are in order to address them)

ICFR component: information and communication system

Tools and resources that allow the organization to reliably capture and communicate accounting information

ICFR component: monitoring

Monitor if new controls need to be implemented, taken out, or be reinforced

ICFR component: control activities

Actual controls such as bank reconciliations, inventory counts ETC.

Example of segregation of duties

Combination of any two can give individuals the chance to commit fraud

Segregation of duties: A

Authorization

Segregation of duties: R

Recording

Segregation of duties: C

Custody

Most important ICFR component

Control environment because auditors are unable to overcome a weakness in this component by performing substantive audit procedures

Objective of ICFR

Reliably report financial information (absence of material misstatements)

ICFR are designed to do: reliable reporting

Reliably capture and report accounting info

ICFR are designed to do: legal compliance

Comply with applicable laws

ICFR are designed to do: efficient operations

Efficiently operate the organization’s business

Testing of design and implementation

Done for both public and private companies

Testing of operating effectiveness

Required for public companies; optional for private companies