auditing: internal control

internal controls take place in what process

during planning process, knowledge of business and understanding IC

internal control definition

process designed, effected and maintained by management to provide reasonable assurance about achievements of entity’s objective relating to: reliabilty of financial reporting

effectiveness and efficency of operations and complaince with laws and regulations

IC system can only provide reasonable assurance because

cost vs benefit

directed at routine, repetitive transactions

human error

collusion for circumvention of IC

abuse of responsibilty

control becomes inadequate

auditors duty with regard to IC

to gain adequate knowledge of business, including the system of internal control by: prior knowledge, discussions, reading manuals, inspecting documents, observation and walk throughs

internal controls system: auditors duty

auditor has to document their knowledge of the IC system utilising system description, internal control questionare adn system flow charts

components of internal control system: COSO model

control environmnt, risk assesment process, information system for fin reporting and communication, control activities and monitoringa dn evaluating IC

control environment(CHOPPER)

client commitment to competence

human resource policy and practices

organisational structure

participation by those charged with governance

philosophy and operating style

ethical value and integrity

responibility for reporting authority

risk assesment process

identify, quantify and evaluate

information systems for reporting

initiate- decide and approve

execute- implementation of decision

record- source documents

process- accounting records

reporting- financial statements

control activites(SCRRAR)

SoD

Access Control

independent review

documentation and records

authorisation

reconciliation

SoD

segregate incompatable functions

access control

control assets and records

independent review

2nd person reviews, sign or initial

documentation and records

document design- easy identification, pre-printed, pre-numbered

stationary control- safeguard register

Authorisation and approval

different levels depending on the transaction and evidence of authorisation required

reconcile

reconcile between actual records and physicla records and between bank statements and account or sub ledger and general ledger

monitoring of controls

asses effectiveness of the design and operations of IC measures, responsibility of internal audit department, performed by those charged with governance

internal controls are used in the accounting system to achieve

control objectives

control objectives

Validity, accuracy and completeness

validity ensures all transactionsa

were authorised, actually occured, during period and supported by documentation

completeness ensures all transactions

were recorded a timely manner and not omitted

accuracy ensures all transactions

were recorded at correct amounts, classified properly in accounting records and correctly summarised and posted to accounting records

3 steps for managenment to design an IC system

Identify risk, formulate control objective and apply components of internal control to design proper system to address the risks and therby achieve control objective