TAILIEUCHUNG - Lecture Auditing & assurance services (8e) - Chapter 6: Internal control in a financial statement audit

After reading the material in this chapter, you should be able to: Understand the importance of internal control to management and auditors, know the definition of internal control, know what controls are relevant to the audit, understand the effect of information technology on internal control, be familiar with the components of internal control, understand how to plan an audit strategy, know how to develop an understanding of an entity's internal control,. | Chapter 6 Internal Control in a Financial Statement Audit McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Internal Control The auditor uses risk assessment procedures to -obtain an understanding of the entity’s internal control -identify the types of potential misstatements -ascertain factors that affect the risk of material misstatement -design tests of controls and substantive procedures The auditor’s understanding of the internal control is a major factor in determining the overall audit strategy. The auditor has a responsibility to: (1) obtain an understanding of internal control and (2) assess control risk. LO# 1 6- COSO’s Internal Control – Integrated Framework Reliability of Financial Reporting Effectiveness and Efficiency of Operations Compliance with Laws and Regulations Objectives LO# 2 6- The Effect of Information Technology on Internal Control LO# 4 6- Components of Internal Control LO# 5 6- LO# 6 Planning an Audit Strategy Figure 6-3 Flowchart of the Auditor’s Consideration of Internal Control and Its Relation to Substantive Procedures 6- Obtain an Understanding of Internal Control Identify types of potential misstatement Design tests of controls and substantive procedures Pinpoint the factors that affect the risk of material misstatement The auditor should obtain an understanding of each of the five components of internal control in order to plan the audit. This knowledge is used to: LO# 7 6- Documenting the Understanding of Internal Control Procedure Manuals and Organizational Charts Flowcharts Internal Control Questionnaires Narrative Description LO# 8 6- The Limitations of an Entity’s Internal Control Override of Internal Control by Management Human Errors or Mistakes Collusion LO# 8 6- Assessing Control Risk Identify specific controls that will be relied upon. Perform tests of controls. Conclude on the achieved level of control risk. LO#

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