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Audit Ch 5

Test 2

Responsibility for internal control Mgmt -has primary responsibility for IC SOC act of 2002
Responsibility for IC - auditor -second standard of field work -PCAOB Auditing Standard No. 5 (AS 5): An audit of IC over fin. reporting that is integrated with an audit of FSs
SOX Section 404 mgmt must also report on the Co's IC over fin. reporting
Co's annual report must include (SOX S 404) -stmnt that mgmt is responsible for establishing and maintaingin adequate IC over fin. reporting -stmnt to identify framework (usually COSO) they use to eval effectiveness of Co's IC -stmnt prov. mgmnt's assesment of the effect, of ICs
AS 5 -auditors must provide their opninion on the effectiveness of clients IC -not a seerate engagement--integrated audit of ICs and FSs
internal control process, effected by a Co's board of directors, mgmt, and other personnel to provide reasonable assurance regarding the achievemnt of objectives
Objectives in IC -reliability of fin. reporting -complinace with applicable laws and regs -effectiveness and efficiency of ops SUCCESSFULLY IMPLEMENTING CORP STRAT TO ACHIEV RETURNS FOR SHAREHOLDERS. KEY COMPONENT IS PEOPLE.
control environment sets the tone of an org. influencing the control consciousness of its people -foundation for all other components -starts with BOD, audit commitee, mgmt
control procedures policies and procedures that help ensure mgmt directives are carried out -to prevent, detect, and correct errors or frauds from entinring the FSs -seg of duties, physical control over security of assests, info processing, perform reviews
Performance reviews -mgmt is charged with ensuring that control objectives are met, must be active doing things like: studies of budget variances, counts of inv and cash on hand -more active better -constrained by CBA
separation of duties person should not be in position to create and conceal errors and fraud --ARRC Authorzation top, recording bttm right, custody bttm left, reconciliation middle
General phases of IC evaluation Two reasons -determine CR planninf -provide an opinion of the effectiveness of IC
General phases of IC evaluation Phase 1 understand and doc -effective bounded by efficiency -reqrd to doc our understanding -understanding should start with top down appraoch -must identify entry level controls
Documenting -Decisoin to rate IC risk less than 100% must be backed by documentation -we use, questionnaires, narrative descriptions (too complex for large Co's), flowcharts
General phases of IC evaluation Phase 2 assess control risk -if CR is high not plan on relying on IC and do more testing on acct bals -if CR is low we test control design and adjust our substantive testing down
General phases of IC evaluation Phase 3 perform tessts of controls and reassess risk of material misstatement -trying to get enough evidence to support our concl. about risk control
4 methods of testing controls -inquiry of client personnel -observation of control operations -document evaluation -re-performance of the control
PCAOB AS 5 -team must plan/perform audit to obtain reasonable assurance about if the Co kept effective control over Fin. reporting -GAAS, if not rely on IC then move to substantive testing -PCAOB, must test ICs
Phases of the engagement 1 plan the engagement 2 use top down approach to get understanding 3 testing IC effectiveness 4 eval control deficiencies 5 wrap up; form opinion on effectiveness of IC over fin. reporting 6 report on IC
signif deficiencies coditions or combo of conditions that could adversely affect the Co's ability to initiate, record, process, and report fin. data in the FSs. not material, important enough to bring attention to those in charge (audit committee)
material weakness deficiency, or combo of deficiencies that results in a reasonable possibility that a material misstatement would not be prevented or detected on a timely basis
3 types of opinions on IC over fin. reporting unqualified-no material weakness found disclaimer of opinion- team cannot perform all the procedures considered necessary adverse opinion-one or more material weakness found
Created by: BMookieW