Relying on internal control

Relying on internal control

1. Overview of an evaluation of accounting and internal control

   • • Obtain an understanding of internal control and its components • Assess control risk • Test of controls • Make a reassessment of control risk • Determine the effect of the control risk assessment on substantive test.
     • a) Understanding the accounting system: involves knowledge of the ways in which transactions are valued, classified, recorded and summarized in data files.
       • b) Understanding the information system: the auditor needs primarily to understand those outputs that are relevant to the financial statements.
         • c) Documentation of the understanding: the auditor will only document the aspects of the control environment that she believes are relevant to the financial statement.

2. Assessing control risk

   • a) Identify financial statement assertions and audit objectives: Starts with the financial assertion about significant account balances.
     • b) Identify relevant controls: Identify the important controls by referring to the types of control activities that might exist.
       • c) Evaluate weakness in internal control: When assessing controls, the auditor looks for weaknesses.
         • d) Assess control risk at or below maximum: the greatest risk that a material misstatement that could occur will not be prevented or detected on a timely basis by the internal control structure

3. Test of controls

   • a) Test of controls are audit procedures to test the effectiveness of control policies and procedures.
     • b) Evidence gathering techniques for test control:
       • 1) Inquiry of client personnel
       • 2) Observation
       • 3) Examination of documents
       • 4) Reperformance
       • c) Timing of test controls: The timeliness of evidential matter considers when the evidence was obtained and the portion of the audit period to which it may be applied.

4. Reassessment of control risk

   • The assessment of the components may change during the course of an audit.
   • Effect of control assessment on substantive test:
     • The level of control risk for an assertion has a direct effect on the design of substantive test.