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Lecture 4

Lecture 4 - Internal Control Evaluation.docx

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Department
Accountancy
Course
AYB301
Professor
All Professors
Semester
Fall

Description
LECTURE 4 – INTERNAL CONTROL EVALUATION Internal Control  Internal control is a process designed to provide reasonable assurance of: o Generating reliable financial accounting information o Safeguarding assets o Operating efficiently and effectively o Complying with applicable laws and regulations. A Framework for Control  Objective o Reliability of financial reporting  Purchase a good IT system o Effectiveness and efficiency of operations  Monitoring, budget to actual per store o Safeguarding assets  Board approval > $Xm  Check-out procedures, receipts and till-balancing o Compliance with law  Audit committee review Components of an Internal Control System • Control environment: overall attitude, awareness and actions of significant internal groups to maintain a well- controlled organisation (tone at the top) • Risk assessment: process designed to identify and manage risks that may affect the organisation’s ability to achieve its objectives • Control activities: policies and procedures established by management to help ensure that internal control objectives are achieved and risks mitigated • Information and communication: the process of identifying, capturing and exchanging information in a timely fashion to enable the organisation to achieve its objectives • Monitoring: a process that assesses the quality of internal controls over time Control Environment  There are a number of factors an auditor should look at when evaluating an organisation’s control environment: o Management’s philosophy and o Human resource policies and practices operating style o Integrity and ethical values o Organisational structure, including o Commitment to competence assignment of authority and o Compensation and evaluation programs responsibility o Effectiveness of the internal audit o Board of directors and audit committee function. Risk Assessment  There are a number of factors an auditor should look at when evaluating an organisation’s risk assessment: o Set KPIs, such as gross margin per store and review regularly. o # of customer complaints Control Activities  Some control procedures are found in almost all accounting systems: o Segregation of incompatible duties o Physical controls to limit access to o Authorisation procedures assets o Documented transaction trail o Independent reconciliation o Competent, trustworthy employees. Accounting Information Systems • Accounting systems capture, record, summarise and report information. Monitoring  Management often requests reports on the quality of its internal controls in order to ensure the company can achieve its major objectives and is not exposed to unnecessary risks  Management receives reports from three sources: o Ongoing monitoring reports from operations o Internal audit reports o External audit reports. Internal Control and Financial Statement Account Balances • Auditors assess control risk for each relevant assertion for each important class of transactions and account balance as a basis for planning the audit. • Auditors need to evaluate the effectiveness of internal control over financial reporting for accounting applications that process material transactions. Relationship of Controls to Auditing • The quality of internal controls affects the organisation’s operating effectiveness and ultimately its ability to remain a going concern. • The quality of internal controls drives the audit approach and amount of testing. Control Effectiveness and Control Risk Asse
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