CLASS EIGHT – Internal Controls
14 page handout
Internal Controls are designed, implemented and maintained by management to provide reasonable
assurance about the achievement of an entity’s objectives that concern:
i)The reliability of financial reporting,
ii)The effectiveness and efficiency of operations, and,
iii)The compliance with applicable laws and regulations.
Limitations of Internal Control (P.1)
Inherent limitations, limit the capacity for internal controls to provide complete assurance.
Internal controls can only provide a reasonable amount of assurance about achieving the entity’s financial
Inherent Limitations also includes the possibility of human error.
Controls may be counter affected by collusion of employees or management collaboration.
ii)Provide reliable accounting and operating data,
iii)Safeguard assets and records,
iv) Promotes operational efficiency,
v) Prevent and detect error, fraud or illegal acts,
vi)Ensure compliance with laws and regulations
ii)Document and evaluate internal controls of financial systems,
iii)Test controls if they will be used for the audit,
iv) Communicate identified weaknesses and deficiencies which can cause material misstatements
-The auditor shall obtain an understanding of internal controls relevant to the audit. (not all controls that
related to financial reporting are relevant to the audit.)
Five Components of Internal Control:
a) Control environment,
b)Entity’s risk assessment process,
c)Information system and communication,
a) Control environment
- The auditor must gain an understanding of the control environment, this includes evaluation of whether: