MGAD10H3 Lecture Notes - Audit Risk, Internal Control, Financial Statement

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Published on 29 Jun 2013
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Chapter 7 Gaining an understanding of the client’s system of internal controls
1. Define internal control
2. Explain the seven generally accepted objectives of internal control activities
3. Understand and describe the elements of internal control at the entity level
4. Understand and describe the elements of internal control at the transaction level, and apply
them to the sales, purchases, and payroll cycles
5. Explain the different techniques used to document internal controls
6. Explain the importance of identifying strengths and weaknesses in a system of internal controls
7. Explain how to communicate internal control strengths and weaknesses to those charged with
governance
CAS 260 communication with those charged with governance
CAS 265 Communicating deficiencies in internal control to those charged with governance and
management
CAS 315 identifying and assessing the risks of material misstatement through understanding the entity
and its environment
7.1 Internal control defined
Defined: the process designed, implemented, and maintained by those charged with
governance, management, and other personnel to provide reasonable assurance about the
achievement of the entity’s objectives with regard to reliability of financial reporting,
effectiveness and efficiency of operations, and compliance with applicable laws and regulations
7.2 Objectives of internal controls
There are 7 objectives of internal controls: real, recorded, valued, classified, summarized,
posted, and timely
o Real to ensure that fictitious or duplicate transactions are not included (occurrence,
rights and obligations, and existence)
o Recorded prevent or detect the omission of transactions (accuracy, completeness, and
valuations and allocation)
o Valued ensure that the correct amounts are assigned (accuracy, and valuations and
allocation)
o Classified charged and allocated correctly (accuracy, classification, and valuation and
allocation)
o Summarized books and records are summarized and totalled correctly (accuracy, and
valuations and allocation)
o Posted totals are transferred from GL to sub. Ledgers (accuracy, classification, and
valuation and allocation)
o Timely recorded in correct accounting period (cut-off and completeness)
Classification and understandability is addressed by doing substantive work on the financial
statements
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Document Summary

Cas 260 communication with those charged with governance. Cas 265 communicating deficiencies in internal control to those charged with governance and management. Cas 315 identifying and assessing the risks of material misstatement through understanding the entity and its environment. Ledgers (accuracy, classification, and valuation and allocation: timely recorded in correct accounting period (cut-off and completeness) Classification and understandability is addressed by doing substantive work on the financial statements. When the objective of an internal control is not met, it is called a deficiency. There are inherent limitations of internal controls: human error, ineffective understanding of controls, collusion, and disabling of control. As per cas 315, internal controls consists of 5 components: control environment, entity risk assessment, the information system, control activities, and monitoring of controls. Entity-level controls: the collective assessment of the client"s control environment, risk assessment process, information system, control activities, and monitoring of controls.

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