MGTD60 Textbook Notes.pdf

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University of Toronto Scarborough
Financial Accounting
P.Yien/ K.Jackson

Ite ms Examples/Details Audit concepts Audit procedures Chapter 9 - internal control an C risks Objectives of internal control 1 Information reliability 2 Control assets from theft Avoid waste ofusing assets 4 Prevent fraud and error lnternal controlfrom audit's . Consider inherent risk and control perspective risk by assertion . Emphasize on transaction-related audit objectives, onlytomaterial misstatement . Apply test ocontrols when substantive tests notwork Elements of control environment 1. Ethical values from topmanagement (umbrella of otherfour internal control 2. Competent workers factors) 3. lndependent and effective board of directors overrides existing controls 4. lndependent and knowledgeable audit committee 5. Solid management philosophy 6. Strictpolicieson HR evaluation 7. Authority distribution B. Effective method of developing and modifying automated or manual system 9. Knee sense of changes in industry 10. Efficient internal audit Risk assessment Ongoing process of analyzing auditrisk lnterview with management Control activities The auditor should check for. 1. Segregation of duties 2. Authorizedtransactions 3. Documented records 4. Physical and logical controlof assets 5. lndependent checks of data Components of understanding internal 1 U nderstand control environ ment The smaller the clientis,the higher Understand accounting sysfem - audit 2 U nderstand general control the controlrisk should be set narrative description,flowchart,or J U nderstand accou nting system transaction walkthrough 4 Understand control activities Evaluate'design effectiveness of 1. Determine ifthere are effective Accounting methods - duplicate sales controls accounting methods and vendor's invoice,otherwise, 2. Effectivecontrol activities imoossible to audit Assess control risks . For practice,always assume control a lfmanagement lack of attitude riskis at 100% or 1.0 towards control, controlrisk is high . Assess qeneral a qeneral controlenvironment, lflack of adequate control, control, and transaction related controlriskis high assertion ldentifyrisk of material misstatement a New information system - testfor material errorsin the earlystage of implementing the system a Large amount of sales during a month - testforincorrect timing or cut-off Design and conduct test of controls for Definition of testof controls - the internalaudit procedure to test the effectivenessof controls in support of assessing control riskbelow max level, i.e. under 100% lmpact of general controls on audit 1. Organization and management . Assessment ofgeneral control e Manual control- check forhuman controls should be done priorlo make the initials 2. Systems, acquisition, development, . decisionwhether reliance should Computer assisted control - check and maintenance controls be placed on auto system for errors on computer generated 3. Operations and information system . Must have reasonable assurance docs and manager's approval support that general control is effective or . Auto system control * check for reliable exceptions on mechanical errors, . lncreased control risks wilaffect i.e. whether overcredit limits level of assertion Organization and management a Segregation of duties controls a Suoer-user oroblem Systems, acquisition, development, . Look for checkpoints if custom and maintenance controls program is developed . Observe policiesmonitoring ongoing programs . lnquiryabout information change 0rocess Operations and Information system Local machines vs.use outsource r Document control over software support
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