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Chapter 1

Chapter 1 - Auditing and Internal Control.docx

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University of Toronto Scarborough
Financial Accounting

Chapter 1 – Auditing and Internal Control Overview  Description into IT auditing  Differences between auditor assertion testing and advisory services  IT structure: the relationship between management assertions, audit objectives, test of controls, and substantive testing  COSO control framework, defining internal controls for manual and IT environment  Audit issues and implications re Sarbanes-Oxley and links general/application controls and financial data integrity External (financial audits)  Provides an opinion regarding the presentation of financial statements  known as attest service  The audit objective is always associated with assuring the fair presentation of financial statements  A key concept is independence Attest Service versus Advisory Services  The requirements of attestation services: require written assertions and a practitioner’s written report, formal establishment of measurement criteria or their description in the presentation, levels of service in attestation engagements limited to examination, review, and application of agreed-upon procedures  Advisory services  to improve their client organizations’ operational efficiency and effectiveness  IT risk management  responsible for providing IT control-related client support o Dual role: provide nonaudit clients with IT advisory services and also work with the firm’s financial audit staff to perform IT-related tests of controls Internal Audits  As an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization  Answers to executive management of the organization or the audit committee of the board of directors External vs. Internal Auditors  Difference lies within respective constituencies: external represents outsiders and internal represent the interests of the organization  If internal audit reports to controller, independence is compromised. The role of the audit committee  Usually consists of 3 people, 1 has to be financially literate  SOX mandates that external auditors now report to the audit committee The Structure of an IT Audit Audit Planning Phase Tests of Controls Phase Substantive Testing Phase 1) Review organization’s 4)Perform test of controls 7) Perform substantive tests policies, practices, and structure 2) Review general controls 5) Evaluate test results 8) Evaluate results and issue and application controls Auditor’s Report 3) Plan tests of controls and 6) Determine degree of 9) Audit report substantive testing reliance on controls procedures Brief history of Internal Control Legislation  Coso – committee of sponsoring organizations  Sarbanes-Oxley – requires public companies to implement an adequate system of internal controls over their financial reporting process. Section 302 requires management to certify their organization’s internal controls on a quarterly and annual basis o External auditors must: interview re significant changes in the design and operations of ICs, evaluate implications due to change in ICs, determine if change in ICs will result in a material impact o Section 404: understand
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