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3 reasons for assessing weaknesses in controls
1. to determine the nature and extent of the substantive tests to be performed
2. to formulate constructive suggestions for improvements
3. for internal control reporting
weaknesses in internal control
are the absence of adequate controls, which increases the risk of misstatements existing in the financial statements
1. controls do not exist at all where there should be controls (design)
2. controls are not operating properly (operation)
Deficiency in internal control
exists when the design or operation of a control does not allow management or employees to prevent or detect misstatements on a timely basis
is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's financial statements will not be prevented or detected on a timely basis
4-step in identifying weaknesses
1. identify existing controls
2. Identify the absence of key controls (where controls are lacking)
3. Determine potential material misstatements that could result
4. Consider the possibility of a compensating controls, A compensating control is one elsewhere in the system that offsets a weakness
Overall response to assessed risk
1. emphasizing the need to maintain professional skepticism
2. assigning more experience staff
3. more supervision
5. changes to nature, timing or extent of audit procedures
is of management's assessment of the effectiveness of internal control over financial reporting
common documentation techniques
1. NARRATIVE DESCRIPTIONS: a written description of a client's internal control structure
2. INTERNAL CONTROL QUESTIONNAIRE: a series of questions about the controls in each audit area (yes or no)
3. CHECK LISTS: a list of controls that should normally be in place
4. FLOW CHARTS: a symbolic, diagrammatic representation of the clients documents and their sequential flow in the organization
of audit procedures refers to both their purpose (tests of controls or substantive procedures) and their type (inspection, observation, inquiry, confirmation, recalculation, re-performance, or analytical procedures)
refers to when audit procedures are performed or the period or date to which the audit evidence applies
Audit Planning Memo
1. Background information
2. the objectives of the audit
3. the assessment of engagement risk and potential follow-up
4. an identification of other auditors or experts that will be relied upon in the audit
5. an assessment of materiality
6. inherent risks
tests of control
are an audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level
Obtaining appropriate audit evidence is done if:
1. expectation that the controls are operating effectively
2. substantive procedures alone
are evaluations of financial information through analysis of plausible relationships among both financial and non-financial data
the comparison of relationships between financial relationships between financial statement accounts, the comparison of an accounts with non-financial data, or the comparison of relationships between firms in an industry
the analysis of accounts balances or changes in account balances within an accounting period in terms of their "reasonableness" in light of expected relationships between accounts
Auditing Standard No. 12
risk assessment procedure in identifying and assessing risks of material misstatement
4 phase analytical procedures
1. formulate expectations(expectations)
2. compare te expected value to the recorded amount (identification)
3. investigate possible explanations for a difference between expected and recorded values (investigation)
4. evaluate the impact of the differences between expectation and recored amounts on the audit and the financial statements (evaluation)
designing and performing substantive analytical procedures (ISA 520)
1. Determine suitability of a particular analytical procedures for given assertions.
2. Evaluate the reliability of data from which the auditor's expectation of recorded amounts or ratios is developed.
3. Develop an expectation of recorded amounts or ratios that is sufficiently precise to identify a misstatement .
4. Determine the amount of any difference of recorded amounts from expected values that is acceptable
nature of account
balance based on estimates or accumulations of transactions, the number of transactions represented by the balance, the control environment
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