Upgrade to remove ads
16- Internal Control Basics
Terms in this set (11)
What does it mean to obtain understanding of internal control?
Obtain initial understanding of IC and flow of documents in client system and document that understanding
Methods to obtain understanding of IC?
1. Inquiry of appropriate personnel;
2. Observation of client activities;
3. Review of documentation -- The auditor reviews relevant documentation, including the client's accounting manuals, prior-year's audit documentation (working papers), etc.
How is auditor understanding of IC structured?
Around major transaction cycles
Transactions of the same type
Implication of using transaction cycles to understand IC?
A specific transaction cycle is the highest level of aggregation about which meaningful generalizations of control risk can be made, since control risk is constant within that transaction cycle. Each transaction within a specific transaction cycle is captured, processed, and recorded subject to the same set of internal control policies and procedures
Amount of documentation for IC?
Depends on circumstances: if auditor plans to rely on IC should have more documentation
Ways to document understanding of IC?
Flowchart adv and disadv?
--A fairly systematic approach that is unlikely to overlook important considerations; tailored to client-specific circumstances; fairly easy for others to review and understand; and fairly easy to update from year to year.
-- Can be rather tedious and time consuming to prepare initially although available commercial software today may eliminate much of that difficulty; the auditor might fail to recognize relevant internal control deficiencies by getting too absorbed in the details of documenting the client's system.
Questionnaire adv and disadv?
Advantages -- Generic questionnaires can be prepared in advance for clients in various industry categories with every conceivable question, so that no important question related to controls is likely to be omitted; deficiencies are easily identified by a client's "no" response to any question.
Disadvantages -- Generic questionnaires are not tailored to client-specific circumstances and irrelevant questions are annoying to client personnel; the client personnel responding to the checklist of questions may conceal deficiencies by inaccurate answers without the auditor's knowledge.
Narrative adv and disadv?
Advantages -- Memos can be tailored to a client's unique circumstances, can be as detailed or general as desired, and are relatively easy to prepare (and easy for reviewers to read it).
Disadvantages -- It is relatively easy to overlook relevant internal control issues (strengths or weaknesses) because the analysis is fairly unstructured.
Feedback: Selecting a few transactions and tracing them through the client system to be sure auditor understands IC. Not test of controls and not documentation of understanding
This set is often in folders with...
17-IC Consideration and approach
18-Internal Control Standards
19-Communication of IC matters identified during a…
20-Using internal audit
You might also like...
CPA AUD- Internal Control Concepts
Other sets by this creator
REG 45-Federal Estate Tax
REG 46-Fiduciary taxation
REG 44.3-S Corp Distributions and special taxes
Other Quizlet sets
Nutrition 3 study group questions
Ch. 16, 17, 49, 54, & 55
PSY. Chapter 10, Exam #4
AMH Chapter 16 Study Guide