9 - 1 Copyright 2003 Pearson Education Canada Inc. CHAPTER 9 The Study of the Internal Control and Assessment of Control Risk
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Chapter 9 The Study of the Client's Internal Control Structure and
Assessment of Control Risk CHAPTER 9
9 - *
What is internal control?
What is internal control?
procedures established & maintained by
efficient conduct of business.
- reliability of controls
provide reasonable assurance regarding
jectives regarding:
- reliability of controls
provide reasonable assurance regarding
objectives regarding:
- reliability of controls
provide reasonable assurance regarding
jectives regarding:
- reliability of controls
provide reasonable assurance regarding
jectives regarding:
Steps in audit planning
Steps in audit planning
Second Examination Standard:
control should be obtained to plan the audit.
Why is an
Copyright 2003 Pearson Education Canada Inc.
Audit Risk has 3 components which combine to make the audit risk model:
audit
risk
inherent
risk
control
risk
Key Internal Control Concepts
the client attain goals
Key Internal Control Concepts
the client attain goals
cost/benefit must be considered
Key Internal Control Concepts
the client attain goals
cost/benefit must be considered
tions (e.g., misunderstandings, mis-
takes, fatigue, carelessness, collusion,
What are the components of internal control?
9 - *
What are the elements of
internal control?
the control
The control environment is the
actions, policies, and procedures that
reflect management’s attitude regard-
ing controls and their importance.
All of these controls are unnecessary!
9 - *
9 - *
9 - *
Consider the following:
business risk
Consider the following:
reporting
9 - *
Consider the following:
operating goals
...our bonuses
What can we do?
- board of directors & committees
between the Board of Directors and internal and
external auditors.
BOARD OF
- organizational structure
responsibility and authority.
What are the
formal methods that
Employee
Handbook
Company
Policies
Job
Description
Memo:
9 - *
- management’s control methods
- management’s control methods
misstatements?
Do management’s methods send a clear message about the importance of control?
9 - *
- systems development methodology
- personnel policies and practices
employed to meet
client goals and
9 - *
With competent, trustworthy, motivated per-
sonnel, even a poorly designed system of
internal control may function adequately.
Employees are the critical com-ponent of effective internal control.
9 - *
designed system will probably fail.
With competent, trustworthy, motivated per-
sonnel, even a poorly designed system of
internal control may function adequately.
9 - *
Copyright 2003 Pearson Education Canada Inc.
management’s reaction to external influences
Factors related to the Control Environment:
Is management aware of external influences such as changes in the economy and technology?
9 - *
- internal audit
- internal audit
Does internal
9 - *
What are the elements of
internal control?
What are the elements of
internal control?
What are the components of internal control?
control
procedures
9 - *
control
procedures
cedures, in addition to those related to
other components, established to enable
the entity to address risks in the
achievement of their objectives.
Categories of Control Procedures
Categories of Control Procedures
accounting
Categories of Control Procedures
authorization of transactions
As custodian of
the corporate auto
fleet, I hereby
Categories of Control Procedures
- separate operational responsibility
Great Britain and one in Canada. Manage-
ment is deciding whether the plant controllers
should report directly to the plant managers
or the corporate vice president of finance.
9 - *
plant
controller
V.P.-
production
V.P.-
finance
plant
manager
plant
controller
plant
manager
plant
controller
plant
manager
plant
controller
plant
controller
V.P.-
production
V.P.-
finance
plant
manager
plant
controller
9 - *
plant
controller
V.P.-
production
V.P.-
finance
plant
manager
plant
controller
plant
manager
plant manager, a potential conflict of interest
exists. In an effort to make that plant’s results
appear favourable, the plant manager may at-
tempt to influence the plant controller.
Which arrangement creates a potential conflict of interest?
9 - *
Categories of Control Procedures
- separate duties within EDP
What kind of company typically has difficulty accomplishing adequate segregation of duties?
9 - *
What kind of company typically has difficulty accomplishing adequate segregation of duties?
Small companies frequently have diffi-
culty with segregation of duties because
of fewer employees and cost constraints.
9 - *
What is collusion?
What is collusion?
separation of duties wherein
...we’re agreed.
yond our wildest
What is the most effective way to prevent collusion?
9 - *
What is the most effective way to prevent collusion?
Hire competent, trustworthy,
Why is collusion particularly troublesome for auditors?
9 - *
Why is collusion particularly troublesome for auditors?
Competent, untrustworthy, motivated
Categories of Control Procedures
and activities
Categories of Control Procedures
and activities
Categories of Control Procedures
and activities
case basis.
Categories of Control Procedures
and activities
should provide reasonable assurance
and all transactions are correctly
recorded.
9 - *
Document
Guidelines
Documents
U N I V E R S I T Y
total cost of order
costs):
Carrier:
1.PO made in purchasing 3. receiving notes ship
2.Copies to vendor, receiv. 4. acctg. reconciles
M a n u f a c t u r i n g
9 - *
Document
Guidelines
Documents
U N I V E R S I T Y
total cost of order
costs):
Carrier:
1.PO made in purchasing 3. receiving notes ship
2.Copies to vendor, receiv. 4. acctg. reconciles
M a nu f a ct ur i n g
9 - *
Document
Guidelines
Documents
U N I V E R S I T Y
total cost of order
costs):
Carrier:
1.PO made in purchasing 3. receiving notes ship
2.Copies to vendor, receiv. 4. acctg. reconciles
M a n u f a c t u r i n g
9 - *
Document
Guidelines
Documents
U N I V E R S I T Y
total cost of order
costs):
Carrier:
1.PO made in purchasing 3. receiving notes ship
2.Copies to vendor, receiv. 4. acctg. reconciles
M a n u f a c t u r i n g
b
c
a
9 - *
Categories of Control Procedures
and activities
4. Adequate safeguards over assets and
records - physical: locking rooms,
deposit boxes, security guards;
9 - *
Categories of Control Procedures
and activities
4. Adequate safeguards over assets and
records
performance - those reviewing
9 - *
Categories of Control Procedures
Segregation of duties is the least
expensive method of performing
The accounting information and
communication system should be
9 - *
- existence - the system should ensure
that recorded transactions exist - no
fictitious transactions
9 - *
- existence
sure that all existing transactions are
recorded
9 - *
objectives differ?
- existence
- completeness
9 - *
objectives differ?
Existence con-
objectives differ?
Existence con-
- existence
- completeness
at the correct amounts
The accounting information and
communication system should be
9 - *
- existence
- completeness
- accuracy
classified, possibly through use of a
chart of accounts.
9 - *
- existence
- completeness
- accuracy
- classification
rect dates. Generally, transactions
after their occurrence.
9 - *
- existence
- completeness
- accuracy
- classification
- timing
included in the accounting records and
accurately summarized.
9 - *
Monitoring activities deal with
ongoing or periodic assessment
Internal auditing departments frequently perform monitoring activities.
9 - *
What are the elements of
internal control?
HOW?
Control
Examina-
tion
Overview
- review prior year’s
Control
Examina-
tion
Overview
- narratives
- flowcharts
- narratives
- flowcharts
Internal Control Questionnaire
of accounts and cycles
Internal Control Questionnaire
of accounts and cycles
internal control weakness
Internal Control Questionnaire
of accounts and cycles
internal control weakness
What are the
advantages provided by
an IC questionnaire?
Internal Control Questionnaire
of internal control
gagement to another
viewed for weaknesses
What are the
advantages provided by
an IC questionnaire?
Internal Control Questionnaire
What are the
disadvantages of using
an IC questionnaire?
Internal Control Questionnaire
trol rather than the system as a whole
- has questionable reliability; oral cli-
ent responses should be supported
by other evidence
clients, especially smaller clients
Are
When would the
answer be NO?
- management lacks
Control
Examina-
tion
Overview
Assess the cost/benefit of
max.
support
low
Control
Examina-
tion
Overview
Assess
control
risk.
9 - *
- maximum:
100% substantive audit
- maximum:
not efficient
supported by
understanding obtained
- supportable:
supported by
understanding obtained
that could be supported
Plan & perform tests of controls.
Control
Examina-
tion
Overview
9 - *
Decide
Based on appropriate
When should weaknesses be reported to the client?
9 - *
When should weaknesses be reported to the client?
When there are significant
operation of internal control.
GAAS requires the
auditor to communicate
audit committee
internal control.
9 - *
What is internal control?
What is internal control?
procedures established & maintained by
efficient conduct of business.
- reliability of controls
provide reasonable assurance regarding
jectives regarding:
- reliability of controls
provide reasonable assurance regarding
objectives regarding:
- reliability of controls
provide reasonable assurance regarding
jectives regarding:
- reliability of controls
provide reasonable assurance regarding
jectives regarding:
Steps in audit planning
Steps in audit planning
Second Examination Standard:
control should be obtained to plan the audit.
Why is an
Copyright 2003 Pearson Education Canada Inc.
Audit Risk has 3 components which combine to make the audit risk model:
audit
risk
inherent
risk
control
risk
Key Internal Control Concepts
the client attain goals
Key Internal Control Concepts
the client attain goals
cost/benefit must be considered
Key Internal Control Concepts
the client attain goals
cost/benefit must be considered
tions (e.g., misunderstandings, mis-
takes, fatigue, carelessness, collusion,
What are the components of internal control?
9 - *
What are the elements of
internal control?
the control
The control environment is the
actions, policies, and procedures that
reflect management’s attitude regard-
ing controls and their importance.
All of these controls are unnecessary!
9 - *
9 - *
9 - *
Consider the following:
business risk
Consider the following:
reporting
9 - *
Consider the following:
operating goals
...our bonuses
What can we do?
- board of directors & committees
between the Board of Directors and internal and
external auditors.
BOARD OF
- organizational structure
responsibility and authority.
What are the
formal methods that
Employee
Handbook
Company
Policies
Job
Description
Memo:
9 - *
- management’s control methods
- management’s control methods
misstatements?
Do management’s methods send a clear message about the importance of control?
9 - *
- systems development methodology
- personnel policies and practices
employed to meet
client goals and
9 - *
With competent, trustworthy, motivated per-
sonnel, even a poorly designed system of
internal control may function adequately.
Employees are the critical com-ponent of effective internal control.
9 - *
designed system will probably fail.
With competent, trustworthy, motivated per-
sonnel, even a poorly designed system of
internal control may function adequately.
9 - *
Copyright 2003 Pearson Education Canada Inc.
management’s reaction to external influences
Factors related to the Control Environment:
Is management aware of external influences such as changes in the economy and technology?
9 - *
- internal audit
- internal audit
Does internal
9 - *
What are the elements of
internal control?
What are the elements of
internal control?
What are the components of internal control?
control
procedures
9 - *
control
procedures
cedures, in addition to those related to
other components, established to enable
the entity to address risks in the
achievement of their objectives.
Categories of Control Procedures
Categories of Control Procedures
accounting
Categories of Control Procedures
authorization of transactions
As custodian of
the corporate auto
fleet, I hereby
Categories of Control Procedures
- separate operational responsibility
Great Britain and one in Canada. Manage-
ment is deciding whether the plant controllers
should report directly to the plant managers
or the corporate vice president of finance.
9 - *
plant
controller
V.P.-
production
V.P.-
finance
plant
manager
plant
controller
plant
manager
plant
controller
plant
manager
plant
controller
plant
controller
V.P.-
production
V.P.-
finance
plant
manager
plant
controller
9 - *
plant
controller
V.P.-
production
V.P.-
finance
plant
manager
plant
controller
plant
manager
plant manager, a potential conflict of interest
exists. In an effort to make that plant’s results
appear favourable, the plant manager may at-
tempt to influence the plant controller.
Which arrangement creates a potential conflict of interest?
9 - *
Categories of Control Procedures
- separate duties within EDP
What kind of company typically has difficulty accomplishing adequate segregation of duties?
9 - *
What kind of company typically has difficulty accomplishing adequate segregation of duties?
Small companies frequently have diffi-
culty with segregation of duties because
of fewer employees and cost constraints.
9 - *
What is collusion?
What is collusion?
separation of duties wherein
...we’re agreed.
yond our wildest
What is the most effective way to prevent collusion?
9 - *
What is the most effective way to prevent collusion?
Hire competent, trustworthy,
Why is collusion particularly troublesome for auditors?
9 - *
Why is collusion particularly troublesome for auditors?
Competent, untrustworthy, motivated
Categories of Control Procedures
and activities
Categories of Control Procedures
and activities
Categories of Control Procedures
and activities
case basis.
Categories of Control Procedures
and activities
should provide reasonable assurance
and all transactions are correctly
recorded.
9 - *
Document
Guidelines
Documents
U N I V E R S I T Y
total cost of order
costs):
Carrier:
1.PO made in purchasing 3. receiving notes ship
2.Copies to vendor, receiv. 4. acctg. reconciles
M a n u f a c t u r i n g
9 - *
Document
Guidelines
Documents
U N I V E R S I T Y
total cost of order
costs):
Carrier:
1.PO made in purchasing 3. receiving notes ship
2.Copies to vendor, receiv. 4. acctg. reconciles
M a nu f a ct ur i n g
9 - *
Document
Guidelines
Documents
U N I V E R S I T Y
total cost of order
costs):
Carrier:
1.PO made in purchasing 3. receiving notes ship
2.Copies to vendor, receiv. 4. acctg. reconciles
M a n u f a c t u r i n g
9 - *
Document
Guidelines
Documents
U N I V E R S I T Y
total cost of order
costs):
Carrier:
1.PO made in purchasing 3. receiving notes ship
2.Copies to vendor, receiv. 4. acctg. reconciles
M a n u f a c t u r i n g
b
c
a
9 - *
Categories of Control Procedures
and activities
4. Adequate safeguards over assets and
records - physical: locking rooms,
deposit boxes, security guards;
9 - *
Categories of Control Procedures
and activities
4. Adequate safeguards over assets and
records
performance - those reviewing
9 - *
Categories of Control Procedures
Segregation of duties is the least
expensive method of performing
The accounting information and
communication system should be
9 - *
- existence - the system should ensure
that recorded transactions exist - no
fictitious transactions
9 - *
- existence
sure that all existing transactions are
recorded
9 - *
objectives differ?
- existence
- completeness
9 - *
objectives differ?
Existence con-
objectives differ?
Existence con-
- existence
- completeness
at the correct amounts
The accounting information and
communication system should be
9 - *
- existence
- completeness
- accuracy
classified, possibly through use of a
chart of accounts.
9 - *
- existence
- completeness
- accuracy
- classification
rect dates. Generally, transactions
after their occurrence.
9 - *
- existence
- completeness
- accuracy
- classification
- timing
included in the accounting records and
accurately summarized.
9 - *
Monitoring activities deal with
ongoing or periodic assessment
Internal auditing departments frequently perform monitoring activities.
9 - *
What are the elements of
internal control?
HOW?
Control
Examina-
tion
Overview
- review prior year’s
Control
Examina-
tion
Overview
- narratives
- flowcharts
- narratives
- flowcharts
Internal Control Questionnaire
of accounts and cycles
Internal Control Questionnaire
of accounts and cycles
internal control weakness
Internal Control Questionnaire
of accounts and cycles
internal control weakness
What are the
advantages provided by
an IC questionnaire?
Internal Control Questionnaire
of internal control
gagement to another
viewed for weaknesses
What are the
advantages provided by
an IC questionnaire?
Internal Control Questionnaire
What are the
disadvantages of using
an IC questionnaire?
Internal Control Questionnaire
trol rather than the system as a whole
- has questionable reliability; oral cli-
ent responses should be supported
by other evidence
clients, especially smaller clients
Are
When would the
answer be NO?
- management lacks
Control
Examina-
tion
Overview
Assess the cost/benefit of
max.
support
low
Control
Examina-
tion
Overview
Assess
control
risk.
9 - *
- maximum:
100% substantive audit
- maximum:
not efficient
supported by
understanding obtained
- supportable:
supported by
understanding obtained
that could be supported
Plan & perform tests of controls.
Control
Examina-
tion
Overview
9 - *
Decide
Based on appropriate
When should weaknesses be reported to the client?
9 - *
When should weaknesses be reported to the client?
When there are significant
operation of internal control.
GAAS requires the
auditor to communicate
audit committee
internal control.
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