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Lecture Auditing and assurance services (International edition) - Chapter 6: Internal control in a financial statement audit

In this chapter, the learning objectives are: Understand the importance of internal control to management and auditors, know the definition of internal control, know what controls are relevant to the audit, understand the effect of information technology on internal control, be familiar with the components of internal control, understand how to plan an audit strategy. | Chapter Six Internal Control in a Financial Statement Audit Internal Control Reliability of Financial Reporting Effectiveness & Efficiency of Operations Compliance with Laws & Regulations Objectives Controls Relevant to the Audit Generally, internal controls pertaining to the preparation of financial statements for external purposes are relevant to an audit. Reliability of Financial Reporting Effectiveness & Efficiency of Operations Compliance with Laws & Regulations Objectives Controls Relevant to the Audit Controls relating to operations and compliance objectives may be relevant when they relate to data the auditor uses to apply auditing procedures. Reliability of Financial Reporting Effectiveness & Efficiency of Operations Compliance with Laws & Regulations Objectives Components of Internal Control Control Environment Entity’s Risk Assessment Process Information System and Related Business Processes Relevant to Financial Reporting & Communication Control Activities Monitoring of Controls Components of Internal Control Components of Internal Control The Effect of Information Technology on Internal Control Planning an Audit Strategy Audit Risk Model AR = IR × CR × DR In applying the audit risk model, the auditor must assess control risk. The figure on the next slide presents a flowchart of the auditor’s decision process when considering internal control in planning an audit. Substantive Strategy After obtaining an understanding of internal control, an auditor may choose to follow a substantive strategy and set control risk at the maximum for some or all assertions because of one or all of the following factors: Controls do not pertain to an assertion. Controls are assessed as ineffective. Testing the effectiveness of controls is inefficient. Reliance Strategy Obtain Understanding of Internal Control Plan to Rely on Internal Control and Assess Control Risk Below Maximum Assertions Occurrence Completeness Authorization Accuracy Cutoff Classification Assertions . | Chapter Six Internal Control in a Financial Statement Audit Internal Control Reliability of Financial Reporting Effectiveness & Efficiency of Operations Compliance with Laws & Regulations Objectives Controls Relevant to the Audit Generally, internal controls pertaining to the preparation of financial statements for external purposes are relevant to an audit. Reliability of Financial Reporting Effectiveness & Efficiency of Operations Compliance with Laws & Regulations Objectives Controls Relevant to the Audit Controls relating to operations and compliance objectives may be relevant when they relate to data the auditor uses to apply auditing procedures. Reliability of Financial Reporting Effectiveness & Efficiency of Operations Compliance with Laws & Regulations Objectives Components of Internal Control Control Environment Entity’s Risk Assessment Process Information System and Related Business Processes Relevant to Financial Reporting & Communication Control Activities Monitoring of .