Lecture Principles of auditing and other assurance services (15/e) - Chapter 7: Internal control. This chapter explained the meaning and significance of internal control, the major components of the client's internal control, and the manner in which auditors consider internal control. | Internal Control Chapter 7 1 Summary of Internal Control Definition A process .designed to provide reasonable , achievement of (the entity’s) objectives on: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and regulations 7- 2 2 Components of Internal Control The Control Environment Risk Assessment The Accounting Information and Communication System Control Activities Monitoring 7- 3 3 Control Environment Factors Integrity and ethical values Commitment to competence Board of directors or audit committee Management philosophy and operating style Organizational structure Human resource policies and practices Assignment of authority and responsibility 7- 4 4 Risk Assessment--Factors Indicative of Increased Financial Reporting Risk Changes in the regulatory or operating environment Changes in personnel Implementation of a new or modified information system Rapid growth of the organization . | Internal Control Chapter 7 1 Summary of Internal Control Definition A process .designed to provide reasonable , achievement of (the entity’s) objectives on: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and regulations 7- 2 2 Components of Internal Control The Control Environment Risk Assessment The Accounting Information and Communication System Control Activities Monitoring 7- 3 3 Control Environment Factors Integrity and ethical values Commitment to competence Board of directors or audit committee Management philosophy and operating style Organizational structure Human resource policies and practices Assignment of authority and responsibility 7- 4 4 Risk Assessment--Factors Indicative of Increased Financial Reporting Risk Changes in the regulatory or operating environment Changes in personnel Implementation of a new or modified information system Rapid growth of the organization Changes in technology affecting production processes or information systems Introduction of new lines of business, products, or processes 7- 5 5 Objectives of an Accounting System Identify and record valid transactions Describe on a timely basis the transactions in sufficient detail to permit proper classification of transactions Measure the value of transactions appropriately Determine the time period in which the transactions occurred to permit recording in the proper period Present properly the transactions and related disclosures in the financial statements 7- 6 Control Activities Performance reviews Information processing Physical controls Segregation of duties 7- 7 6 Segregation of Duties 7- Monitoring Ongoing monitoring activities Separate evaluations 7- 8 Limitations of Internal Control Errors may arise from misunderstandings of instructions, mistakes of judgment, fatigue, etc. Controls that depend on the segregation of duties may be circumvented by collusion .
