Chapter 8 - Understanding the internal control structure and assessing control risk. After studying this chapter you should be able to: Define internal control, and explain the audit logic of assessing control risk; understand the concepts of inherent limitations and reasonable assurance with regard to internal control; describe the general objectives of internal control and how the auditor uses them to develop specific control objectives;. | CHAPTER 8 UNDERSTANDING THE INTERNAL CONTROL STRUCTURE AND ASSESSING CONTROL RISK AUDIT STRATEGY AND INTERNAL CONTROL STRUCTURE To reach a conclusion on reliability of underlying accounting data, the auditor can: Test the accounting data (substantive approach). Perform procedures to review and evaluate the internal control structure to see whether accounting data was developed under conditions likely to ensure accuracy and reliability (lower assessed level of control risk approach). Auditor adopts the best combination of these STRUCTURE OF AND RESPONSIBILITY FOR INTERNAL CONTROL Internal control structure is: Management’s philosophy and operating style, and all the policies and procedures adopted by management to assist in achieving the entity’s objectives Management is responsible for establishing, maintaining and monitoring the internal control structure. INHERENT LIMITATIONS OF INTERNAL CONTROL STRUCTURE Inherent limitations arise because of: Control breakdowns as a result of the actions of careless, fatigued or deviant staff The possibility of management override The existence of non-routine transactions for which internal controls were not devised REASONABLE ASSURANCE Internal control structure should be designed to provide reasonable assurance that assets are safeguarded and accounting records are reliable. Concept of reasonable assurance recognises that, in some cases, cost of establishing and maintaining controls can outweigh benefits of adopting controls. OBJECTIVES OF INTERNAL CONTROL STRUCTURE Management controls: Risks are identified and minimised Management decision making is effective and business processes efficient Transaction controls: Transactions are carried out in accordance with management’s general or specific authorisations Transactions are promptly and accurately recorded so as to allow the preparation of financial reports Access to assets limited in accordance with authorisation Asset records are compared . | CHAPTER 8 UNDERSTANDING THE INTERNAL CONTROL STRUCTURE AND ASSESSING CONTROL RISK AUDIT STRATEGY AND INTERNAL CONTROL STRUCTURE To reach a conclusion on reliability of underlying accounting data, the auditor can: Test the accounting data (substantive approach). Perform procedures to review and evaluate the internal control structure to see whether accounting data was developed under conditions likely to ensure accuracy and reliability (lower assessed level of control risk approach). Auditor adopts the best combination of these STRUCTURE OF AND RESPONSIBILITY FOR INTERNAL CONTROL Internal control structure is: Management’s philosophy and operating style, and all the policies and procedures adopted by management to assist in achieving the entity’s objectives Management is responsible for establishing, maintaining and monitoring the internal control structure. INHERENT LIMITATIONS OF INTERNAL CONTROL STRUCTURE Inherent limitations arise because of: Control .
