Audit Team Training26 March 2013

System Notes and

Internal Controls

This document contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement. It does not purport to be comprehensive or to render professional advice. The reader should not act on the basis of any matter contained in this publication without first obtaining specific professional advice.

We believe that the statements made by us in this document are accurate but no warranty of accuracy or reliability is given. Our conclusions are based on interpretations of accounting standards and other relevant professional pronouncements and legislation current as at the date of this document. Should the interpretations, accounting standards, other relevant professional pronouncements or legislation change, our conclusions may not be valid. We are under no obligation to update the matters considered in this document after its publication.

© Hanrick Curran, February 2013All rights reserved

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Your Presenters

Matthew Green CA

Contact details:

matthew.green@hanrickcurran.com.au

(+61)(0) 447 724 595

(+61)(0) 7 3218 3900

Twitter: @matthewjgreenca

LinkedIn: http://au.linkedin.com/in/matthewjgreenca

Wendy Low CA

Contact details:

wendy.low@hanrickcurran.com.au

(+61)(0) 7 3218 3900

Topic \\ Date

About Hanrick Curran

Our client base is mainly located in South East Queensland, but also extends to Northern New South Wales, Western Queensland, Sydney, Melbourne, Darwin, Townsville and Mackay as well as other regional areas.

We have a strong position with clients in Papua New Guinea and we also serve a growing Asian business sector. While these international connections may not be of immediate interest but we believe they are important in enabling us to effectively serve our clients.

Hanrick Curran’s Client Base

Agenda

1)Purpose and Component of Internal controls

2)System notes3)Fun time…4)Angela Winton

Aim of this training

ObjectiveA brief understanding of internal controls.Audit team members should have an understanding on the questions to ask and the ability to write up on system notes

Why?Effective internal controls are important for financial reporting.System notes will assist with risk assessments and planning for the job.

At the end of the sessionAudit team members will have basic understanding of internal controls and will be able to efficiently prepare system notes.

Purpose and Components of Internal Controls

ASA 315: Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment.

Internal control objectives – 4 broad categories:- Strategic, high level goals- Financial Reporting- Operations- Compliance with laws and regulations

Control Environme

nt

Risk Assessme

nt

Information System

Control Activities

Monitoring

5 components of Internal Controls

Internal

Control

Component 1: Control Environment

What is the control environment?

• Foundation for effective internal control• Addresses the governance and management functions• Controls are usually pervasive in nature

Question: What does pervasive mean?

Why is it important for auditors?

• Influences the evaluation of effectiveness of specific areas

Component 1: Control Environment(cont.)

Key Elements• Communication and enforcement of integrity• Commitment to competence• Participation by those charged with governance• Management’s philosophy and operating style• Organisational structure• Assignment of authority and responsibility• Human resources policies and practices

Component 2: Risk Assessment

What is the Risk Assessment?

• Provides management with the information needed to determine what business/fraud risks should be managed and action to be taken

Why is it important for auditors?

• An absence of a documented risk assessment process may represent a significant deficiency in internal control

Component 2: Risk Assessment(cont.)

Possible conditions and events that may indicate risk of material misstatement

• Volatile markets• Going concern and liquidity issues• Constraints on availability of capital and credit• Lack of accounting personnel• Changes in key personnel (departure)• Litigation

Component 3: Information System

“ASA 315.18-19”

What is information system?

• Identifies, captures, processes and distributes information supporting the achievement of financial reporting and internal control objectives

• Communication of financial reporting roles and responsibilities

Why is it important for auditors?

• Business processes and the links to accounting systems captures financial information which is relevant to financial reporting

Component 3: Information System(cont.)

Understanding the information system• Sources of information used?• How information is captured and processed?• How the information produced is used?

Communication• Key component for successful information system• Information needed for decision making needs to be

communicated in a timely manner• Can be done verbally or through policies

Component 4: Control Activities

“ASA 315.20-21”

What are control activities?

• Policies and procedures that help ensure that management’s directives are carried out

• It is designed to mitigate risks involved in everyday activities such as transactional processing

Question: What is transactional processing?

Component 4: Control Activities(cont.)

“Business Processes : set of activities designed to produce a specific output”

Controls Classification Description

Preventive controls Avoid errors or irregularities

Detective controls Identify errors or irregularities

Compensating controls Provide some assurance where resource limitations per preclude other more direct controls

Steering controls Guide action towards desired objectives

Component 4: Control Activities(cont.)

Typical controls will include the following:

1. Segregation of duties2. Authorisation controls3. Account reconciliations4. IT Application Controls5. Actual results review6. Physical controls

Component 5: Monitoring

“ASA 315: 22-24”

What is monitoring?- Assesses the effectiveness of internal control’s performance over

time.- To ensure that controls are working properly

Sources of Information used for monitoring- Periodic monitoring (Internal audit)- Hiring external consultants- Complaints from customers- External auditors

Audit Training - Materiality - April 2013

Thank you

www.hanrickcurran.com.au

Hanrick Currant. (07) 3218 3900f. (07) 3218 3901

Level 11307 Queen StreetBrisbane Qld 4000

GPO Box 2268Brisbane Qld 4001