internal control chapter 7. mcgraw-hill/irwin © 2006 the mcgraw-hill companies, inc., all rights...
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McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 7-3 Components of Internal Control The Control Environment Risk Assessment The Accounting Information and Communication System Control Activities MonitoringTRANSCRIPT
Internal Control
Chapter 7
7-2
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Summary of Internal Control Definition
A process ...designed to provide reasonable assurance...regarding, achievement of (the entity’s) objectives on: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and
regulations
7-3
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Components of Internal Control
The Control Environment Risk Assessment The Accounting Information and
Communication System Control Activities Monitoring
7-4
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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
7-5
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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
7-6
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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
7-7
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Control Activities
Performance reviews Information processing Physical controls Segregation of duties
7-8
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Segregation of Duties
7-9
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Monitoring
Ongoing monitoring activities Separate evaluations
7-10
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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
Management may override the structure Compliance may deteriorate over time
7-11
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The Auditors’ Consideration of Internal Control
Obtain an understanding Document the understanding Determine planned assessed level of
control risk Design additional tests of control Reassess control risk If necessary, modify planned
substantive tests
7-12
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7-13
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Documenting Internal Control
Questionnaires Written Narratives Flowcharts
7-14
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7-15
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The Relationships Among Control Deficiencies
7-16
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Content of Management’s Report on Internal Control
Acknowledgment of responsibility for internal control
An assessment of internal control effectiveness as of the last day of the company’s fiscal year
7-17
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Approach to Audit of Internal Control
Plan the engagement Evaluate management’s assessment process Obtain an understanding of internal control Test and evaluate design effectiveness of
internal control Test and evaluate operating effectiveness of
internal control Form an opinion on control effectiveness