Internal Control Essay

850 Words Apr 24th, 2012 4 Pages
INTERNAL CONTROL - NOTES 1

1. Definition of Internal Control Internal Control is a process designed by management of an entity to provide reasonable assurance that an entity achieves its objectives in the following categories: • • • Reliability of financial reporting Effectiveness and efficiency of operations, Compliance with applicable laws and regulations.

2. Major components 1. Control Environment – factors that set the tone of an organization and influences the consciousness of its people. There are seven factors (ICHAMBO). I – Integrity and ethical values C – Commitment to competence H – Human resource policies and practices A – Assignment of authority and responsibility M – Management’s philosophy and operating style B – Board
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Monitoring – assessment of the quality of internal control performance over time

3. Auditor’s Required Understanding to Plan an Audit (1) Overall Internal Control – obtain knowledge about the design and whether controls have been placed for an operation; the understanding should be adequate to allow the auditor to: a. Identify types of potential misstatements b. Consider factors affecting risk of material misstatements c. Design effective substantive tests (2) Control environment – obtain sufficient knowledge to understand management’ and the board of directors’: a. Attitudes; b. Awareness; and c. Actions (3) Risk assessment – obtain an understanding of how management: a. Identify risks b. Estimate the significance of the risks c. Assess the likelihood of occurrence (4) Control Activities – obtain additional understanding as necessary to plan an audit. Ordinarily, an understanding of control activities related to each account or to every assertion is not necessary. (5) Information and Communication – obtain understanding of: a. Major transaction classes

b. c. d. e. f.

How transactions are initiated Available accounting records and support Manner of processing of transactions Reporting process used to prepare statements Means entity uses to communicate reporting roles and responsibilities

(6) Monitoring – obtain sufficient understanding of major types of monitoring activities

4. Documentation of an

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