Professional Documents
Culture Documents
INTERNAL CONSIDERATION
ACCOUNTING AND
INTERNAL
CONTROL SYSTEMS
• Accounting system - series of tasks and records of
an entity by which transactions are processed as a
means of maintaining financial records
• Internal control system - all policies and
procedures adopted by the management of an
entity to assist in achieving management’s
objective of ensuring:
orderly and efficient conduct of its business, adherence
to management policies
safeguarding of assets
prevention and detection of fraud and error
accuracy and completeness of the accounting records,
and
timely preparation of reliable financial information
INTERNAL
CONTROL
1. Control environment
2. Entity’s risk assessment
process
3. Information and
communication system
4. Control activities
5. Monitoring controls
COMPONENTS OF
INTERNAL
CONTROL
1. CONTROL ENVIRONMENT
• governance and management functions and the
attitudes , awareness and actions of those
charged with governance and management
concerning the entity’s internal control and its
importance in the entity
• Elements of control environment
Integrity and ethical values
Management’s philosophy and operating style
Commitment to competence
Participation by those charged with governance
Assignment of authority and responsibility
Human resources policies and procedures
Organizational structure.
COMPONENTS OF
INTERNAL
CONTROL
2. ENTITY’S RISK ASSESSMENT PROCESS
• the process of identifying and responding to business
risk s and the results thereof
• risks can be due to
changes in operating environment
new personnel
new or revamped information systems
rapid growth
new technology
new business models, products or activities
corporate restructuring
expanded foreign operations
new accounting pronouncements
COMPONENTS OF
INTERNAL
CONTROL
2. ENTITY’S RISK ASSESSMENT PROCESS (continued…)
• Auditor shall obtain an understanding of
whether the entity has a process for:
Identifying business risks relevant to
financial reporting objectives
Assessing the significance of risks and
likelihood of their occurrence
Deciding how to manage those risks
COMPONENTS OF
INTERNAL
CONTROL
3. INFORMATION AND COMMUNICATION SYSTEM
An information system consists of:
• Infrastructure (physical and hardware
components)
• Software
• Process and procedures
• People, and
• Input or data
COMPONENTS OF
INTERNAL
CONTROL
4. CONTROL ACTIVITIES (APIPS)
Policies and procedures to help ensure that management
directives are carried out.
Examples of control activities:
• A uthorization
Specific – for unusual , material or infrequent
transactions
General – for regular transactions
• P erformance reviews (actual vs budget vs prior period)
• I nformation processing (controls from initiation up to
the inclusion of transactions in the financial reports
• P hysical controls (both assets and documents)
COMPONENTS OF
INTERNAL
CONTROL
4. CONTROL ACTIVITIES (continued)
• S egregation of duties – incompatible functions
The following should be separated (I CARE)
I ndependent checks
C ustody of assets
A uthorizaton of transactions
R ecording of transactions
E xecution of transactins
COMPONENTS OF
INTERNAL
CONTROL
5. MONITORING OF CONTROLS
Process of assessing the quality of internal control
performance over time
assessing the design and operations of controls on
a timely basis and taking the corrective actions
Monitoring can be accomplished through:
on-going monitoring activities (performed by
persons within the same line functions)
separate evaluations (performed by internal
auditors, audit committee and or external auditors)
combination of the two
INTERNAL
CONTROL
CONSIDERATION
Auditor should obtain understanding of the accounting
and internal control systems sufficient to plan the audit
and develop an effective audit approach
STEPS
• More effective
CR assessment is changed to Switch to no reliance procedures
HIGH approach • Test nearer or at year-
end
• Large sample size
INTERNAL CONTROL
CONSIDERATION
• More effective
CR assessment is changed to Switch to no reliance procedures
HIGH approach • Test nearer or at year-
end
• Large sample size