Audit Ch 5. Risk Assessment: Internal Control Eval

A process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives

3 objective categories of internal control

Limitations of internal control

–There is often a trade-off between the cost and the effectiveness of internal controls. –The concept of reasonable assurancerecognizes that the cost of an entity’s internal control should not exceed the benefits that are expected to be derived.

–Responsibility for establishing and maintaining adequate internal control over financial reporting –Assess and report on the effectiveness of internal control over financial reporting

–For public companies, must audit and issue an opinion about the effectiveness of the internal control over financial reporting –For each fraud risk, must evaluate whether controls are in place to mitigate the fraud risk –Must assess control risk to determine the nature, timing and extent of substantive procedures to be performed

COSO

Coso includes what organizations

Internal control componenets (COSO)

The most pervasive influences on the control environment

_____________ are better if it is cost effective

•Sets the “tone at the top”of an organization, influencing the control consciousness of its people. •It is the foundation for all other components.

An auditor must obtain a detailed understanding of the ______________ and document that understanding

•Integrity and ethical values •Board of directors •Management’s philosophy and operating style •Organizational Structure •Financial reporting competencies •Authority and responsibility •Human resources

Audit committee composition