CHAPTER 10 : AUDITS OF INTERNAL CONTROL AND CONTROL RISK

Internal control: a process designed to provide reasonable assurance regarding the

achievement of management’s objectives in following categories (1) reliability of financial
reporting, (2) effectiveness and efficiency of operations and (3) compliance with applicable laws
and regulations.

Three objectives:
(1) reliability of financial reporting
- the information must be fairly presented in accordance with reporting requirements of
accounting framework such as GAAP and IFRS.
- The objective of effective internal control is to fulfill these financial reporting
responsibilities.
(2) effectiveness and efficiency of operations
- controls within company encourage efficient and effective use of its resources to
optimize the company’s goal
- The objectives of these controls is accurate financial and non-financial information about
the company’s operations for decision making.
(3) compliance with applicable laws and regulations.
- issuing report about operating effectiveness of internal control over financing report are
required to all public companies
- Income taxes regulations, anti fraud legal provisions.

Management responsibilities for internal control

- responsible to establishing and maintaining the entity’s internal control
- Required to publicly report on the operating effectiveness of those controls.
- Two keys concept :
1. Reasonable assurance
- Company should develop internal controls that provide reasonable, not
absolute,assurance that the financial statement are fairly stated.
- Internal controls should be developed by considering both costs and benefits of the
controls.
- This concept allows for only remote likelihood that material misstatement will not be
prevented or detected on a timely basis by internal controls.
2. Inherent limitations
- the effectiveness of the controls depends on the competency and dependability of the
people using it.
- Collusions: the act of two or more employees who conspire to steal assets or misstate
the records.
3. Design of internal controls
- management need to evaluate whether the controls are designed and put in place in
order to prevent or detect material misstatement int he financial statement.
- Management focus: on the controls that address risks related to all relevant assertions
for all significant accounts and disclosures in the financial statements
- Including evaluating how significant transactions are initiated, authorized, recorded,
processed and reported in order to identify points in the flow of transactions where
material misstatements due to error or fraud could occur.
4. Operating effectiveness
- management must test