The top down attack to an audit of internal control begins at the fiscal statement degree and hearers ‘ apprehension of the effectivity of internal controls over fiscal coverage for the company. You start at the top of the corporate hierarchy including the board of managers, the audit commission and top direction. This is done by measuring the company ‘s control environment. The entity should hold ethical and behavioural criterions which are good communicated and upheld throughout the company. This tone should include direction ‘s actions to take the inducements for employees to prosecute in unethical behaviour. This is accomplished through policy statements, codifications of behavior and taking by illustration. The board of managers and audit commission are responsible for the inadvertence of the top direction. You want the board of managers to be independent of direction, to hold good corporate administration ( for illustration the CEO is non besides the chair of the board ) . The board needs to hold competent, ethical and occupied members. You besides need to understand top directions doctrine and operating manner. They set the tone at the top, set up and joint fiscal coverage aims, and choice accounting rules. They need to be committed to accurate fiscal accounting. The organisational construction should hold clearly defined lines of duty, authorization and answerability.
Next the hearer must place and prove the entity-level controls which are of import to making their decisions about the effectivity of the internal controls over fiscal coverage. Entity degree controls include controls related to the control environment, controls over direction override, the company ‘s hazard appraisal procedure, centralized processing and controls including shared service environments, controls to supervise consequences of operations, controls to supervise other controls including activities of the internal audit map, the audit commission, and self-assessment plans, controls over the period-end fiscal coverage procedure and policies that address important concern control and hazard direction patterns.
Steping lower, the hearer must now measure the period-end fiscal coverage procedure. This includes processs used to come in minutess sums into the general leger, processs related to the choice and application of accounting policies, processs used to originate, record and process diary entries in the general leger, processs used to enter reoccurring and nonrecurring accommodations to the one-year and quarterly fiscal statements and related revelations. The hearer must besides place important histories and revelations and their relevant averments, being any averment which has a sensible possibility of incorporating a misstatement which would do the fiscal statements to be materially misstated. These averments include being or happening, completeness, rating or allotment, rights and duties, and presentation and revelation. The hearer must besides understand that the constituents of a possible important hazard history or revelation may be capable to significantly differing hazards and as such differing controls may be necessary to turn to those hazards. For illustration histories receivable, allowance for bad histories and stock list histories typically carry higher sums of hazard and even with proper controls in topographic point still may incorporate above an acceptable sum of residuary hazard.
Once the hearer has this understanding they can understand likely beginnings of misstatement. To farther understand this the hearer needs to understand the flow of minutess related to the relevant averments, including how the minutess are initiated, authorized, processed, and recorded ; to verify they have identified the points within the company ‘s procedures which a misstatement, including fraud, could originate that, separately or in combination with other misstatements, would be material ; to place the controls that direction has implemented to turn to these possible misstatements ; and to Identify the controls direction has implemented over the bar or timely sensing of unauthorised acquisition, usage, or temperament of the company ‘s assets which could ensue in a material misstatement of the fiscal statements. To obtain an apprehension of the control activities in accounting processes the hearer can execute a walkthrough, take works and operational Tourss, reexamine client-prepared certification and reexamine the prior-years ‘ audit certification.
Finally the hearer should choose the controls to prove. These controls should be of import to the hearers ‘ decision on whether the company ‘s controls sufficiently address the assessed hazard of misstatement to each relevant averment. The hearer should be knowing and efficient in his choice, if one control addresses the assessed hazard of misstatement for more than one relevant averment it is non necessary to prove the control multiple times, unless the control calls for redundancy. Besides while executing a walkthrough the hearer can inquire inquiries of the employees about their apprehension of what is required by the company ‘s processs and controls. These inquiries, combined with other walkthrough processs can be used to let the hearer to derive a sufficient apprehension of the procedures and their strengths and failings and to potentially let the hearer to derive an apprehension of different types of important minutess handled by the procedure.
“ A stuff failing is a lack, or a combination of lacks, in internal control over fiscal coverage, such that there is a sensible possibility that a material misstatement of the company ‘s one-year or interim fiscal statements will non be prevented or detected on a timely footing. ”
“ A important lack is a lack, or a combination of lacks, in internal control over fiscal coverage that is less terrible than a material failing, yet of import plenty to deserve attending by those responsible for inadvertence of the company ‘s fiscal coverage. ”
A stuff failing occurs where there is a sensible possibility that the absence of effectual controls would let stuff misstatements to happen in the fiscal statements and non be detected or corrected on a timely footing. A important lack is of import plenty that the hearer has to convey it to the attending of direction and the audit commission but the lack does non lift to the degree of a material failing. A material failing is reported to everyone where a important lack is merely reported to direction and the board of managers but non to foreigners.
Indexs of stuff failings include:
– Designation of fraud, whether or non material, on the portion of senior direction.
– Restatement of antecedently issued fiscal statements to reflect the rectification of a material misstatement.
– Designation by the hearer of a material misstatement of fiscal statements in the current period in fortunes that indicate that the misstatement would non hold been detected by the company ‘s internal control over fiscal coverage.
– Ineffective inadvertence of the company ‘s external fiscal coverage and internal control over fiscal coverage by the company ‘s audit commission.
The hearer must pass on all stuff failings identified during the audit in composing to direction and the audit commission prior to the issue of the hearer ‘s study. If the hearer determines the inadvertence of the company ‘s external fiscal coverage and internal control over fiscal coverage by the audit commission is uneffective the hearer must pass on that decision in composing to the board of managers. The hearer must pass on all important lacks in composing to the audit commission. The hearer is non required to execute processs that are sufficient to place all control lacks, instead they report the lacks in internal control over fiscal coverage of which they are cognizant. Because an audit of internal control over fiscal coverage does non supply the hearer with confidence that they have identified all lacks less severe than a material failing, the hearer should non publish a study saying that no such lacks were noted during the audit. Last the hearer should pass on to direction in composing all lacks in internal control over fiscal coverage identified during the audit and inform the audit commission when this communicating has been made. When doing this communicating, it is non necessary for the hearer to reiterate information about such lacks which have been included in antecedently issued written communications, whether those communications were made by the hearer, internal hearers, or others within the organisation.