Auditing Standard No. 5 ( AS5 ) was implemented on June 12, 2007 for the intent of concentrating hearers on the most of import affairs in audit of internal controls. AS5 is known as “ An Unit of Internal Control Over Financial Reporting That Is Integrated with An Audited account of Fiscal Statements. ” Within AS5 is counsel for utilizing the top-down attack for choosing certain internal controls to be tested. Headlines within the top down attack include:
Identifying Entity-Level Controls
Identifying important histories and revelations and their relevant averments
Understanding likely beginnings of misstatement
Choosing controls to prove
Top-down Approach
In choosing control trials for the audit of internal control over fiscal describing an hearer should utilize the top-down attack. To get down the top-down attack the hearer starts at the fiscal statement degree and the apprehension of the overall hazard to internal controls over fiscal coverage. Next the hearer focuses on entity degree controls and works down to of import histories and revelations. The top-down attack ushers hearers to histories, revelations and averments that bestow hazard of material misstatement in the fiscal statements and related revelations. With apprehension of the hazards in the company ‘s concern activity, the hearer selects controls to be tested that reference high hazard of misstatement.
Identifying Entity-Level Controls
Testing relevant entity degree controls is of import for the hearer decision on whether the company has affectional internal control or non. The rating of these controls can take to increasing or diminishing proving that hearers would of executed on other controls. Higher-level controls might be designed to catch possible dislocations in lower degree controls.
An illustration of entity degree controls is controls related to the control environment that the hearer should see. This consists of whether the directors ‘ concern manner promotes effectual internal controls in describing fiscal information and whether ethical values are promoted within and are understood. Another entity degree control is control over direction override. This control is of import to internal control of the fiscal statements of all companies, but specifically of import to smaller concerns because of greater engagement of higher direction engaged in a assortment of responsibilities where segregation of responsibilities is reduced.
Identifying Significant Histories and Disclosures and their Relevant Assertions
The hearer should place of import histories and revelations and the possibility of them incorporating a misstatement that would do the fiscal statement to be materially misstated. To place the averments the hearer should analyze the qualitative and quantitative hazard factors associated to the fiscal statement every bit good as determine the likely beginnings of the undeveloped misstatement by inquiring themselves “ what could travel incorrect? ” within certain histories or revelations. Amalgamate fiscal statements should be used by the hearer in calculating out important histories and revelations and possible misstatements within, when a company is involved with assorted concern locations.
Understanding Likely Beginnings of Misstatement
In selected controls to prove and understanding the likely beginning of misstatement the hearer should understand the flow of minutess, how Information Technology ( IT ) affects the flow of the minutess, and place the stairss direction has taken to turn to possible misstatements. Because of the great trade of judgement involved in these activities, the hearer should execute the stairss personally or closely supervise those who provide aid in the audit. The most affectional manner to accomplish the stairss to understanding likely beginnings of misstatements is by executing walkthroughs. Walkthroughs help the hearer follow minutess from inception through the company ‘s procedure, including IT, and to the concluding beginning papers. In executing walkthrough, the hearer should oppugn the company ‘s forces about their apprehension of the flow of information.
Choosing Controls to Test
The controls that are critical to the hearer ‘s decision about whether the company controls adequately convey the opportunity of misstatement are the controls that should be tested. More so one control may be needed to turn to possible hazards within a relevant averment. Decisions on what controls to be tested besides depends on whether controls can independently or in combination be used to judge the hazard of a possible misstatement.
Material Weakness versus a Significant Lack
A stuff failing and a important lack are similar in that they are both lacks, or a mixture of lacks covering with affairs in internal control over fiscal coverage. The difference between stuff failing and important lack is that stuff failing is a lack where the likeliness of the event is either “ moderately possible ” or likely ” ( FAS 5 ) that a material misstatement of a concern ‘s period-ending fiscal statements will non be prevented or detected on a timely footing. A list of indexs of stuff failings from AS5 is:
Designation of fraud, whether or non material, on the portion of senior direction ( PCAOB AS5, p.69 )
Restatement of antecedently issued fiscal statements to reflect the rectification of a material misstatement ( PCAOB AS5, p.69 )
Designation by the hearer of a material misstatement of fiscal statements in the current period in fortunes the indicate the misstatement would non hold been detected by the company ‘s internal control over fiscal coverage ( PCAOB AS5, p.69 )
Ineffective inadvertence of the company ‘s ageless fiscal coverage and internal control over fiscal coverage by the company ‘s audit commission ( PCAOB AS5, p.69 )
A important lack is a lack that is less terrible so a stuff failing, yet it is of import plenty to convey to the attending of direction and the audit commission, but non foreigners.
Communicating Certain Matters
Communication, in authorship, from the hearer to direction and the audit commission is required when material failings are identified during the audit. Communication should be made before the hearer issues the study on internal control over fiscal coverage. The hearer must describe stuff failings to the board of managers if they feel the study to the company ‘s audit commission is uneffective. Lacks that the hearer feels are important lacks should be reported to the audit commission, in composing. Significant lacks should non be reported to the populace in the hearer ‘s study.
