The intent of this memo is to sum up the top down attack, indicate the difference between stuff failing and important lack, province the written communications between the hearer and the audit commission, and stand for the needful elements in the auditing study.
The top-down attack is to breakdown the system, degree by degree, to analyse the inside informations of basic component. Harmonizing to AS5, hearers foremost use the fiscal statements as the original beginning and so travel to some of import histories for elaborate information in order to calculate out the sensible relationship among those histories and figures and finally choose a control to prove.
First, as an hearer, you must hold a full image of the whole organisation ‘s internal control. It will give you the original and overview, non detailed, of information on whether the system over fiscal coverage works efficaciously or non. Then as the hearer you can revise your proving at the first topographic point.
Different natures or background of entities have different control systems. Some may concentrate on one specific degree and some may non. If an entity does n’t utilize the particular and effectual control, we need to prove more control systems and avoid cross affects.
When analysing the whole entity control, which includes control environment, hazard appraisal, control activities, information and communicating and monitoring, the hearer has to pay attending to some elements such as the control environment, direction override and the fiscal coverage procedure. As to command environment, the more effectual direction ‘s doctrine and operating manner shows in internal control over fiscal coverage, the less hazard in internal controls ; the more top directors show honest and royalty, the more employees present religion to the company ; the more responsible audit commission understands, the more assurance in the internal controls. sing fiscal coverage procedure is critical to both fiscal statement and internal control over fiscal statements, hearer must cognize the inside informations on how comptrollers create general leger or sporadically studies ( quarterly, semi, yearly, yearly ) , what method they use to fix some entries, such as depreciation disbursal, histories receivable, histories collectible and involvement payable, whether the subordinate public presentation is included and the nature and the alterations of the audit commission, the board of managers. After the first measure, hearers have the basic, foundation information of the internal controls.
If hearers merely look at thoe Numberss in the statements, hearers will happen nil but some perfect balanced figures for the organisation, which need to be audited, supply the fiscal statements by itself. The true narrative, nevertheless, is ever behind those Numberss. So we need travel to the 2nd measure to happen farther item information about whether the organisation cooked the books to do some fabricated minutess and grosss.
Second, hearers dig item histories information. Since, Internal controls purposes to supply a sensible, non the perfect, confidence for the direction, which means it may do some little misstatements. In order to explicate those complicated unmanageable state of affairs, the company will compose down some notes in the fiscal statements. What hearers need to make is to happen whether those peculiar instances really happened, released to the populace, had related effects to the concluding consequences and finally ended. Besides, hearers should indicate out the entire fiscal statements including the subordinate ‘s fiscal statements if the company has one and so do his sentiments in a more sensible footing by sing more different fiscal conditions. Then hearers evaluate the sensible relationship between the histories and measure what the related hazard it will happen. Whether the history calculated under a sensible size or volume, represented in a dubious base, changed former accounting method and accounted decently and accurately are the basic criterions for ranking the hazard.
Furthermore, hearers non merely necessitate to happen those common hazards but besides have an unfastened head to those possible hazards which cause fraud statements. Furthermore, different possible hazards need different controls in order to work more efficaciously. In order to obtain better apprehension of those possible hazards or factors which causes misstatements, hearers should hold a clear logic flow of the relationship between those important of import histories and the related averments, point the controls which direction maintain away those misstatements hazards and comprehend the whole direction procedure on the footing of controls. Hearers, for the interest of executing more efficaciously and expeditiously in understanding those possible misstatements, normally use walkthrough scheme. They track one random dealing through the full control systems to happen whether it shows in the fiscal records accurately. Hearers straight face employees and inquire them inquiries about the direction procedure or controls. Employees have more insight about the company, so they sometimes can supply elaborate and true current information to the hearers, which will salvage hearers clip in figure out some of import but ignored jobs. Due to the demands, hearers ca n’t be both the supervisor and the performing artist who processes the control.
Last, hearer should take controls to prove. After all the information has collected, hearers will derive an insight position of what accounts or hazards is critical to the company and trial it. Regard to several related hazard controls, the most efficient control which shows the most relevant should be chosen to prove, alternatively of proving all or several of them. Besides, test those controls affects hearers sentiment.
Harmonizing to AS5, stuff failing, a lack or combined lacks, is sensible possible cause misstatement of fiscal statements without prevented or detected, which is more serious than the important lack in internal control over fiscal coverage. But hearers ca n’t pretermit those important lacks. Hearers use elaborate information and confidence as criterions to distinguish badness. When a lack, or combined lacks, affects let go ofing a sensible confidence of the dealing, it is treated as stuff failing. Otherwise, it is non treated as stuff failing. A material failing includes: define fraud on the footing of CFO ‘s, CEO ‘s and others ‘ who take duty in describing procedure ain sentiment or combined sentiments ; alter the former fiscal statements in order to rectify the current misstatements ; happen undetected misstatement by hearer presently ; audit commission ignores the external fiscal and internal control over fiscal coverage in vain.
After completing all the audit work and before publishing the hearer study, audit must pass on audit commission and direction through written. The written communicating happens between hearer and the audit commission when some important lacks or material misstatements was detected by the hearer or between the hearer and the board of manager when the company has inefficient and uneffective in internal or external controls or between hearer and direction when hearer found any lacks. And hearers do n’t necessitate to supply an efficient and effectual internal control to forestall lacks but the hearer commission needs to inform the hearer if he happen some lacks in its systems. Since the definition between a lack and a stuff failing are based on hearers ‘ subjective sentiments, hearers ca n’t province no lacks were detected. Hearers may hold entree to derive confidential information during auditing, nevertheless, they ca n’t utilize what they obtained to against the company or Tell others even what the company does is illegal, except required by the authorities. In other words, though there is an illegal act but it does non impact internal control over fiscal study, hearer issues a qualified sentiment.
After written communicating, hearers must publish a study, which must include write ‘independent ‘ in the rubric of the study, province direction should maintain maintaining and bettering the internal control system, define direction ‘s study on internal control, province hearer ‘s sentiment, follow the definition of internal control in AS5 A5, province the procedure of scrutinizing comply with PCAOB criterions, province effectual internal control over fiscal coverage in all facets under the criterions of PCAOB, illustrate the procedure of scrutinizing ( understanding, measuring, measuring, planing and executing ) , province hearer ‘s sentiment on a sensible base, create an paragraph to province that the controls may be uneffective or the procedure will be improper in the hereafter or altering conditions, point hearer ‘s sentiment based on standards demoing the company use effectual internal controls by the given clip, write or publish hearer ‘s house, in which metropolis and province ( state, if is a non US hearer ) issues the study and day of the month of the study.
I will be really glad if you have clip to further discourse the AS5 with me.