Top Down Approach And Accounting Standard No 5 Accounting Essay

Accounting Standard No. 5 contains critical information about how to carry on audits of internal control over fiscal coverage that are integrated with audits of fiscal statements. Important facets of the standard include the execution of the top-down attack as a agency to place the controls to prove, every bit good as the differences between a stuff failing and a important lack and how each should be handled.

Summary of the Top-Down Approach

The top-down attack novices at the fiscal statement degree where the hearer should grok the overall hazards to internal control over fiscal coverage. The hearer so works their manner down to the entity degree controls where they determine important histories and revelations and their relevant averments. By get downing at the top and working downward the hearer can more easy place where the greater possibility of material misstatements may lie and develop their control tests consequently.

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Appraisal of entity degree controls should demo the hearer where failings in the company ‘s control system could take to material misstatement on the fiscal statements. It should besides demo where controls are sufficient and forestall the demand for extra testing. In finding what controls are in topographic point at the entity degree and placing where they are sufficient and where they are missing, the hearer can infer which histories are more susceptible to misstatement. Entity Level controls include controls over direction override, controls to supervise consequences of operations, controls of the internal audit and self-assessment, controls over period-end fiscal coverage etc. These are all controls implemented to maintain things running swimmingly and true to world.

The control environment should besides be assessed by the hearer. They should hold an apprehension of the nucleus values of direction in order to assure they have ethical doctrine, sound unity and appropriate values and maintain duty for accurate fiscal statements. This can assist find whether more or less attending should be paid in certain countries of proving.

The procedure at the terminal of the period for fiscal coverage should besides be evaluated. It should include appropriate processs to guarantee minutess were recorded suitably, approved accounting policies were implemented, and necessary revelations were included. IT engagement should besides be evaluated at this point to vouch that the hazard of misstatement is sufficiently addressed.

The following measure of the top-down attack is to place important histories and revelations every bit good as their relevant averments based on the appraisal of controls and processes antecedently performed. The relevant averments are those which have a sensible possibility of being misstated and doing the fiscal statements to be materially misstated.

Looking at the line points in the fiscal statements and finding hazard factors related to each point helps find where the hazards prevarication and where proving is required. The hearer should measure things like the size of the history, susceptibleness to mistakes or fraud, the complexness, the nature, the complexnesss associated with it, and other such qualities that might do it susceptible to misstatement whether it is inadvertent or deceitful. While finding which histories are important based on these features the hearer should measure the likeliness that an mistake occurred due to these features with consideration to the controls antecedently assessed. A cardinal inquiry to inquire about each important history is “ what could travel incorrect? ”

Understanding the maps of the company being audited is highly of import. The hearer should hold sufficient information about the flow of minutess, possible failings, understand controls in topographic point to rectify those failings, controls for bar of misstatement, etc. A walk through of the company ‘s procedures is an effectual manner to roll up all of this information.

After garnering all the necessary information about the company ‘s controls and important histories, the hearer should prove controls in order to turn to the assessed hazard of misstatements. The controls tested should in entire sufficiently address the possibility of misstatement.

Material Weakness versus Significant Deficiency

A stuff failing is a lacking in internal control where there is a sensible possibility that a material misstatement on a company ‘s fiscal statements will non be prevented or noticed in a timely mode. It is of import to keep that a material failing can be without an happening of misstatement.

A important lack is similar to a stuff failing in that there is a failing in internal control over fiscal coverage, . but the result is less terrible. Although it is non every bit terrible as a stuff failing it is still of import to take notice of it and uncover it to the company.

Warning marks that a stuff failing exists in internal control over fiscal describing include any designation of fraud by senior direction, restated fiscal statements in the past due rectification of stuff misstatements, current misstatements of stuff sums due to miss of internal control, and uneffective supervising of fiscal coverage by the audit commission. These are serious jobs due to deficiency of controls within the company. Significant lacks may hold some of the same indexs, but they are less terrible.

It is required that all material failings identified during the audit are reported in composing to direction and the audit commission prior to the issue of the hearer ‘s study. Management should besides be notified in authorship of any lacks identified during the audit procedure and the audit commission should be informed when that presentment is made.

The hearer ‘ study will incorporate the hearer ‘s sentiment on whether or non the company maintained effectual internal control ( no stuff failings ) over fiscal coverage. It is non required that any important lack is revealed in the hearer ‘s study.

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