A top-down attack should be used by the hearer to choose and prove the internal controls over fiscal coverage. The hearer has to to the full understanding the hazard to internal control over fiscal coverage before utilizing the top-down attack at the fiscal statement degree. Then the hearer focuses on the entity degree in which they will reexamine important histories and revelations and besides their relevant averments. In this attack, hearer has to understand and mind that the histories, revelations, and averments may show a sensible possibility of material misstatement. The hearer so identifies the hazards in the company ‘s procedures and tests the controls which sufficiently address the assessed hazard of misstatement.
Entity Level Control
The hearer must prove on the entity-level controls, since they are of import to the hearer ‘s decision about whether the company has an effectual internal control over fiscal study. Entity-level controls vary in nature and preciseness. Some controls are indirect but are of import, such as certain control environment controls. These controls may impact the clip, nature, and processs extent of other controls. Controls that are designed to place possible dislocations in the lower degree are indispensable, because this may let the hearer to cut down the testing of other controls related to that hazard when they are operated efficaciously. By and large, there are eight types of entity-level controls, which include controls related to the control environment, controls over direction override, the company ‘s hazard appraisal procedure, centralized processing and controls, controls to supervise consequences of operations, controls to supervise other controls, controls over the period-end fiscal coverage procedure, and policies that address important concern control and hazard direction patterns.
Control Environment
Since an effectual internal control over fiscal coverage is really of import, hearer must measure the company ‘s control environment. As portion of the rating, hearer should measure whether the direction ‘s doctrine and operating manner promote an effectual internal control, whether the company, particularly the top direction developed and understood unity and ethical values, and whether the board of managers and hearer commissions understand and exercise oversight duty over internal controls and fiscal coverage.
Period-end Financial Reporting Procedure
Because fiscal studies and hearer ‘s sentiments are of import to internal controls over the fiscal coverage, hearer must measure the period-end fiscal coverage procedure. This procedure includes the processs used to come in to dealing sums into general leger, processs related to choose and use the accounting policies, processs used to originate, authorise, record, and process diary entries, processs used to enter both repeating and nonrecurring accommodations of one-year and quarterly fiscal statements, and processs that used to fix one-year and quarterly fiscal statements and related revelations. As portion of measuring the period-end fiscal coverage procedure, hearers should measure inputs, perform processs, and end product the company ‘s procedure that the company uses to bring forth its one-year and quarterly fiscal statements. Besides, hearer should measure the extent of information engineering that involved in the one-year fiscal studies, who participates in direction, the location where the studies generated, the methods used to set and consolidate entries, and the nature and extent of the inadvertence of the procedure by the board of managers and audit commissions.
Identifying Significant Histories and Disclosures and Their Relevant Assertions
Hearers should place important histories and revelations and their relevant averments. The relevant averments are fiscal statements averments that may incorporate sensible possibility of misstatement which would take to misstatement of the fiscal statements. The fiscal averments include being or happening, completeness, rating or allotment, rights and duties, presentation and revelation. To place important histories and revelations and their relevant averments, the hearer should measure qualitative and quantitative hazard factors related to the fiscal statement line points and revelations.
Harmonizing to the criterion, the hazard factors include:
Account ‘s Size and composing,
Susceptibility to misstatement because of mistakes or fraud,
Volume of activity and complexness of each dealing processed through the history or reflected in the revelation,
Nature of the history or revelation,
Accounting and describing complexnesss of the history or revelation,
History losingss exposure,
Significant liabilities arise from the activities reflected in the history,
Related party minutess exist in the history, and
Changes of the features of anterior period ‘s history or revelation.
As portion of identifying, the hearer should be able to find some resources that may potentially take to misstatement of the fiscal statements. In order to find those resources, they should ever inquire themselves “ what could travel incorrect? ” within a important history or averment. The hazard factors that hearer should measure are the same as measuring important histories and averments. Different constituents of a important history or averment have different hazards. Therefore, different controls should be used. When a company has many sections and office locations, the hearer should find important histories and revelations and their relevant averments based on the amalgamate fiscal statements. In doing those determinations, hearer should use the waies in Appendix B for different locations scoping determinations.
Understanding Likely Beginnings of Misstatement
To further understand possible false resources and choose the controls to prove, hearers should understand the flow of minutess related to the relevant averments, including how they are initiated, recorded, and authorized. Besides, hearers should understand any points within the company ‘s procedures that could take to misstatement and would be material. Auditor should place controls are implemented in order to work out the possible misstatements and prevent or observe unauthorised acquisition, usage, or temperament of the company ‘s assets. Since executing the processs requires a certain grade of judgement, the hearer should be able to accomplish the aims in paragraph 34 stated in the scrutinizing criterion, which is to oversee the work of others who provide direct aid to the hearer. They should besides understand how IT affects company ‘s flow of minutess.
Performing Walkthroughs
Performing walkthroughs are ever the most effectual manner to accomplish the aims in paragraph 34 stated in the scrutinizing criterion. In this procedure, the hearer uses the same paperss and IT that the company uses to follow the company ‘s inception, including information system, until it reflects on the fiscal records. These processs include uniting enquiry, observation, review of relevant paperss, and re-perform the controls. During the procedure, hearer will inquire the company ‘s forces some inquiries about their apprehension of what is required by the company ‘s controls. These inquiries, uniting with other walkthrough processs, will give more information to the hearer about whether the design of controls is effectual.
Choosing Controls to Test
The hearer should choose the controls to prove in order to do certain that the controls address the hazard of misstatement of relevant averments. There could be more than one control reference one peculiar relevant averment and frailty versus, one control could turn to more than one relevant averment. But it is unneeded to prove all controls related to a relevant averments or to prove redundant controls unless redundancy is a control aim. The determination of choosing controls to be tested depends on which controls, separately or in combination, sufficiently address the hazard of misstatement of a relevant averment alternatively of depends on how the control is labeled
Indexs of Material Weaknesses
Harmonizing to the scrutinizing criterion, index of stuff failings in internal control over fiscal describing include:
On the portion of senior direction, place fraud, whether or non material ;
Repeating old fiscal statements in order to reflect the rectification of a material misstatement ;
Auditor ‘s designation of a material misstatement of fiscal statements in the current period and indicate that the misstatement would non be detected by the company ‘s internal control ; and
Ineffective inadvertence of the company ‘s external fiscal coverage and internal control over fiscal coverage by the company ‘s audit commission.
When measuring the badness of a lack, or combination of lacks, the hearer should find the degree of item and grade of confidence that would fulfill prudent functionaries to pull off their ain personal businesss and hence they have a sensible confidence that all the recorded minutess and fiscal statements are compatible with general accepted accounting rules. If the hearer could non find the degree of item and grade of confidence, they should handle the lack as an index of a material failing.
Communicating Certain Matters
Hearer must hold sufficient written commutings with the direction degree and audit commissions when they discovered material failings during the audit procedure, and these communications should be made before the issue of the hearer ‘s study on internal control. If the hearer ‘s decision of the inadvertence of company ‘s external fiscal coverage and internal controls over fiscal coverage is uneffective, hearer must hold a written communicating with the audit commissions. Besides, a written communicating should be made if there are important lacks, including lacks in internal control over fiscal coverage, but it is non necessary to reiterate describing the lacks that are antecedently communicated. Although the hearer is non required to execute the processs that used to place all the control lacks, they are required to pass on the internal control lacks with the audit commissions. Since an audit over internal control does non guarantee that the lacks they identified are less terrible than a material failing, the hearer should non publish a study saying that there are no such lacks identified during the procedure. When scrutinizing the internal control over fiscal coverage, hearer should be cognizant that fraud or illegal Acts of the Apostless are possible during the procedure. Therefore, they must clearly place their duties under AU sec. 316, Consideration of Fraud in a Financial Statement Audit, AU sec. 317, Illegal Acts by Clients, and Section 10A of the Securities Exchange Act of 1934.
Reporting on Internal Control
Harmonizing to the scrutinizing criterion, an audit study of internal controls over fiscal describing consists of the undermentioned elements.
The word “ independent ” should be included in the rubric.
A statement that direction is responsible for maintain and measuring an effectual internal control over fiscal coverage.
An designation of direction study of internal controls.
A statement that the hearer is responsible for showing their sentiments over company ‘s internal controls based on their audit.
A definition of internal control over fiscal coverage
A statement that the audit was conducted with the criterions of the Public Company Accounting Oversight Board.
A statement that, as required by the criterions of PCAOB, the audit program and execute the audit to obtain sensible confidence about whether an effectual control was maintained.
A statement that an audit includes understanding the internal control over fiscal coverage, measuring the hazard that a stuff failing exists, proving and measuring the design and runing effectivity of internal control based on the assessed hazard, and executing such other processs that are necessary.
A statement that the hearer believes the audit provides a sensible footing for their sentiments.
A paragraph saying that because of built-in restrictions, internal control over fiscal coverage may non forestall or observe misstatements and that projections of any rating of effectivity to future periods are capable to the hazard that controls may go unequal because of alterations in conditions, or that the grade of conformity with the policies or processs may deteriorate.
The hearer ‘s sentiment on whether the company maintained an effectual internal control over fiscal coverage as of the specified day of the month based on the control standard.
