The end for any hearer in the field is to prove a house ‘s averments and so be able to publish a statement with sensible assurance that all possible stuff misstatements have been detected. Unfortunately, it is hard to be one-hundred percent sure about a house ‘s statements without proper audit planning. The top-down attack to an audit of internal controls is the PCAOB ‘s manner of helping hearer ‘s with this procedure. This attack allows the hearer to concentrate proving on specific histories and revelations determined to hold to most legitimate possibility of stuff misstatements.
The first measure in the top-down attack involves placing important histories where stuff hazards could lie based upon what the fiscal statements show. The 2nd measure moves into the procedure of developing an apprehension for the internal controls of the house being audited. By deriving an apprehension of internal controls hearers can do sensible premises about the likeliness of a material misstatement being overlooked by the house ‘s ain controls. This can be achieved by first analysing the control environment, which is composed of the house ‘s general feelings and actions towards internal controls. Assorted factors can do up a house ‘s control environment such as direction ‘s manner and doctrines, duty and involvement shown by the audit commission, every bit good as the unity and ethical values exhibited by top-management. It is besides a demand for an hearer to derive a strong apprehension of a house ‘s period-end fiscal coverage procedure. It may be necessary to see the information and journal entry processes, every bit good as which persons have system override capablenesss. It may besides be of import to understand the extent of I.T. ‘s capablenesss affecting minutess, along with the general inadvertence in the fiscal coverage procedure displayed by direction, the board of managers, and the audit commission.
After developing an apprehension of a house ‘s internal controls the following measure for an hearer is to place important histories and revelations along with their relevant averments. Relevant averments are those which carry the possibility of a misstatement that would take the house ‘s fiscal statements to be materially misstated. High hazard histories such as gross revenues are most evidently associated with fraud and misstatements, but there are some other hazard factors used to happen where the stuff misstatements may be. These factors include, but are non limited to ; account size and type, volume and complexness of minutess within an history, complexness associated with history revelation, and alterations in history features from the anterior period. As good it may non be necessary to asses where all misstatements shack, merely the 1s that will probably interrupt the materiality threshold in order to restrict the sum of audit testing preformed. The best manner to prove histories for these symptoms is by following specific minutess through the house ‘s internal procedures, in a process known as a “ walkthrough ” .
The concluding measure in the top-down procedure of internal control audits is the choice of which controls are to be tested. It is of import that the hearer chooses to analyze the controls that will assist solidify the decision of whether or non a house ‘s internal controls are capable of forestalling a material misstatement. It besides may be possible that more than one control satisfies the demands of a comparative averment, and on the other manus one control may fulfill more than one comparative averment. It is in the hearer ‘s best involvement to prove these scenarios to the fullest extent while utilizing the least sum of resources possible, which finally is the intent of the top-down attack.
Material Weakness V. Significant Lack
The PCAOB ‘s AS5 definitions of stuff failing versus a important lack look to be rather similar in their entireness, if non for a few specific alterations in give voicing. A material failing is defined as, “ A lack, or a combination of lacks, in internal control over fiscal coverage, such that there is aA sensible possibilityA that a material misstatement of the company ‘s one-year or interim fiscal statements will non be prevented or detected on a timely footing. ” The definition of a important lack is less terrible than that of a material failing ; nevertheless the deficiency of internal control should be brought to the attending of direction.
Since a stuff failing is a more terrible affair when it comes to internal controls, it is of import to turn to specific indexs that a stuff failing exists. These indexs include the designation of any kind of old fraud by upper direction, the restatement of antecedently materially misstated fiscal statements, the sensing of a misstatement in the current period by an hearer that would non hold been caught by a the house ‘s internal controls, every bit good as uneffective fiscal coverage inadvertence by the house ‘s audit commission.
It is of import for an hearer to properly study any material failing or important lacks that he or she finds while carry oning an internal audit. In footings or the audit commission, all relevant stuff failings and important lacks must be reported to them in composing prior to the hearer ‘s study on internal controls is issued. It would besides be pertinent to present this information in composing to direction so they can work on doing the necessary betterments to internal controls. In footings of publishing an internal hearer ‘s study, all material failings must be stated to the populace so that users can measure their impact and do premises about the hereafter of the organisation. On the other manus, important lacks are non required to be included in any internal control audit studies by the hearer due to their deficiency of “ material significance ” . It is up to the house ‘s direction to take duty to the populace to rectify these internal control errors.