When obtaining an understanding of the accounting and internal control systems to plan the audit the auditor should obtain knowledge about the?
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Page 1 of 13 AT-5910 CPA REVIEW SCHOOL OF THE PHILIPPINES M a n i l a AUDITING THEORY INTERNAL CONTROL Related PSAs/PAPSs: PSA 400, 402 and 315 The auditor should obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. Accounting system means the series of tasks and records of an entity by which transactions are processed as a means of maintaining financial records. Such systems identify, assemble, analyze, calculate, classify, record, summarize and report transactions and other events. Internal Control System means all the policies and procedures (internal controls) adopted by the management of an entity to assist in achieving management’s objective of ensuring, as far as practicable,: • orderly and efficient conduct of its business, including adherence to management policies; • safeguarding of assets; • prevention and detection of fraud and error; • accuracy and completeness of the accounting records; and • timely preparation of reliable financialinformation. The internal control system extends beyond those matters which relate directly to the functions of the accounting system. Internal Control Components (PSA 315) (a) The control environment; (b) The entity’s risk assessment process; (c) The information system, including the related business processes, relevant to financial reporting, and communication; (d) Control activities; and (e) Monitoring of controls. Control environment The control environment includes the attitudes, awareness, and actions of management and those charged with governance concerning the entity’s internal control and its importance in the entity. The control environment also includes the governance and management functions and sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for effective internal control, providing discipline and structure. The control environment encompasses the following elements: • Communication and enforcement of integrity and ethical values. • Commitment to competence. • Participation by those charged with governance. • Management’s philosophy and operating style. • Organizational structure. • Assignment of authority and responsibility. • Human resource policies and practices. Entity’s risk assessment process An entity’s risk assessment process is its process for identifying and responding to business risks and the results thereof. For financial reporting purposes, the entity’s risk assessment process includes how management identifies risks relevant to the preparation of financial statements that are presented fairly, in all material respects in accordance with the entity’s applicable financial reporting framework, estimates their significance, assesses the likelihood of their occurrence, and decides upon actions to manage them. When auditing a company the auditor should obtain an understanding of internal control sufficient to?internal control,3 the auditor should obtain an understanding of the internal audit function sufficient to identify those internal audit activities that are rel- evant to planning the audit. The extent of the procedures necessary to obtain this understanding will vary, depending on the nature of those activities.
When obtaining an understanding of an entity's internal control an auditor should concentrate on the substance of controls rather than their form because?The auditor should concentrate on the substance of managcmcnt'3 policies, procedures, and related actions controls rather than their form because management controls may be established appropriate policies and procedures but not acted upon.
When obtaining an understanding of the entity and its environment the auditor should obtain an understanding of internal controls primarily to?2. The auditor should obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial statements whether due to fraud or error, and sufficient to design and perform further audit procedures.
What are the auditing standard requirements for obtaining an understanding of internal controls?The auditor should obtain a sufficient understanding of each component8/ of internal control over financial reporting ("understanding of internal control") to (a) identify the types of potential misstatements, (b) assess the factors that affect the risks of material misstatement, and (c) design further audit procedures ...
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