Part 10 Section 404 Audits of Internal Control and Control Risk Internal Control Risk Internal Control .Slide 2
Presentation Outline An Overview of Internal Control The Components of Internal Control Process for Understanding Internal Control and Assessing Control Risk Communications with the Audit Committee and ManagementSlide 3
I. An Overview of Internal Control Internal Control Defined Reasonable Assurance Section 404 Reporting Requirements for Management Key Components of Managements\' Assessment of Internal Control Auditor Responsibilities for Understanding Internal ControlSlide 4
A. Interior Control Defined An element\'s arrangement of inside control comprises of approaches and methods intended to furnish administration with sensible affirmation that the organization accomplishes its destinations and objectives including: Reliability of monetary reporting Compliance with appropriate laws and directions Effectiveness and productivity of operationsSlide 5
B. Sensible Assurance Code the missing money to awful obligations. Sensible confirmation includes two contemplations: The cost of the element\'s interior control ought not surpass the normal advantages. Constraints exist in any substance\'s interior control. ArrangementSlide 6
C. Area 404 Reporting Requirements for Management Section 404 of Sarbanes-Oxley requires the administration of open organizations to issue an interior control report that incorporates: An announcement that administration is in charge of building up and keeping up a satisfactory inward control structure and methods for money related reporting. An evaluation of the viability of the interior control structure and methods for monetary reporting as of the end of the organization\'s financial year.Slide 7
D. Key Components of Managements\' Assessment of Internal Control Management must assess the plan of inward control over money related reporting. Administration must test the working viability of those controls.Slide 8
E. Inspector Responsibilities for Understanding Internal Control Public and privately owned businesses – An adequate comprehension of inner control is to be gotten to arrange the review and to decide the nature, timing, and degree of tests to be performed. (2 nd standard of hands on work) Public organizations – Section 404 requires exertion past that expressed above so that the inspector can give a provide details regarding interior controls that contains the accompanying two sentiments: Whether administration\'s evaluation of the viability of inner control over money related reporting as of the end of the monetary period is genuinely expressed in every material regard. Whether the organization kept up, in every material regard, successful inward control over money related reporting as of the predetermined date.Slide 9
II. The Components of Internal Control The interior control system for generally U.S. organizations is the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control—Integrated Framework , issued in 1992. The Control Environment Risk Assessment Control Activities Information and Communication MonitoringSlide 10
The control environment is worried with the activities, arrangements, and techniques that mirror the general disposition of the customer\'s top administration, chiefs, and proprietors of a substance about interior control and its significance. Respectability and moral qualities Commitment to capability Board of chiefs and review panel Management\'s theory and working style Organizational structure Assignment of power and duty Human asset arrangements and practices A. The Control EnvironmentSlide 11
1. Uprightness and Ethical Values Management activities to evacuate impetuses that incite a man to carry on shamefully. Correspondence of behavioral models by implicit rules and case.Slide 12
2. Duty to Competence Management\'s thought of the capability levels for particular employments and how those convert into imperative abilities and learning.Slide 13
3. Top managerial staff and Audit Committee Board delegates duty regarding inside control to administration and is accused of standard autonomous appraisals of administration built up interior control. The significant stock trades require recorded organizations to have a review advisory group made out of completely free chiefs who are fiscally educated.Slide 14
4. Administration\'s Philosophy and Operating Style Management, through its exercises, gives clear flags to representatives about the significance of inside control. For instance, are deals and profit targets doubtful, and are representatives urged to take forceful activities to meet those objectives.Slide 15
5. Authoritative Structure Understanding the customer\'s hierarchical structure furnishes the examiner with a comprehension of how the customer\'s business capacities and executes controls.Slide 16
Employee Job Descriptions 6. Task of Authority and Responsibility Formal techniques for correspondence including: Top administration memoranda concerning inward control Organizational working arrangements Employee sets of expectationsSlide 17
7. Human Resource Policies and Practices If workers are straightforward and dependable, different controls can be truant and solid budgetary proclamations will at present outcome. Techniques by which people are procured, prepared, advanced, and repaid are essential components of inner control.Slide 18
Client administration\'s distinguishing proof and examination of dangers applicable to the arrangement of the money related articulations as per GAAP. Customer Management\'s Risk Assessment Auditor Risk Assessment B. Hazard AssessmentSlide 19
1. Customer Management\'s Risk Assessment Client administration surveys chance as a feature of planning and working inner controls to minimize mistakes and extortion. Three stages include: Identify components that may expand hazard Determine noteworthiness of hazard and probability of event Develop particular activities to decrease hazard to an adequate level.Slide 20
2. Reviewer Risk Assessment The evaluator gets learning about administration\'s hazard appraisal handle by: Determining how administration distinguishes dangers pertinent to money related reporting Evaluating their criticalness and probability of event Deciding the activities expected to address the dangers.Slide 21
Policies and strategies that customer administration has set up to meet its destinations for money related reporting. Sufficient isolation of obligations Proper approval of exchanges and exercises Adequate reports and records Physical control over resources and records Independent keeps an eye on execution C. Control ActivitiesSlide 22
1. Sufficient Segregation of Duties Separation of the elements of approval, recordkeeping, and care. Isolating IT obligations from User DepartmentsSlide 23
2. Legitimate Authorization of Transactions and Activities General approval is allowable for routine occasions for which there are approaches to take after. For a few exchanges particular approval is required on a case-by-case premise.Slide 24
3. Satisfactory Documents and Records Prenumbered successive archives so missing things are seen Prepared as close to exchange time as conceivable Good plan with directions and fitting spacesSlide 25
4. Physical Control Over Assets and Records Deterrents to avert physical get to. Get to controls to avoid getting into PC framework. Reinforcement and recuperation methodology Incorrect PasswordSlide 26
5. Free Checks on Performance Personnel are probably going to overlook or purposefully neglect to take after strategies, or they may get to be distinctly reckless unless somebody watches and assesses their execution.Slide 27
Methods used to start, record, process, and report an element\'s exchanges and to keep up responsibility for related resources. For a little organization with dynamic contribution by the proprietor, a basic modernized bookkeeping framework that includes one fair, capable bookkeeper may give a satisfactory bookkeeping framework. A bigger organization requires a more mind boggling framework that incorporates deliberately characterized duties and composed systems. D. Data and CommunicationSlide 28
Client administration\'s progressing and intermittent appraisal of the nature of inward control execution to figure out if controls are working as proposed and adjusted when required. For some organizations, particularly bigger ones, an inner review division is fundamental for successful observing. To keep up inner review freedom, it is basic that they be autonomous of working and bookkeeping divisions; and that they answer to an abnormal state of power, ideally the review advisory group of the governing body. E. CheckingSlide 29
III. Handle for Understanding Internal Control and Assessing Control Risk Phase 1: Obtain and Document Understanding of Internal Control: Design and Operation Phase 2: Assess Control Risk Phase 3: Design, Perform, and Evaluate Tests of Controls Phase 4: Decide Planned Detection Risk and Substantive TestsSlide 30
A. Stage 1: Obtain and Document Understanding of Internal Control Three strategies usually utilized by inspectors to acquire and archive their comprehension of the outline of inside control are stories, flowcharts, and inward control polls (see Figure 10-4 on p. 286). The evaluator should likewise assess whether the planned controls are really put in operation. PCAOB Standard 2 requires the examiner to perform no less than one walkthrough for every real class of exchanges. In a walkthrough, the inspector chooses one or a couple reports for the start of an exchange sort and follows them through the whole bookkeeping process.Slide 31
B. Stage 2: Assess Control Risk Two particular appraisals must be made to touch base at the preparatory evaluation: The primary appraisal is whether the element is auditable. This is dictated by considering the uprightness of administration and the a
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