An auditor is required to obtain sufficient understanding of each component of a

Question

An auditor is required to obtain sufficient understanding of each component of a company's internal control system to plan the audit of a company’s financial statements, and to assess and evaluate the control risk for assertions that are part of the account balance, transaction class and disclosure components of the financial statements.

Required:

(a) What are management’s incentives for establishing and maintaining a strong internal control system? Identify and explain the auditor’s main concerns with an internal control system. (4 marks)

(b) Briefly discuss the five components of internal control. (5 marks)

(c) Discuss three tools commonly used by auditors to document their understanding of a company’s internal control system. Identify and explain the relative strengths and weaknesses of each tool. (6 marks)

Explanation / Answer

Part ( a)

Strong internal control ensure that assets and records are properly safeguarded. Management also needs a control system that generates reliable information for decision making. If the information system does not generate reliable information, management may be unable to make informed decision about issues such as product pricing, cost of production, and profit information.

The auditor uses the understanding of the entities internal control to identify the types of potential misstatement, ascertain factors that affect the risk of material misstatement, and design test of controls and substantive procedures. The auditor understanding of internal control is a major factor in determining the overall audit strategy.

Part ( B)

Benefits :

• Consistent application of predefined business rules and performance of complex calculations in processing large volumes of transactions or data.

• Enhancement of the timeliness, availability, and accuracy of information.

• Facilitation of additional analysis of information.

• Enhancement of the ability to monitor the performance of the entity activities and its policies and procedures.

• Reduction in the risk that controls will be circumvented.

Part ( C )

The tools are classified into 4 categories :

Generic Tools : That enables the users to document internel control, reduce potential risks and provide some level of comfort that compliance initiatives are in place.

Document management and workflow tools : These are more capable of interacting with other software than our generic products and can address relatively straightforward functions such as report tracking.

Data Mining, File Retrivel, Business intelligence pattern recognition and business intelligence tools :It gather data from seprate systemsand organise and analyze them.

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