Every firm has its approach for understanding a client’s internal control struct

Question

Every firm has its approach for understanding a client’s internal control structure. Some firms use a standardized internal control questionnaire to evaluate controls that are in place whereas other firms do not rely on internal controls at all and plan their audits as if there are no controls in place or consider them as not effective.

Assume you are training a new team of auditors for your CPA firm. Prepare a PowerPoint presentation to present the pros and cons of each approach. Then, select the approach that your firm uses (that is, the approach you think is best) and explain why. Include the following components in your presentation:

What effect, if any, does the size of the organization have on the decision?

What are the auditing standard requirements for obtaining an understanding of internal controls?

What are the differences, if any, in understanding internal controls for a public company versus a non-public company?

Explanation / Answer

Ans:- Internal control talks about the designed processes and procedure which prevents from any fraud or mis-selling to customers. It is an ongoing process which promotes clean business and efficiency in operation.

Internal audit is performed at a scheduled specific time in a company. Internal audit checks whether all operation activities are working as per defined processes or not. It evaluates organisational governance and compliance processes.

The firm should use internal control as first line of defence and internal audit as second line of defence. It is always better to implement a better internal control. Internal audit should only highlight exceptional scenarios.

Size of an organisation plays an important role in decision making. There are various effects of size of an organisation on decision like:-

a). The effect of decision need to reach the last person in a large organisation. To do this, a large organisation needs to put lot of effort like conference call, video conference, marketing mailers etc.

b). The decision needs to be taken at board level in a large organisation and it should flow to lower level of a heirarchy. In a small organisation, the decision could be taken by gathering the employees together.

There are various auditing standard requirements for obtaining an understanding of internal controls like:-

a). Reponsibility and function of an independent auditor should be mentioned clearly.

b). Quality control should be put in place.

c). Audit of financial documents and transactions need to be done.

d). Reporting standards should be standardised.

There are various internal controls for a public company versus a non-public company like:-

a). Non- public company's financial documents might not be in public domain.

b). Public company has to go through scheduled audit by the regulator and internal audit team.

c). Public company have to disclose every information in annual report.

d). Internal control needs to be reviewed in a stricter way for public company.

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