Modern Auditing:
Assurance Services and the Integrity
of Financial Reporting, 8
thEdition
William C. Boynton
California Polytechnic State University at San Luis Obispo
Raymond N. Johnson
Portland State University
Fundamental Concepts of
Internal Controls
• Process integrated with an entity’s
infrastructure
• People implement internal control
• Can only provide reasonable assurance
Components of Internal Control
•
Control Environment
•
Risk Assessment
•
Control Activities
•
Information and Communication
Entity Objectives with Internal
Control
•
Reliability of financial information
•
Compliance with applicable laws
and regulations
Limitations of Internal Control
•
Mistakes in Judgment
•
Breakdowns
•
Collusion
•
Management Override
Roles and Responsibilities
•
Management
•
Board of Directors and Audit
Committee
Roles and Responsibilities (cont.)
•
Other Entity Personnel
•
Independent Auditors
Study Break
1. _____ is a process that assesses the
quality of internal control
performance over time.
A. Control activities
B. Risk assessment
C. Information and communication
D. Monitoring
Study Break
2. This limitation of an entity’s internal
controls occurs when two or more
individuals act together to perpetrate and conceal fraud.
A. Breakdowns B. Collusion
C. Management override D. Mistakes in judgment
Control Environment
•
Integrity and Ethical Values
•
Commitment to Competence
•
Board of Directors and Audit
Committee
•
Management’s Philosophy and
Control Environment (cont.)
•
Organizational Structure
•
Assignment of Authority and
Responsibility
Information and Communication
•
Information
– Transactions– Audit Trail or Transaction Trail
– Documents
– Records
Control Activities
•
Authorization Controls
•
Segregation of Duties
– Transaction authorization
– Custody of assets
Control Activities (cont.)
•
Information Processing Controls
– General Controls– Computer Application Controls
General Controls
• Organization and Operation Controls
• Systems Development and Documentation Controls
• Hardware and Systems Software Controls
• Access Controls
Computer Application Controls
•
Input Controls
•
Processing Controls
Control Activities (cont.)
•
Physical Controls
•
Performance Reviews
•
Controls over Management
Control Activities (cont.)
•
Monitoring
– Ongoing monitoring programs
– Separate evaluations
Study Break
3. Which of the following does not
influence the control environment? A. Management’s Philosophy
B. Adequate Training C. Hiring Processes
D. All of the above influence the control environment
Study Break
4. This component of control activities ensures that every transaction is
authorized by management acting within the scope of their authority. A. Authorization Controls
B. Segregation of Duties
C. Information Processing Controls D. All of the above
Study Break
5. This computer application control is
designed to ensure that the processing results are correct and only authorized personnel receive the information.
A. Input Controls
B. Processing Controls C. Output Controls
D. Data Controls
Understanding Internal Control
Must perform procedures to:
•
Understand design of policies and
procedures
Understanding Internal Control
Auditor uses the understanding to:
•
Identify types of potential
misstatements
•
Understand factors affecting risk of
material misstatement
Effects of Preliminary Audit
Strategies
•
Control Environment
•
Risk Assessment
•
Information and Communication
•
Control Activities
Procedures to Obtain an
Understanding
• Review previous experience with the client
• Inquire management, supervisory, and staff personnel
• Inspect documents and records
• Observe activities and operations
Documenting the Understanding
•
Questionnaires
•
Flowcharts
•
Decision Tables
Study Break
6. All of the following are procedures used to obtain an understanding of internal controls except:
A. Inspecting documents
B. Inquiries of client’s customers C. Inquiries of management
D. All of the above procedures are used
Study Break
7. This form of documentation is a
diagram that uses symbols to identify the steps involved in processing
information through the accounting system.
A. Questionnaire B. Flowchart
C. Decision Table
D. Narrative Memoranda
