Zou's Fencing Controls Essay

Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 12.1 EyeMax Corporation . . Evaluation of Audit Differences

2. Test of internal controls: In order to test internal controls the audit team should review Smackey’s documents, records,and reports on file. The audit team should also speak with the staff at Smackey’s to determine if they are following policies and procedures as outlined in company policies.

Moreover, the auditor should preform test for effectiveness of internal controls. He may interview management by asking questions on the process of the transactions and operational activities. He may discuss with management the process of some transactions from beginning to end and then test it by using sample testing. Also he/she should make sure that there is proper control of activities; policies and procedures for adequate segregation of duties are met.

Stage 2: Test of internal controls - By testing the effectiveness of the internal controls the auditor can determine the control risk that lies within the company. The audit team can perform tests of controls by making inquiries of appropriate client personnel, examining documents, records, and reports maintained by Smackey, observing control-related activities such as the one done for the inventory procedures for returned Best Boy Gourmet dog food, and re-perform the client procedures.

The chances of failures can be decreased by executing the checks on the systems. These keep an eye on the systems preventing risks from occurring, and these checks are avoided as the interior controls. The motivation behind the inner controls is to keep the organization safe from risks associated with the modernized accounting-system risks. Organizations change their manual accounting systems to computerized accounting systems for different reasons, this incorporates the points of interest, and the explanation behind utilizing electronic accounting information is instinct. The organizations embrace the policies of their

Planning and developing audit methodologies for Financial & Operating Audits such as contracts and Procurements, accounts payable, inventory management, petrochemicals co-ordination, Fixed Assets, Budgeting, & Financial resource management.

Having internal controls is one thing, but how the company evaluates that control is a matter all by itself. Being an independent auditor, it is our job to understand an entity and

To conduct the audit, the firm must acquire sufficient understanding of the internal control processes to help determine the nature and timing of the audit. However, the audit is not designed to identify deficiencies in internal control or provide assurance. The firm will make the audit committee aware of any significant deficiencies that come to Anderson, Olds, and Watershed’s attention during the audit.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate (Louwers & Reynolds, 2007). We believe that the audit evidence obtained is sufficient and appropriate to provide a reasonable basis for our opinions.

● Monitoring — Internal control systems need to be monitored–a process that assesses the quality of the system’s performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. Ongoing monitoring occurs in the course of operations. It includes regular management and supervisory activities, and other actions personnel take in performing their duties. The scope and frequency of separate evaluations will depend primarily on an assessment of risks and the effectiveness of ongoing monitoring procedures. Internal control deficiencies should be reported upstream, with serious matters reported to top management and the board.

Auditors have the responsibilities as well as management to report internal controls. The auditors must examine closely management’s claim of effectiveness and also physically test the controls. After the examination, the auditors should express their opinion and any recommendations to fix any internal control weaknesses.

Performing internal tests of controls is intended to assess the operating effectiveness of those internal controls. Here the staff would select an area of control to test, perhaps inventory management and return policy. They would then look at the procedures that help prevent fraud or error, talk to management, and observe activities. They would notice there is very little control in place for this area. There is no management oversight or dock security measures, no direct recording of sales receipts, shipping labels, or matching to accounts receivable. This would be noted as an area of additional concern. The next stage is to perform substantive testing procedures, where the purpose is to collect audit evidence that the management assertions made in the financial statements are reliable and in accordance with GAAP. Since my staff is good, they would have noticed the company’s sales projections are weak in control and are overstated by around 11%. They would perform a substantive test of detail in this area by selecting a sample of items from the account balances and finding bank statements, invoices, and test of details of balances. They would likely see specifically where the over-projections are being made. Lastly, in finalization, they would compile a report to management detailing any important matters, evaluating the audit evidence, and considering the type of audit opinion that should be reported. Specifically here, they would

When testing of internal controls indicates that there may be significant deficiencies, then the auditor

Bear in mind that upper management is ultimately accountable for any missing data or documentation. External auditors often expect requested information to be provided within one to two days, so information management systems must be efficient and organized. Software systems are proven ways to integrate efforts, increase compliance tracking and reduce errors and redundancies. Many software programs provide customized reports that specifically address different compliance requirements. These reports act as helpful performance controls that can be integrated into internal audits. Software systems also expand reporting capabilities, checks and balances and process and workflow

An assessment of inherent risk is important for determining the possibility of material misstatement before considering internal control effectiveness (259). Obtaining an understanding of internal control is the basis for determining control risk (410). This understanding helps the auditor determine areas of weakness, which may require more attention. Analytical procedures indicate possible misstatements and unusual fluctuations requiring substantive tests of transactions or tests of details of balances for proof of misstatement occurrence. Substantive analytical procedures can also help reduce the sample sizes needed or certain tests of details of balances (406). Assessment of planned detection risk is the risk that material misstatements will not be discovered by the audit as planned and involves either disregarding internal control in the substantive approach resulting in more evidence being gathered or considering internal control in the reducing risk approach resulting in less evidence being gathered. Performing tests of controls is only necessary if one is following a reducing control risk approach. If following a substantive approach, the auditor can ignore testing controls