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2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
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Key Concepts
Managements Responsibility
Mgt establishes and maintains control system
Reasonable Assurance
Internal controls need only provide reasonable, not absolute assurance
Inherent Limitations
No internal control system is perfect only as good as the employees using the system
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2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
Clients Concerns
Clients want IC systems for: Reliability of financial reporting Efficiency and effectiveness of operations Compliance with applicable laws and regulations
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 10 - 3
Auditor Concerns
Auditors want IC systems for: (to comply with second standard of fieldwork) Controls related to reliability of financial reporting Controls over classes of transactions
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
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2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
Control Environment
Risk Assessment
Control Activities
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley
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Risk Assessment
Managements identification and analysis Identify factors affecting risk. Assess significance of risks and likelihood of occurrence. Determine actions necessary to manage risk.
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Physical controls
Access controls
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The need for independent checks arise because internal control tends to change over time unless there is a mechanism for frequent review.
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Monitoring
Managements ongoing and periodic assessment of the quality of internal control performance to determine whether controls are operating as intended and modified when needed.
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Communication
Audit committee communications: Reportable conditions letter or oral discussion with committee (required) Management letters (not required)
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Tests of Controls
The procedures to test effectiveness of controls in support of a reduced assessed control risk are called tests of controls.
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Extent of Procedures
Extent depends on desired assessment level of control risk
A. Reliance on evidence from prior years audit B. Testing less than the entire audit period C. Rotating tests of controls
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End of Chapter 10
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