arens solution manual chapter 10

Chapter 10 – Section 404 Audits of Internal Control and Control Risk10 - *
Chapter 10
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1. Reliability of financial reporting
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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for understanding, testing, and
reporting on internal controls.
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to Internal Control
Management’s responsibility
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to Internal Control
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to Internal Control
Auditor responsibilities for
understanding internal control
Auditor responsibilities for testing
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Risk
assessment
Control
activities
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committee participation
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Organizational structure
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Assess the likelihood of the risk occurring
Determine actions necessary to manage the risk
Estimate the significance of the risk
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2. Proper authorization of transactions and activities
3. Adequate documents and records
4. Physical control over assets and records
5. Independent checks on performance
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General authorization
Specific authorization
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Designed for multiple use
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measure for safeguarding assets and
records is the use of physical precautions.
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over time unless there is a mechanism
for frequent review.
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and communication system is to…
initiate, record, process, and report
the entity’s transactions and to maintain
accountability for the related assets.
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Monitoring
quality of internal control performance…
to determine whether controls are operating
as intended and modified when needed.
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The SEC has extended the deadline for
small public companies compliance
with Section 404 requirements.
Over Financial Reporting for Smaller
Public Companies.
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Phase 1
Obtain an
understanding of
internal control:
design and
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require auditors to obtain an understanding
of internal control for every audit.
Procedures to obtain an understanding:
Design of internal controls
Whether placed in operation
integrated audit
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Narrative
and record in the system
2. All processing that takes place
3. The disposition of every document
and record in the system
4. An indication of the controls relevant
to the assessment of control risk
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experience with the entity
Examine documents and records
Perform walk-throughs of the accounting system
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controls, significant deficiencies,
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are auditable.
Use of a control risk matrix to assess
control risk.
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process.
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Identify and evaluate control deficiencies,
significant deficiencies, and material weaknesses
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Decide whether there is a significant deficiency
or material weakness
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Communications
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risk are called tests of controls.
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1. Make inquiries of client personnel
2. Examine documents, records, and reports
3. Observe control-related activities
4. Reperform client procedures
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Testing of controls related to significant risks
Testing less than the entire audit period
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Inquiry
Documentation
Observation
Reperformance
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The auditor uses the results of the control risk
assessment process and tests of controls to
determine the planned detection risk and
related substantive tests.
to the balance-related audit objectives.
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1. The auditor’s opinion on whether management’s
assessment of the effectiveness of internal control
over financial reporting as of the end of the fiscal
period is fairly stated, in all material respects.
2. The auditor’s opinion on whether the company
maintained, in all material respects, effective
internal control over financial reporting as of
the specified date.
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1. Reporting requirements
4. Assessing control risk
3. Extent of understanding needed
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Internal controls over financial reporting
Internal controls used to assess
control risk below maximum
an audit of financial statements
Controls that must be tested in
an audit of internal controls
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arens solution manual chapter 10

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