Evaluating Internal Controls: Lecture Notes for – ACC 544

Summary

Internal controls are a key part of an organisation's financial management. Students learn how auditors evaluate these controls to assess financial risk.

The Five Components

Internal controls have five parts. These parts are the basis for auditors' assessment of financial risk. Auditors use these parts to plan their audit work.

Phase I: Understanding

The audit team examines the company's internal control environment. They document their understanding using descriptions or flowcharts. The team then designs a preliminary audit program.

Phase II: Assessment

The audit team analyses the company's control strengths and weaknesses. They document their findings in audit files. The team decides which controls to test and the required compliance.

Phase III: Testing

The audit team tests the specified controls and reassesses the control risk. They document the basis for their risk assessment. The team then performs tests on the planned substantive procedures.

Key terms

Control environment

The overall atmosphere in which people carry out duties that affect financial reporting.

Control risk

The risk that a mistake in a financial statement will not be prevented or detected.

Substantive procedures

Audit tests that check the amounts and disclosures in the financial statements.

Company-level controls

Controls that apply to the whole company, not just to individual business units.

Bridge workpapers

Audit files where the team documents their findings and preliminary conclusions.

Compliance

Following the company's control policies and procedures.

Questions this document helps with

• What are the five components of internal controls?
• How do auditors assess a company's control risk?
• What happens in the testing phase of internal control evaluation?

Summary written with AI from the document's text.