Essential Concepts of Internal Control

1. Internal control is a process

2. Internal control is effected by those charged with governance,
management and other personnel
3. Internal control can be expected to provide reasonable assurance
of achieving the entitys objectives
4. Internal control is designed to help achieve the entitys
objectives
Components of Internal Control
5. Control environment
6. Risk assessment
7. Information and communication systems
8. Control activities
9. Monitoring
Inherent Limitations of Internal Control
10.
Managements usual requirement that the cost of an
internal control should not exceed the expected benefits to be
derived.
11.
Most internal controls tend to be directed at routine
transactions rather than non-routine transactions.
12.
The potential for human error due to carelessness,
distraction, mistakes of judgment and the misunderstanding of
instructions.
13.
The possibility of circumvention of internal controls through
the collusion among employees.
14.
The possibility of management overriding the internal
control.
15.
The possibility that procedures may become inadequate
due to changes in conditions, and compliance with procedures
may deteriorate.
Tools for Reviewing Internal Control
16.
Narrative description of the entitys internal control
17.
Flowchart that diagrams the flow of transactions and
documents
18.
Internal control questionnaire providing managements
responses to questions about internal control
Cardinal Principles of Internal Control
19.
Responsibilities must be fixed.
20.
Functional responsibilities must be segregated.
21.
No one person must be in complete charge of a business
transactions.
22.
All available proof of accuracy must be utilized.

23.
Personnel must be carefully selected and trained.
24.
Personnel should be bonded, especially those in a position
of trust.
25.
Personnel should be rotated.
26.
Operating instructions must be reduced into writing.
27.
Do not exaggerate double entry accounting.
28.
Use of controlling accounts.
29.
Use of mechanical or electronic equipment, if feasible.
Steps in Considering the Entitys Internal Control System
30.
Obtain understanding of the internal control
31.
Document the understanding of accounting and internal
control systems.
32.
Assess the level of control risk
33.
Perform tests of controls
34.
Document the assessed level of control risks
Evidence
35.
36.
37.
38.

Gathering Techniques in Performing Test of Controls

Inquiry
Observation
Inspection
Reperformance

39.
It is the foundation of effective internal control,
providing discipline and structure.
Control environment
40.
These are policies and procedures that help ensure
that management directives are carried out.
Control activities
41.
These activities encompass the physical security of
assets, including adequate safeguards.
Physical controls
42.
It is the process of assessing the quality of internal
control performance over time.
Monitoring
43.
It involves assigning different people the
responsibilities of authorizing transactions, recording
transactions and custody of assets.
Segregation of duties
44.
It involves the examination of documents and
records to provide evidence of reliability depending on
their nature and source.

Inspection
45.
The document in which internal control weaknesses
together with other matters of concern are documented.
Management letter

Basic Types of Auditor

1. External auditor
2. Internal auditor
3. Government auditor
Basic Types of Audit
4. Financial statement audit
5. Compliance audit
6. Operational audit
Broad Groups of GAAS
7. General standards
8. Standards of Fieldwork
9. Standards of reporting
Financial Statement Assertions
10.
Occurrence
11.
Completeness
12.
Accuracy;
Cutoff, Classification, Existence, Rights and obligations, valuation
and allocation
Audit Process
13.
Accepting an engagement
14.
Audit planning
15.
Considering internal control
16.
Performing substantive tests
17.
Completing the audit
18.
Issuing a report
Components of Audit Risk
19.
Control risk
20.
Detection risk
21.
Inspection
22.