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    CH 1 Auditing and Internal Control

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    angelica valenzuela
    The document defines auditing and discusses important auditing concepts like standards, types of audits, and the Sarbanes-Oxley Act. It also explains the basics of internal controls, including the COSO internal control framework. The COSO framework outlines five components of effective internal controls: control environment, risk assessment, control activities, information and communication, and monitoring. It provides organizations a standard for designing, implementing, and assessing the effectiveness of their internal control systems.

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    CH 1 Auditing and Internal Control

    Uploaded by

    angelica valenzuela
    112 views20 pages
    The document defines auditing and discusses important auditing concepts like standards, types of audits, and the Sarbanes-Oxley Act. It also explains the basics of internal controls, including the COSO internal control framework. The COSO framework outlines five components of effective internal controls: control environment, risk assessment, control activities, information and communication, and monitoring. It provides organizations a standard for designing, implementing, and assessing the effectiveness of their internal control systems.

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    AUDITING

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    The document defines auditing and discusses important auditing concepts like standards, types of audits, and the Sarbanes-Oxley Act. It also explains the basics of internal controls, including the COSO internal control framework. The COSO framework outlines five components of effective internal controls: control environment, risk assessment, control activities, information and communication, and monitoring. It provides organizations a standard for designing, implementing, and assessing the effectiveness of their internal control systems.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    112 views20 pages

    CH 1 Auditing and Internal Control

    Uploaded by

    angelica valenzuela
    The document defines auditing and discusses important auditing concepts like standards, types of audits, and the Sarbanes-Oxley Act. It also explains the basics of internal controls, including the COSO internal control framework. The COSO framework outlines five components of effective internal controls: control environment, risk assessment, control activities, information and communication, and monitoring. It provides organizations a standard for designing, implementing, and assessing the effectiveness of their internal control systems.

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    AUDITING AND

    INTERNAL CONTROL
     Definition of Auditing
     Auditing Standards
     Sarbanes-Oxley Act of 2002
     Internal Control
     COSO Internal Control Framework
    Auditing
    American Accounting Association Definition:
    • Auditing is a systematic process of objectively obtaining
    and evaluating evidence regarding assertions about
    economic actions and events to ascertain the degree of
    correspondence between the assertions and established
    criteria and communication the results to interested
    users. (AAA Committee on Basic Auditing Concepts)
    Roles of Audit

    1.ASSURANCE
    2.CONSULTING
    Types of Audit:
    • Financial
    • Operational
    • Administrative
    • IS
    • Forensic
    Auditing Standards
    • Generally Accepted Auditing Standards (GAAS)
    • General Qualification Standards
    • Field work standards
    • Reporting Standards
    • Statements on Auditing Standards (SASs) –
    authoritative interpretations of GAAS issued by AICPA
    Generally Accepted Auditing Standards (GAAS)
    General Standards Standards of Fieldwork Reporting Standards
    1. The auditor must have 1. Audit work must be 1. The auditor must state in
    adequate technical training adequately planned the report whether financial
    and proficiency statements were prepared
    in accordance with GAAP
    2. The auditor must have 2. The auditor must gain a 2. The report must identify
    independence of mental sufficient understanding of those circumstances in
    attitude the internal control structure which GAAP were not
    applied
    3. The auditor must 3. The auditor must obtain 3. The report must identify
    exercise due professional sufficient, competent any items that do not have
    care in the performance of evidence adequate informative
    the audit and the disclosures
    preparation of the report
    4. The report shall contain
    an expression of the
    auditor’s opinion on the
    financial statements as a
    whole
    IT Controls: Sarbanex-Oxley Act of 2002
    • Sarbanes-Oxley, Sarbox, SOX
    • United States Federal Law enacted on July 30, 2002
    • In response to a number or major corporate and
    accounting scandals which shook investor confidence in
    financial statements
    • 2 Key Provisions:
    1. Section 302 – requires senior management to certify their internal
    controls quarterly and annually, external auditors to perform quarterly
    procedures to identify material modifications in controls over financial
    reporting
    2. Section 402 – requirement that management and auditors establish
    internal controls and reporting methods on the adequacy of those
    controls
    IT Controls: Sarbanex-Oxley Act of 2002
    • AUDIT IMPLICATION:
    • SOX legislation mandates external auditors to attest to
    management’s assessment of internal controls:
    • issue a separate audit opinion in addition to the fairness of financial
    statements and
    • perform quarterly procedures to identify any material modifications
    in controls over financial reporting:
    • Interview Management regarding any significant changes in the design
    and operation of internal control that occurred subsequent to preceding
    annual audit or prior review of interim financial information
    • Evaluate the implications of misstatements identified by the auditor as
    part of the interim review that relate to effective internal controls
    • Determine whether changes in internal controls are likely to materially
    affect internal control over financial reporting
    IT Controls: Sarbanex-Oxley Act of 2002
    • AUDIT IMPLICATION:
    • SOX places responsibility on auditors to detect fraudulent
    activity
    • PCAOB Standard No. 5 specifically requires auditors to
    understand transaction flows, including controls pertaining
    to how transactions are initiated, authorized, recorded,
    and reported.
    Internal Controls
    A process that helps an entity achieve its objectives:
    1. To safeguard assets of the firm
    2. To ensure accuracy and reliability of accounting records and
    information
    3. To promote efficiency in the firm’s operation’s
    4. To measure compliance with management’s prescribed
    policies and procedures

    4 Modifying Principles:
    • Management Responsibility
    • Data Processing
    • Limitations – error, circumvention, management override,
    changing conditions
    • Reasonable Assurance
    Internal Controls

    • The PDC Control Model


    • Preventive – keep undesirable events from occurring
    • Detective – identify and expose undesirable events
    • Corrective – address undesirable event after its occurrence
    COSO
    • COSO – Committee on Sponsoring Organizations of the
    Treadway Commission is a joint initiative of 5 private
    sector organizations (AAA, AICPA, FEI, IMA, IIA)
    • Dedicated to the development of frameworks and
    guidance of enterprise risk management, internal control
    and fraud deterrence
    COSO 2013 Framework
    COSO 2013 Framework
    • The original framework was first published in 1992
    • Standard framework for designing, implementing, and
    conducting internal controls
    • Was updated in May 2013 to account for the ongoing
    changes in the business environment
    • Most significant change was the addition of the 17
    principles and 77 focus areas which further define the
    five core areas/components
    COSO 2013 Framework

    COSO Objectives

    Components of
    Internal Control
    COSO 2013 Framework: The Five Components
    1. Control Environment – the culture of internal controls
    at the organization
    2. Risk Assessment – an activity whereby all of the
    activities, and associated risks, in an organization are
    looked at and each considered on a spectrum of either
    low risk or high risk.
    3. Control Activities – procedures and controls put in
    place to mitigate risks
    4. Information and communication – how management
    communicates the culture of compliance and the
    specific policies individuals need to follow
    5. Monitoring – ongoing evaluations, separate
    evaluations, or some combination of both to ascertain
    each component are present and functioning
    COSO 2013 Framework: Objectives
    1. Operations Objectives – related to the effectiveness and efficiency of
    entity’s operations, including operational and financial performance
    and goals, and safeguarding assets against loss
    2. Reporting Objectives – related to the internal and external reporting
    to the stakeholders, which would encompass reliability, timeliness,
    transparency, or other terms as established by regulators, standard
    setters, or the entity’s policies.
    3. Compliance Objectives – related to adhering to laws and regulations
    that the entity must follow
    COSO 2013 Framework
    COSO 2013 Framework
    Google Company
    COSO Objective: Operations
    Threat to the objective: Loss of employee morale
    Control Objective: To employees stay positive and motivated

    Internal Control Element (COSO) Evidence Control objective is met


    Management implements sound hiring and training
    Control Environment policies for employees

    Management carries out stress risk assessment using a


    Risk Assessment certified detailed questionnaire and form which suggests
    ways to mitigate risks

    Management establishes employee-friendly workplace


    Control Activities polices such as allowing work away from the worksite

    Management to engage with the employee in counseling


    Information and Communications sessions

    Management uses mobile or cloud-based tech tools to


    Monitoring
    track employees’ moods
    COSO Internal Control Framework
    GROUP ACTIVITY
    Internal Control From an Internal Auditor Perspective
    Objective: To understand concepts surrounding internal
    auditors’ role in evaluating internal controls so that their
    employer meets the objectives using the COSO approach as the
    basis for control matrix development
    Directions:
    1. Identify threats to meeting the COSO objectives
    2. Discuss Control objectives necessary to see that the threats
    are contained
    3. Match the five components of a good internal control system
    to meet the control objectives with a control activity that
    management could have in place
    4. Identify steps to be taken by the auditor to assure that control
    objectives are met

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