Module 5 Summary

Internal control

This module considers the reasons for and methods used in the study and evaluation of internal controls. It explains the relationship between internal control objectives and control procedures carried out by the client. You learn how to document internal controls and assess control risk by conducting a preliminary evaluation and then testing key controls. The module concludes by considering the role of internal control in overall audit strategy and auditor's reports on a client's internal control over financial reporting.

Define internal control and explain the two reasons for evaluating internal control.

Differentiate between management and auditor responsibility with respect to internal control, and describe the internal control objectives of interest to both management and auditor.

Identify the components of internal control and explain the nature of a control environment.

Identify the three phases of internal control evaluation.

Explain internal control for planning purposes and how an auditor gains a sufficient understanding of internal control under a combined approach and a substantive approach.

Identify and describe the seven internal control objectives.

Explain the relationship between control objectives and financial statement assertions.

Completeness Valuation Rights, Obligations Presentation and Disclosure
Validity X     X  
Completeness   X   X  
Authorization X   X X  
Accuracy     X    
Classification         X
Accounting         X
Proper Period X X      

Describe the control procedures found in good control systems.

Explain the general effect of computerized controls.

Explain the CICA Handbook requirements for documenting internal control.

Describe the use of narratives, internal control questionnaires, flowcharts, and walk-through tests to document internal control.

Explain how an auditor decides whether to assess control risk at maximum or below maximum.

Explain the conditions under which the auditor would test controls.

Describe the nature and extent of tests of controls and provide examples of tests of controls.

Explain the rationale for testing controls at an interim date.

Explain how audit strategy is affected by the study and evaluation of internal control.

Briefly describe the auditor’s considerations when issuing an audit report on internal control over the client’s financial reporting processes.