Transcript Learning Objectives LO1 Distinguish between management and auditor’s responsibilities regarding an auditee organization’s internal controls. LO2 Explain why the auditor evaluates an auditee’s internal controls. LO3

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Learning Objectives
LO1 Distinguish between management and auditor’s
responsibilities regarding an auditee organization’s
internal controls.
LO2 Explain why the auditor evaluates an auditee’s
internal controls.
LO3 Define seven internal control objectives,
relating them to the assertions in management’s
financial statements.
LO4 Describe general and application control
activities found in an accounting information system.
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Control Objectives
There are seven control objectives.

Each control objective is intended to prevent a
class of errors that may lead to material
misstatement.
LO3
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Control Objectives and
Financial Statement Assertions
Control objectives are closely associated with
management’s assertions.
Financial Statement Assertions
Presentation
Existence/ CompleteRights
and
Objectives
Occurrence ness
Valuation Obligations disclosure
Validity
X
X
Completeness
X
X
Authorization
X
X
X
Accuracy
X
Classification
X
Accounting
X
Proper period
X
X
LO3
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Control Objectives and
Financial Statement Assertions
An auditor may determine that not all of the
control objectives are met for a particular
account balance.

More substantive work will be required in those
areas. This can be seen in the audit risk model
AR = IR X CR X DR.
LO3
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Phases of a Control
Evaluation
The process of control evaluation takes place in
three phases:



Understanding control
Assessing control risk
Testing Controls
A major audit goal is to be efficient. This means
performing work in minimum time and cost while
still doing high quality work.
LO3
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Audit Cost Trade-off
Generally, the more auditors can rely on good
internal controls, the less substantive work they
need to do.



Auditor can opt not to rely on controls, and do
extensive substantive procedures.
Auditor can perform a complete evaluation of
control, assess control risk to be low, and
minimize the substantive procedures.
Auditor needs to determine the most efficient
mix of control and substantive procedures.
LO3
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Audit Cost Trade-off
Audit cost
Total Cost
Cost of
internal
control
evaluation
Cost of
substantive
audit work
Assurance from testing
controls
LO3
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Phase 1 – Understanding the
Internal Control
Understanding the internal controls:
 Needs
to be done early in the audit.
 Obtain overall acquaintance with:
 Control
environment,
 Flow of transactions, and
 Effectiveness of key control procedures.
LO3