Page 1 of 13 CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING THEORY INTERNAL CONTROL Related PSAs/PAPSs: PSA 400,

402 and 315 The auditor hould o!tain an under tandin" o# the a$$ountin" and internal $ontrol % te& audit and de(elo' an e##e$ti(e audit a''roa$h) u##i$ient to 'lan the

Accounting system &ean the erie o# ta * and re$ord o# an entit% !% +hi$h tran a$tion are 'ro$e ed a a &ean o# &aintainin" #inan$ial re$ord ) Su$h % te& identi#%, a e&!le, anal%,e, $al$ulate, $la i#%, re$ord, u&&ari,e and re'ort tran a$tion and other e(ent ) Internal Control System &ean all the 'oli$ie and 'ro$edure -internal $ontrol . ado'ted !% the &ana"e&ent o# an entit% to a i t in a$hie(in" &ana"e&ent/ o!0e$ti(e o# en urin", a #ar a 'ra$ti$a!le,1 orderl% and e##i$ient $ondu$t o# it !u ine , in$ludin" adheren$e to &ana"e&ent 'oli$ie 2 a#e"uardin" o# a et 2 're(ention and dete$tion o# #raud and error2 a$$ura$% and $o&'letene o# the a$$ountin" re$ord 2 and ti&el% 're'aration o# relia!le #inan$ial in#or&ation) The internal $ontrol % te& e3tend !e%ond tho e &atter +hi$h relate dire$tl% to the #un$tion o# the a$$ountin" % te&) Internal Control Co&'onent -PSA 315.

(a) (b) (c) (d) (e)

The $ontrol en(iron&ent2 The entit%/ ri * a e &ent 'ro$e 2 The in#or&ation % te&, in$ludin" the related !u ine $o&&uni$ation2 Control a$ti(itie 2 and Monitorin" o# $ontrol )

'ro$e

e , rele(ant to #inan$ial re'ortin", and

Control environment The $ontrol en(iron&ent in$lude the attitude , a+arene , and a$tion o# &ana"e&ent and tho e $har"ed +ith "o(ernan$e $on$ernin" the entit%/ internal $ontrol and it i&'ortan$e in the entit%) The $ontrol en(iron&ent al o in$lude the "o(ernan$e and &ana"e&ent #un$tion and et the tone o# an or"ani,ation, in#luen$in" the $ontrol $on $iou ne o# it 'eo'le) It i the #oundation #or e##e$ti(e internal $ontrol, 'ro(idin" di $i'line and tru$ture) The $ontrol en(iron&ent en$o&'a e the #ollo+in" ele&ent 1

Co&&uni$ation and en#or$e&ent o# inte"rit% and ethi$al (alue ) Co&&it&ent to $o&'eten$e) Parti$i'ation !% tho e $har"ed +ith "o(ernan$e) Mana"e&ent/ 'hilo o'h% and o'eratin" t%le) Or"ani,ational tru$ture) A i"n&ent o# authorit% and re 'on i!ilit%) 4u&an re our$e 'oli$ie and 'ra$ti$e )

Entitys risk assessment rocess An entit%/ ri * a e &ent 'ro$e i it 'ro$e #or identi#%in" and re 'ondin" to !u ine ri * and the re ult thereo#) 5or #inan$ial re'ortin" 'ur'o e , the entit%/ ri * a e &ent 'ro$e in$lude ho+ &ana"e&ent identi#ie ri * rele(ant to the 're'aration o# #inan$ial tate&ent that are 're ented #airl%, in all &aterial re 'e$t in a$$ordan$e +ith the entit%/ a''li$a!le #inan$ial re'ortin" #ra&e+or*, e ti&ate their i"ni#i$an$e, a e e the li*elihood o# their o$$urren$e, and de$ide u'on a$tion to &ana"e the&)

Page ! of 13 Ri * $an ari e or $han"e due to $ir$u& tan$e u$h a the #ollo+in"1

C"anges in o erating environment ) Chan"e in the re"ulator% or o'eratin" en(iron&ent $an re ult in $han"e in $o&'etiti(e 're ure and i"ni#i$antl% di##erent ri * ) #e$ ersonnel) Ne+ 'er onnel &a% ha(e a di##erent #o$u on or under tandin" o# internal $ontrol) #e$ or revam ed information systems ) Si"ni#i$ant and ra'id $han"e in in#or&ation % te& $an $han"e the ri * relatin" to internal $ontrol) Ra id gro$t") Si"ni#i$ant and ra'id e3'an ion o# o'eration $an train $ontrol and in$rea e the ri * o# a !rea*do+n in $ontrol ) #e$ tec"nology) In$or'oratin" ne+ te$hnolo"ie into 'rodu$tion 'ro$e e % te& &a% $han"e the ri * a o$iated +ith internal $ontrol) or in#or&ation

#e$ %usiness models, roducts& or activities) Enterin" into !u ine area or tran a$tion +ith +hi$h an entit% ha little e3'erien$e &a% introdu$e ne+ ri * a o$iated +ith internal $ontrol) Cor orate restructurings) Re tru$turin" &a% !e a$$o&'anied !% ta## redu$tion and $han"e u'er(i ion and e"re"ation o# dutie that &a% $han"e the ri * a o$iated +ith internal $ontrol) in

E' anded foreign o erations) The e3'an ion or a$6ui ition o# #orei"n o'eration $arrie ne+ and o#ten uni6ue ri * that &a% a##e$t internal $ontrol, #or e3a&'le, additional or $han"ed ri * #ro& #orei"n $urren$% tran a$tion ) #e$ accounting ronouncements) Ado'tion o# ne+ a$$ountin" 'rin$i'le 'rin$i'le &a% a##e$t ri * in 're'arin" #inan$ial tate&ent ) or $han"in" a$$ountin"

Information system& including t"e related %usiness rocesses& relevant to financial re orting& and communication An in#or&ation % te& $on i t o# in#ra tru$ture -'h% i$al and hard+are $o&'onent ., o#t+are, 'eo'le, 'ro$edure , and data) In#ra tru$ture and o#t+are +ill !e a! ent, or ha(e le i"ni#i$an$e, in % te& that are e3$lu i(el% or 'ri&aril% &anual) The in#or&ation % te& rele(ant to #inan$ial re'ortin" o!0e$ti(e , +hi$h in$lude the #inan$ial re'ortin" % te&, $on i t o# the 'ro$edure and re$ord e ta!li hed to initiate, re$ord, 'ro$e , and re'ort entit% tran a$tion -a +ell a e(ent and $ondition . and to &aintain a$$ounta!ilit% #or the related a et , lia!ilitie , and e6uit%) A$$ordin"l%, an in#or&ation % te& en$o&'a e &ethod and re$ord that1

Identi#% and re$ord all (alid tran a$tion ) 7e $ri!e on a ti&el% !a i the tran a$tion in u##i$ient detail to 'er&it 'ro'er $la i#i$ation o# tran a$tion #or #inan$ial re'ortin") Mea ure the (alue o# tran a$tion in a &anner that 'er&it re$ordin" their 'ro'er &onetar% (alue in the #inan$ial tate&ent ) 7eter&ine the ti&e 'eriod in +hi$h tran a$tion o$$urred to 'er&it re$ordin" o# tran a$tion in the 'ro'er a$$ountin" 'eriod) Pre ent 'ro'erl% the tran a$tion and related di $lo ure in the #inan$ial tate&ent )

Co&&uni$ation in(ol(e 'ro(idin" an under tandin" o# indi(idual role and re 'on i!ilitie 'ertainin" to internal $ontrol o(er #inan$ial re'ortin") It in$lude the e3tent to +hi$h 'er onnel under tand ho+ their a$ti(itie in the #inan$ial re'ortin" in#or&ation % te& relate to the +or* o# other and the &ean o# re'ortin" e3$e'tion to an a''ro'riate hi"her le(el +ithin the entit%) O'en $o&&uni$ation $hannel hel' en ure that e3$e'tion are re'orted and a$ted on) Control activities

Control a$ti(itie are the 'oli$ie and 'ro$edure that hel' en ure that &ana"e&ent dire$ti(e are $arried out, #or e3a&'le, that ne$e ar% a$tion are ta*en to addre ri * that threaten the a$hie(e&ent o# the entit%/ o!0e$ti(e ) Page 3 of 13 8enerall%, $ontrol a$ti(itie that &a% !e rele(ant to an audit &a% !e $ate"ori,ed a 'oli$ie and 'ro$edure that 'ertain to the #ollo+in"1

Per#or&an$e re(ie+ ) In#or&ation 'ro$e in") Ph% i$al $ontrol ) Se"re"ation o# dutie )

(onitoring of controls Mana"e&ent/ &onitorin" o# $ontrol in$lude $on iderin" +hether the% are o'eratin" a intended and that the% are &odi#ied a a''ro'riate #or $han"e in $ondition ) Monitorin" o# $ontrol &a% in$lude a$ti(itie u$h a &ana"e&ent/ re(ie+ o# +hether !an* re$on$iliation are !ein" 're'ared on a ti&el% !a i , internal auditor / e(aluation o# ale 'er onnel/ $o&'lian$e +ith the entit%/ 'oli$ie on ter& o# ale $ontra$t , and a le"al de'art&ent/ o(er i"ht o# $o&'lian$e +ith the entit%/ ethi$al or !u ine 'ra$ti$e 'oli$ie ) Inherent Li&itation o# Internal Control

1. Mana"e&ent/ u ual re6uire&ent that the $o t o# an internal $ontrol doe not e3$eed the e3'e$ted !ene#it 2. 3. 4. 5. 6.
to !e deri(ed) Mo t internal $ontrol tend to !e dire$ted at routine tran a$tion rather than non9routine tran a$tion ) The 'otential #or hu&an error due to $arele ne , di tra$tion, &i ta*e o# 0ud"&ent and the &i under tandin" o# in tru$tion ) The 'o i!ilit% o# $ir$u&(ention o# internal $ontrol throu"h the $ollu ion o# a &e&!er o# &ana"e&ent or an e&'lo%ee +ith 'artie out ide or in ide the entit%) The 'o i!ilit% that a 'er on re 'on i!le #or e3er$i in" an internal $ontrol $ould a!u e that re 'on i!ilit%, #or e3a&'le, a &e&!er o# &ana"e&ent o(erridin" an internal $ontrol) The 'o i!ilit% that 'ro$edure &a% !e$o&e inade6uate due to $han"e in $ondition , and $o&'lian$e +ith 'ro$edure &a% deteriorate)

A$$ountin" and Internal Control A e &ent 1t :nder tandin" o# a$$ountin" and internal $ontrol % te& 2nd Plan the a e ed le(el o# $ontrol ri * 3rd Per#or&an$e o# te t o# $ontrol -i# a''ro'riate. 4th Rea e &ent o# $ontrol ri * 5th 5inal a e &ent o# $ontrol ri * -1 t. :nder tandin" o# A$$ountin" and Internal Control S% te& In the audit o# #inan$ial tate&ent , the auditor i onl% $on$erned +ith tho e 'oli$ie and 'ro$edure +ithin the a$$ountin" and internal $ontrol % te& that are rele(ant to the #inan$ial tate&ent a ertion ) The under tandin" o# rele(ant a 'e$t o# the a$$ountin" and internal $ontrol % te& , to"ether +ith the inherent and $ontrol ri * a e &ent and other $on ideration , +ill ena!le the auditor to1 -a. identi#% the t%'e o# 'otential &aterial &i tate&ent that $ould o$$ur in the #inan$ial tate&ent 2 (b) $on ider #a$tor that a##e$t the ri * o# &aterial &i tate&ent 2 and (c) de i"n a''ro'riate audit 'ro$edure ) The nature, ti&in" and e3tent o# the 'ro$edure 'er#or&ed !% the auditor to o!tain an under tandin" o# the a$$ountin" and internal $ontrol % te& +ill (ar% +ith, a&on" other thin" 1 The i,e and $o&'le3it% o# the entit% and o# it $o&'uter % te&) Materialit% $on ideration ) The t%'e o# internal $ontrol in(ol(ed) The nature o# the entit%/ do$u&entation o# 'e$i#i$ internal $ontrol ) The auditor/ a e &ent o# inherent ri *) E3'erien$e "ained #ro& 'rior audit )

1. 2. 3. 4.

Procedures in )%taining *nderstanding Ma*e in6uirie o# a''ro'riate $o&'an% 'er onnel In 'e$t do$u&ent and re$ord O! er(e the $o&'an%/ a$ti(itie and o'eration ;al*9throu"h

Page + of 13 ,ocumentation of *nderstanding The auditor hould do$u&ent hi under tandin" o# internal $ontrol) The e3tent o# do$u&entation i a &atter o# the CPA/ 0ud"&ent and the #or& o# do$u&entation de'end u'on hi 're#eren$e and *ill ) 1 5lo+$hart ) Narrati(e de $ri'tion 3) 2 Che$*li t ) Internal $ontrol 6ue tionnaire -IC<. 4) -2nd. Preli&inar% A e &ent o# Control Ri * The 'reli&inar% a e &ent o# $ontrol ri * i the 'ro$e o# e(aluatin" the e##e$ti(ene o# an entit%/ a$$ountin" and internal $ontrol % te& in 're(entin" or dete$tin" and $orre$tin" &aterial &i tate&ent ) There +ill al+a% !e o&e $ontrol ri * !e$au e o# the inherent li&itation o# an% a$$ountin" and internal $ontrol % te&) A#ter o!tainin" an under tandin" o# the a$$ountin" and internal $ontrol % te& , the auditor hould &a*e a 'reli&inar% a e &ent o# $ontrol ri *, at the a ertion le(el, #or ea$h &aterial a$$ount !alan$e or $la o# tran a$tion ) The auditor ordinaril% a e e $ontrol ri * at a hi"h le(el #or o&e or all a ertion +hen1 (a) the entit%/ a$$ountin" and internal $ontrol % te& are not e##e$ti(e2 or (b) e(aluatin" the e##e$ti(ene o# the entit%/ a$$ountin" and internal $ontrol % te& +ould not !e e##i$ient) The 'reli&inar% a e &ent o# $ontrol ri * #or a #inan$ial tate&ent a ertion hould !e hi"h unle the auditor1 (a) i a!le to identi#% internal $ontrol rele(ant to the a ertion +hi$h are li*el% to 're(ent or dete$t and $orre$t a &aterial &i tate&ent2 and (b) 'lan to 'er#or& te t o# $ontrol to u''ort the a e &ent) -3rd. Te t o# Control I# a''ro'riate, te t o# $ontrol are 'er#or&ed to o!tain audit e(iden$e a!out the e##e$ti(ene o# the1 (a) design o# the a$$ountin" and internal $ontrol % te& , that i , +hether the% are uita!l% de i"ned to 're(ent or dete$t and $orre$t &aterial &i tate&ent 2 and (b) operation o# the internal $ontrol throu"hout the 'eriod) Procedures for Performing -ests of Controls 1 3 ) In 'e$tion ) O! er(ation 2 4 ) In6uir% ) Re'er#or&an$e Re.uired ,ocumentation A e 4i"h -Ma3i&u&. Re6uired Re6uired Re6uired Not re6uired ed Control Ri * Le than hi"h -=elo+ Ma3i&u&. Re6uired Re6uired Not re6uired Re6uired

5)

;al*9throu"h

:nder tandin" o# ICS Te t o# Control A e &ent o# Control Ri * Rea on #or a e &ent

-4th. Rea e &ent o# $ontrol ri * =a ed on the re ult o# the te t o# $ontrol, the auditor hould e(aluate +hether the internal $ontrol are de i"ned and o'eratin" a $onte&'lated in the 'reli&inar% a e &ent o# $ontrol ri *) The e(aluation o# de(iation &a% re ult in the auditor $on$ludin" that the a e ed le(el o# $ontrol ri * need to !e re(i ed) In u$h $a e , the auditor +ould &odi#% the nature, ti&in" and e3tent o# 'lanned u! tanti(e 'ro$edure ) -5th. 5inal A e &ent o# Control Ri * =e#ore the $on$lu ion o# the audit, !a ed on the re ult o# the u! tanti(e 'ro$edure and other audit e(iden$e o!tained !% the auditor, the auditor hould $on ider +hether the a e &ent o# $ontrol ri * i $on#ir&ed)

Page / of 13 Co&&uni$ation o# ;ea*ne e A a re ult o# o!tainin" an under tandin" o# the a$$ountin" and internal $ontrol % te& and te t o# $ontrol, the auditor &a% !e$o&e a+are o# +ea*ne e in the % te& ) The auditor hould &a*e &ana"e&ent a+are, a oon a 'ra$ti$al and at an a''ro'riate le(el o# re 'on i!ilit%, o# &aterial +ea*ne e in the de i"n or o'eration o# the a$$ountin" and internal $ontrol % te& , +hi$h ha(e $o&e to the auditor/ attention) The $o&&uni$ation to &ana"e&ent o# &aterial +ea*ne e +ould ordinaril% !e in +ritin" ) 4o+e(er, i# the auditor 0ud"e that oral $o&&uni$ation i a''ro'riate, u$h $o&&uni$ation +ould !e do$u&ented in the audit +or*in" 'a'er ) It i i&'ortant to indi$ate in the $o&&uni$ation that onl% +ea*ne e +hi$h ha(e $o&e to the auditor/ attention a a re ult o# the audit ha(e !een re'orted and that the e3a&ination ha not !een de i"ned to deter&ine the ade6ua$% o# internal $ontrol #or &ana"e&ent 'ur'o e ) M:LTIPLE C4OICE <:ESTIONS

1. A$$ordin" to PSA 400, +hi$h o# the #ollo+in" i $orre$t re"ardin" internal $ontrol % te&> a. Internal $ontrol % te& re#er to all the 'oli$ie and 'ro$edure ado'ted !% the auditor to a i t in b. c. d.
a$hie(in" &ana"e&ent/ o!0e$ti(e) A tron" en(iron&ent, !% it el#, en ure the e##e$ti(ene o# the internal $ontrol % te&) In t e a!dit o" "inan#ia$ state%ents& t e a!ditor is on$' #on#erned (it t ose po$i#ies and pro#ed!res (it in t e a##o!nting and interna$ #ontro$ s'ste%s t at are re$e)ant to t e "inan#ia$ state%ents* The internal $ontrol % te& i $on#ined to tho e &atter +hi$h relate dire$tl% to the #un$tion o# the a$$ountin" % te&)

2. ;hi$h o# the #ollo+in" i $orre$t a!out internal $ontrol> a. A$$ountin" and internal $ontrol % te& 'ro(ide &ana"e&ent +ith $on$lu i(e e(iden$e that o!0e$ti(e
are rea$hed)

b. One o" t e in erent $i%itations o" a##o!nting and interna$ #ontro$ s'ste%s is t e possi+i$it' t at c. d.
t e pro#ed!res %a' +e#o%e inade,!ate d!e to # anges in #onditions& and #o%p$ian#e (it pro#ed!res %a' deteriorate* Mo t internal $ontrol tend to !e dire$ted at non9routine tran a$tion ) Mana"e&ent doe not $on ider $o t o# the a$$ountin" and internal $ontrol % te& )

3. Cor'orate dire$tor , &ana"e&ent, e3ternal auditor , and internal auditor all 'la% i&'ortant role in $reatin"
a 'ro'er $ontrol en(iron&ent) To' &ana"e&ent i 'ri&aril% re 'on i!le #or a. Esta+$is ing a proper en)iron%ent and spe#i"'ing o)era$$ interna$ #ontro$* b. Re(ie+in" the relia!ilit% and inte"rit% o# #inan$ial in#or&ation and the &ean u ed to $olle$t and re'ort u$h in#or&ation) c. En urin" that e3ternal and internal auditor ade6uatel% &onitor the $ontrol en(iron&ent) d. I&'le&entin" and &onitorin" $ontrol de i"ned !% the !oard o# dire$tor )

4. ;hi$h o# the #ollo+in" !e t de $ri!e the interrelated $o&'onent o# internal $ontrol> a. Or"ani,ational tru$ture, &ana"e&ent 'hilo o'h%, and 'lannin") b. Contro$ en)iron%ent& ris- assess%ent& #ontro$ a#ti)ities& in"or%ation and #o%%!ni#ation
s'ste%s& and %onitoring*

c. Ri * a e &ent, !a$*u' #a$ilitie , re 'on i!ilit% a$$ountin" and natural la+ ) d. Le"al en(iron&ent o# the #ir&, &ana"e&ent 'hilo o'h%, and or"ani,ational tru$ture) 5. In an audit o# #inan$ial tate&ent , an auditor/ 'ri&ar% $on ideration re"ardin" a $ontrol i +hether it a. Re#le$t &ana"e&ent/ 'hilo o'h% and o'eratin" t%le) b. A""e#ts %anage%ent.s "inan#ia$ state%ent assertions* c. Pro(ide ade6uate a#e"uard o(er a$$e to a et ) d. Enhan$e &ana"e&ent/ de$i ion9&a*in" 'ro$e e ) 6. E##e$ti(e internal $ontrol a. Eli&inate ri * and 'otential lo to the or"ani,ation) b. Cannot !e $ir$u&(ented !% &ana"e&ent) c. I una##e$ted !% $han"in" $ir$u& tan$e and $ondition en$ountered !% the or"ani,ation)

Red!#es t e need "or %anage%ent to re)ie( e/#eption reports on a da'0to0da' +asis* Page 0 of 13

7. ;hi$h o# the #ollo+in" tate&ent a!out internal $ontrol i $orre$t> a. Pro'erl% &aintained internal $ontrol rea ona!l% a ure that $ollu ion a&on" e&'lo%ee $annot o$$ur) b. E ta!li hin" and &aintainin" internal $ontrol i the internal auditor/ re 'on i!ilit%) c. E3$e'tionall% tron" $ontrol allo+ the auditor to eli&inate u! tanti(e te t ) d. T e #ost0+ene"it re$ations ip s o!$d +e #onsidered in designing interna$ #ontro$* 8. The ulti&ate 'ur'o e o# a e in" $ontrol ri * i to $ontri!ute to the auditor/ e(aluation o# the ri * that a. Te t o# $ontrol &a% #ail to identi#% $ontrol rele(ant to a ertion ) b. 1ateria$ %isstate%ents %a' e/ist in t e "inan#ia$ state%ents* c. S'e$i#ied $ontrol re6uirin" e"re"ation o# dutie &a% !e $ir$u&(ented !% $ollu ion) d. Entit% 'oli$ie &a% !e o(erridden !% enior &ana"e&ent) 9. A 'ro'er under tandin" o# the $lient/ internal $ontrol i an inte"ral 'art o# the audit 'lannin" 'ro$e ) The
re ult o# the under tandin" a. Mu t !e re'orted to the hareholder and the SEC) b. =ear no relation hi' to the e3tent o# u! tanti(e te tin" to !e 'er#or&ed) c. Are not re'orted to $lient &ana"e&ent) d. 1a' +e !sed as t e +asis "or (it dra(ing "ro% an a!dit engage%ent*

10. An entit% hould $on ider the $o t o# a $ontrol in relation hi' to the ri *) ;hi$h o# the #ollo+in" $ontrol !e t a. b. c. d.
re#le$t thi 'hilo o'h% #or a lar"e 'e o in(e t&ent in hea(% &a$hine tool > Condu$tin" a +ee*l% 'h% i$al in(entor%) Pla$in" e$urit% "uard at e(er% entran$e 24 hour a da%) I%printing a #ontro$$ed identi"i#ation n!%+er on ea# too$* 4a(in" all di 'o ition a''ro(ed !% the (i$e 're ident o# ale )

11. Audit e(iden$e $on$ernin" e"re"ation o# dutie ordinaril% i !e t o!tained !% a. Per#or&in" te t o# tran a$tion that $orro!orate &ana"e&ent/ #inan$ial tate&ent a ertion b. O+ser)ing t e e%p$o'ees as t e' app$' spe#i"i# #ontro$s* c. O!tainin" a #lo+$hart o# a$ti(itie 'er#or&ed !% a(aila!le 'er onnel) d. 7e(elo'in" audit o!0e$ti(e that redu$e $ontrol ri *) 12. ;hi$h o# the #ollo+in" tate&ent a!out 'reli&inar% a e &ent o# $ontrol ri * i $orre$t> a. A#ter o!tainin" an under tandin" o# the a$$ountin" and internal $ontrol % te& , the auditor hould b. c. d.
&a*e a 'reli&inar% a e &ent o# $ontrol ri * , at the a ertion le(el, #or all a$$ount or tran a$tion $la e ) The 'reli&inar% a e &ent o# $ontrol ri * $an !e done onl% a#ter $o&'letin" te t o# $ontrol ) The 'reli&inar% a e &ent o# $ontrol ri * #or a #inan$ial a ertion i nor&all% lo+, unle the auditor i a!le to identi#% +ea*ne e that &a% indi$ate ine##e$ti(ene o# a$$ountin" and internal $ontrol % te&) T e a!ditor ordinari$' assesses #ontro$ ris- at ig $e)e$ "or so%e or a$$ assertions ( en it is not #ost e""i#ient to do tests o" #ontro$s*

13. ;hi$h o# the #ollo+in" tate&ent $on$ernin" $ontrol ri * i $orre$t> a. ;hen $ontrol ri * i at the &a3i&u& le(el, an auditor i re6uired to do$u&ent the !a i #or that
a e &ent)

b. Control ri * &a% !e a e ed u##i$ientl% lo+ to eli&inate u! tanti(e te tin" #or i"ni#i$ant tran a$tion c. d.
$la e ) ;hen a e in" $ontrol ri *, an auditor hould not $on ider e(iden$e o!tained in 'rior audit a!out the o'eration o# $ontrol ) Assessing #ontro$ ris- and o+taining an !nderstanding o" an entit'.s interna$ #ontro$ %a' +e per"or%ed #on#!rrent$'*

14. =a ed on a $on ideration o# internal $ontrol $o&'leted at an interi& date, the auditor a e ed $ontrol ri *
at a lo+ le(el and 'er#or&ed interi& u! tanti(e te t ) The re$ord and 'ro$edure +ould &o t li*el% !e te ted a"ain at %ear9end i# a. Te t o# $ontrol +ere not 'er#or&ed !% the internal auditor durin" the re&ainin" 'eriod) b. Internal $ontrol 'ro(ide a !a i #or li&itin" the e3tent o# u! tanti(e te tin") c. The auditor u ed non tati ti$al a&'lin" durin" the interi& 'eriod te tin" o# $ontrol ) d. In,!iries and o+ser)ations $ead t e a!ditor to +e$ie)e t at #onditions a)e # anged*

Page 1 of 13

15. Althou"h u! tanti(e te t &a% u''ort the a$$ura$% o# underl%in" re$ord , the e te t #re6uentl% 'ro(ide
no a##ir&ati(e e(iden$e o# e"re"ation o# dutie !e$au e a. Su! tanti(e te t rarel% "uarantee the a$$ura$% o# the re$ord i# onl% a 'er on +ho 'er#or& in$o&'ati!le #un$tion ) b. T e re#ords %a' +e a##!rate e)en t o!g t e' are %aintained +' a person ( o per"or%s in#o%pati+$e "!n#tions* c. Su! tanti(e te t relate to the entire 'eriod under audit, !ut te t o# $ontrol ordinaril% are $on#ined to the 'eriod durin" +hi$h the auditor i on the $lient/ 're&i e ) d. Man% $o&'uteri,ed 'ro$edure lea(e no audit trail o# +ho 'er#or&ed the&, o u! tanti(e te t &a% ne$e aril% !e li&ited to in6uirie and o! er(ation o# o##i$e 'er onnel)

16. A#ter o!tainin" an under tandin" o# internal $ontrol and a e in" $ontrol ri *, an auditor de$ided not to
'er#or& additional te t o# $ontrol ) The auditor &o t li*el% $on$luded that the

a. Additiona$ e)iden#e to s!pport a "!rt er red!#tion in #ontro$ ris- (as not #ost0+ene"i#ia$ to b. c. d.
o+tain* A e ed le(el o# inherent ri * e3$eeded the a e ed le(el o# $ontrol ri *) Internal $ontrol +a 'ro'erl% de i"ned and 0u ti#ia!l% &a% !e relied on) E(iden$e o!taina!le throu"h te t o# $ontrol +ould not u''ort an in$rea ed a e ri *)

&ent o# $ontrol

17. The o!0e$ti(e o# te t o# detail o# tran a$tion 'er#or&ed a te t o# $ontrol i to a. Monitor the de i"n and u e o# entit% do$u&ent u$h a 'renu&!ered hi''in" #or& b. 7eter&ine +hether $ontrol ha(e !een 'la$ed in o'eration) c. 7ete$t &aterial &i tate&ent in the a$$ount !alan$e o# the #inan$ial tate&ent ) d. E)a$!ate ( et er #ontro$s operated e""e#ti)e$') 18. An auditor +i he to 'er#or& te t o# $ontrol on a $lient/ $a h di !ur e&ent 'ro$edure ) I# the $ontrol
lea(e no audit trail o# do$u&entar% e(iden$e, the auditor &o t li*el% +ill te t the 'ro$edure !% a $ ) Con#ir&ation and o! er(ation) ) Anal%ti$al 'ro$edure and $on#ir&ation) + d * O+ser)ation and in,!ir'* ) In6uir% and anal%ti$al 'ro$edure 1?) ;hi$h o# the #ollo+in" +ould not !e a &ethod u ed to $ondu$t te t o# $ontrol > a ! # ) In6uir% ) ;al*throu"h * Con"ir%ation the e3ten ion ) Thi i an e3a&'le o# a a* !) Test o" #ontro$s Su! tanti(e te t $ ) d ) 7ual 'ur'o e te t Te t o# !alan$e d ) O! er(atio n

20. The auditor i e3a&inin" $o'ie o# ale in(oi$e onl% #or the initial o# the 'er on re 'on i!le #or $he$*in"

21. ;hi$h o# the #ollo+in" t%'e o# e(iden$e +ould an auditor &o t li*el% e3a&ine to deter&ine +hether
$ontrol are o'eratin" a de i"ned> a. Con#ir&ation o# re$ei(a!le (eri#%in" a$$ount !alan$e ) b. Letter o# re're entation $orro!oratin" in(entor% 'ri$in") c. Attorne% / re 'on e to the auditor/ in6uirie ) d. C$ient re#ords do#!%enting t e !se o" #o%p!ter progra%s)

22. ;hi$h o# the #ollo+in" 'ro$edure $on$ernin" a$$ount re$ei(a!le i an auditor &o t li*el% to 'er#or& to
o!tain e(idential &atter in u''ort o# an a re$ei(a!le) e ed le(el o# $ontrol ri * !elo+ the &a3i&u& le(el>

a. Sendin" $on#ir&ation re6ue t to an entit%/ 'rin$i'al $u to&er to (eri#% the e3i ten$e o# a$$ount b. In 'e$tin" an entit%/ anal% i o# a$$ount re$ei(a!le #or unu ual !alan$e ) c. Co&'arin" an entit%/ un$olle$ti!le a$$ount e3'en e to a$tual un$olle$ti!le a$$ount re$ei(a!le) d. O+ser)ing an entit'.s e%p$o'ee prepare t e s# ed!$e o" past d!e a##o!nts re#ei)a+$e* 23. An auditor i lea t li*el% to te t $ontrol that 'ro(ide #or a. C$assi"i#ation o" re)en!e and e/pense transa#tions +' prod!#t $ine b. A''ro(al o# the 'ur$ha e and ale o# tradin" e$uritie c. Se"re"ation o# the #un$tion o# re$ordin" di !ur e&ent and re$on$ilin" the !an* a$$ount d. Co&'ari on o# re$ei(in" re'ort and (endor / in(oi$e +ith 'ur$ha e order

Page 2 of 13

24. In a &all $o&'an% that doe n@t e&'lo% an ade6uate nu&!er o# e&'lo%ee to 'er&it 'ro'er di(i ion o# a. b. c. d.
re 'on i!ilitie , e##e$ti(e internal $ontrol $an !e tren"thened !% Dire#t parti#ipation +' t e o(ner o" t e +!siness in t e re#ord -eeping a#ti)ities o" t e +!siness* E&'lo%&ent o# te&'orar% 'er onnel to aid in the e'aration o# dutie ) 7ele"ation o# #ull, $lear9$ut re 'on i!ilit% to ea$h e&'lo%ee #or the #un$tion a i"ned to ea$h) En"a"in" a CPA to 'er#or& &onthl% A+rite u'A +or*)

25. ;hi$h o# the #ollo+in" i true o# the $o&&uni$ation to &ana"e&ent o# &aterial +ea*ne e in a$$ountin"
and internal $ontrol> a. Co&&uni$ation &u t !e in +ritin") b. Ora$ #o%%!ni#ation o" %ateria$ (ea-nesses& ( en appropriate& (o!$d +e do#!%ented in t e a!dit (or-ing papers* c. The $o&&uni$ation hould indi$ate that the auditor had e3ten i(el% e3a&ined the a$$ountin" and internal $ontrol % te& o# the $lient) d. The auditor hould indi$ate in the $o&&uni$ation that the e3a&ination i 'ri&aril% de i"ned to deter&ine +hether the a$$ountin" and internal $ontrol i ade6uate) <:IBBERS

1. Tran a$tion authori,ation +ithin an or"ani,ation &a% !e either 'e$i#i$ or "eneral) An e3a&'le o# 'e$i#i$ a. b. c. d.
tran a$tion authori,ation i the Appro)a$ o" a #onstr!#tion +!dget "or a ne( (are o!se Settin" o# auto&ati$ reorder 'oint E ta!li h&ent o# a $u to&er/ $redit li&it E ta!li h&ent o# ale 'ri$e

2. Internal $ontrol hould 'ro(ide rea ona!le -!ut not ne$e aril% a! olute. a uran$e +hi$h &ean that1 a. T e #ost o" #ontro$ a#ti)ities s o!$d not e/#eed t e +ene"its* b. Internal $ontrol i &ana"e&ent/ , not auditor/ , re 'on i!ilit%) c. An atte tation en"a"e&ent a!out &ana"e&ent/ internal $ontrol a ertion &a% not ne$e aril% dete$t
all re'orta!le $ondition )

d. There i al+a% a ri * that re'orta!le $ondition &a% re ult in &aterial &i tate&ent ) 3. ;hi$h o# the #ollo+in" tate&ent i an e3a&'le o# an inherent li&itation o# internal $ontrol) a. Errors %a' arise "ro% %ista-es in 2!dg%ents* b. The e##e$ti(ene o# $ontrol 'ro$edure de'end on e"re"ation o# dutie ) c. Pro$edure are de i"ned to a ure that tran a$tion are e3e$uted a &ana"e&ent authoritie ) d. Co&'uter 'ro$e lar"e nu&!er o# tran a$tion ) 4. Pro'er e"re"ation o# #un$tional re 'on i!ilitie $all #or e'aration o# the #un$tion o# a. A!t ori3ation& e/e#!tion& and re#ording* c. Cu tod%, e3e$ution, and re'ortin") b. Authori,ation, e3e$ution, and 'a%&ent) d. Authori,ation, 'a%&ent, and re$ordin") 5. ;hi$h o# the #ollo+in" i a re 'on i!ilit% that hould not !e a i"ned to onl% one e&'lo%ee> a. A##ess to se#!rities in t e #o%pan'.s sa"e deposit +o/* b. Cu todian hi' o# the $a h +or*in" #und) c. Re$on$iliation o# !an* tate&ent) d. Cu todian hi' o# tool and &all e6ui'&ent) 6. ;hi$h o# the #ollo+in" a$ti(itie +ould !e lea t li*el% to tren"then a $o&'an%/ internal $ontrol> a. 1aintaining ins!ran#e "or "ire and t e"t* b. Se'aratin" a$$ountin" #ro& other #inan$ial o'eration ) c. 5i3in" re 'on i!ilit% #or the 'er#or&an$e o# e&'lo%ee dutie ) d. Care#ull% ele$tin" and trainin" e&'lo%ee ) 7. A a. b. c. d.
"enerall% $on$ei(ed, the Caudit $o&&itteeD o# a 'u!li$l% held $o&'an% hould !e &ade u' o# 1e%+ers o" t e +oard o" dire#tors ( o are not o""i#ers or e%p$o'ees* Re're entati(e o# the &a0or e6uit% intere t -!ond , 're#erred to$*, $o&&on to$*.) The audit 'artner, the $hie# #inan$ial o##i$er, the le"al $oun el, and at lea t one out ider) Re're entati(e #ro& the $lient/ &ana"e&ent, in(e tor , u''lier , and $u to&er )

Page 3 of 13

8. ;hen $on iderin" internal $ontrol, the auditor/ 'ri&ar% $on$ern i to deter&ine a. T e re$ia+i$it' o" t e a##o!nting in"or%ation s'ste%* b. The 'o i!ilit% o# #raud o$$urrin") c. Co&'lian$e +ith 'oli$ie , 'lan , and 'ro$edure ) d. The t%'e o# an o'inion he +ill i ue) 9. O# the #ollo+in", the !e t tate&ent o# the CPA/ 'ri&ar% o!0e$ti(e in $on iderin" internal $ontrol i that a. b. c. d.
the re(ie+ i intended to 'ro(ide A +asis "or re$ian#e on t e s'ste% and deter%ining t e s#ope o" ot er a!diting pro#ed!res* Rea ona!le 'rote$tion a"ain t $lient #raud and de#al$ation !% $lient e&'lo%ee ) A !a i #or $on tru$ti(e u""e tion to the $lient #or i&'ro(in" hi internal $ontrol % te&) A &ethod #or en urin" that there i rea ona!le a uran$e that the #inan$ial tate&ent are relia!le)

10. ;hen an auditor a e e $ontrol ri * !elo+ the &a3i&u& le(el, the auditor i re6uired to
do$u&ent the auditor/ =a i #or $on$ludin" that $ontrol Ri * i !elo+ the &a3i&u& le(el a* Yes !) No $) Ee d) No :nder tandin" o# the entit%/ internal $ontrol tru$ture ele&ent Yes No No Ee

11. The e6uen$e o# te' in "atherin" e(iden$e a the !a i o# the auditor/ o'inion i a. Su! tanti(e te t , do$u&entation o# $ontrol tru$ture, and te t o# $ontrol b. Do#!%entation o" #ontro$ str!#t!re& tests o" #ontro$s& and s!+stanti)e tests c. 7o$u&entation o# $ontrol tru$ture, u! tanti(e te t , and te t o# $ontrol d. Te t o# $ontrol , do$u&entation o# $ontrol tru$ture, and u! tanti(e te t 12. In o!tainin" an under tandin" o# an entit%/ internal $ontrol tru$ture, an auditor i re6uired to o!tain
*no+led"e a!out the O'eratin" e##e$ti(ene o# Poli$ie and 'ro$edure Ee No Ee No 7e i"n o# 'oli$ie and 'ro$edure Ee Yes No No

a) +* $) d)

13) ;hi$h o# the #ollo+in" audit te$hni6ue &o t li*el% +ould 'ro(ide an auditor +ith the &o t a uran$e a!out the e##e$ti(ene o# the o'eration on an internal $ontrol 'ro$edure> a) Con#ir&ation +ith out ide 'artie $) Re$o&'utation o# a$$ount !alan$e d +* O+ser)ation o" #$ient personne$ ) In6uir% o# $lient 'er onnel

14. ;hi$h o# the #ollo+in" i the $orre$t order #or 'er#or&in" the auditin" 'ro$edure A throu"h C !elo+
A F Te t o# Control = F Pre'aration o# a #lo+$hart de'i$tin" the $lient/ internal $ontrol tru$ture C F Su! tanti(e te t a) A=C +* 4AC $) AC= d) =CA

15. A#ter $on iderin" a $lient/ internal $ontrol, an auditor ha $on$luded that the % te& i +ell de i"ned and
i #un$tionin" a anti$i'ated) :nder the e $ir$u& tan$e , the auditor +ould &o t li*el% a. Cea e to 'er#or& #urther u! tanti(e te t b. Not in#rease t e e/tent o" p$anned s!+stanti)e tests c. In$rea e the e3tent o# anti$i'ated anal%ti$al 'ro$edure d. Per#or& all te t o# $ontrol to the e3tent outlined in the 're'lanned audit 'ro"ra&

16. A#ter $on iderin" internal $ontrol, an auditor &i"ht de$ide to a. In$rea e the e3tent o# te t o# $ontrol and u! tanti(e te t in area +here internal $ontrol i b. In#rease t e e/tent o" s!+stanti)e tests in areas ( ere interna$ #ontro$ is (ea-

tron"

Redu$e the e3tent o# te t o# $ontrol in area +here internal $ontrol i

tron" Page 14 of 13

d. Redu$e the e3tent o# !oth u! tanti(e te t and te t o# $ontrol in area +here internal $ontrol i
tron"

17. To o!tain an under tandin" o# the rele(ant 'oli$ie and 'ro$edure o# internal $ontrol, the auditor
'er#or& all o# the #ollo+in" e3$e't1 a) +* Ma*e in6uirie Design s!+stanti)e tests a o$iated +ith +hi$h o# the #ollo+in"> a) +* Se'aration o# dutie Understanding t e s'ste% $ ) d ) 5lo+$hart a$$ura$% Te t o# $ontrol $ ) d ) Ma*e o! er(ation In 'e$t do$u&ent and re$ord

18. In an auditor/ $on ideration o# internal $ontrol, the $o&'letion o# a 6ue tionnaire i &o t $lo el%

19. =e#ore rel%in" on the % te& o# internal $ontrol, the auditor o!tain a rea ona!le de"ree o# a uran$e
that the internal $ontrol 'ro$edure are in u e and o'eratin" a 'lanned) The auditor o!tain thi a uran$e !% 'er#or&in" 'lanned $ a) Su! tanti(e te t ) Tran a$tion te t d +* Tests o" #ontro$s ) Te t o# trend and ratio

20. A#ter o!tainin" an under tandin" o# a $lient/ $ontrol , an auditor &a% de$ide to o&it te t o# the $ontrol )
;hi$h o# the #ollo+in" in not a''ro'riate rea on to o&it te t o# $ontrol > a. The $ontrol du'li$ate other $ontrol ) b. T e #ontro$s appear ade,!ate* c. Re'orta!le $ondition 're$lude a e in" $ontrol ri * !elo+ the &a3i&u&) d. The e##ort to te t $ontrol e3$eed the e##ort a(ed !% not 'er#or&in" u! tanti(e te t )

21. In "eneral, a &aterial +ea*ne

in internal $ontrol &a% !e de#ined a a $ondition in +hi$h &aterial error or irre"ularitie &a% o$$ur and not !e dete$ted +ithin a ti&el% 'eriod !% a. An inde'endent auditor durin" te t o# $ontrol ) b. Mana"e&ent +hen re(ie+in" interi& #inan$ial tate&ent and re$on$ilin" a$$ount !alan$e ) c. E%p$o'ees in t e nor%a$ #o!rse o" per"or%ing t eir assigned "!n#tions* d. Out ide $on ultant +ho i ue a 'e$ial9'ur'o e re'ort on internal $ontrol tru$ture)

22. Internal $ontrol 'ro$edure are not de i"ned to 'ro(ide rea ona!le a uran$e that a. Tran a$tion are e3e$uted in a$$ordan$e +ith &ana"e&ent@ authori,ation) b. A$$e to a et i 'er&itted onl% in a$$ordan$e +ith &ana"e&ent@ authori,ation) c. Irreg!$arities (i$$ +e e$i%inated* d. The re$orded a$$ounta!ilit% #or a et i $o&'ared +ith the e3i tin" a et at rea ona!le
inter(al )

23. A e$ondar% 'ur'o e o# the auditor@ $on ideration o# internal $ontrol i to 'ro(ide a. A !a i #or a e in" $ontrol ri *) b. An a uran$e that the re$ord and do$u&ent ha(e !een &aintained in a$$ordan$e +ith
e3i tin" $o&'an% 'oli$ie and 'ro$edure )

c. A +asis "or #onstr!#ti)e s!ggestions a+o!t i%pro)e%ents in interna$ #ontro$ str!#t!re* d. A !a i #or the deter&ination o# the re ultant e3tent o# the te t to +hi$h auditin" 'ro$edure are to
!e re tri$ted)

24. The auditor@ re(ie+ o# the $lient@ internal $ontrol i do$u&ented in order to u! tantiate a. Con#or&it% o# the a$$ountin" re$ord +ith 8AAP) b. Adheren$e to re6uire&ent o# &ana"e&ent) c. Co%p$ian#e (it genera$$' a##epted a!diting standards* d. The #airne o# the #inan$ial tate&ent 're entation) 25. A $on ideration o# internal $ontrol &ade durin" an audit i u uall% not u##i$ient to e3're
an o'inion on an entit%@ $ontrol !e$au e a. ;ea*ne e in the % te& &a% "o unnoti$ed durin" the audit en"a"e&ent) b. A $on ideration o# internal $ontrol i not ne$e aril% &ade durin" an audit en"a"e&ent) c. On$' t ose #ontro$s on ( i# an a!ditor intends to re$' are re)ie(ed& tested& and e)a$!ated*

d. Control $an $han"e ea$h %ear)

Page 11 of 13

26. The a$$ountant@ re'ort e3're in" an o'inion on an entit%@ internal $ontrol hould tate that the a. O!0e$ti(e o# the $lient@ internal $ontrol are !ein" &et) b. Con ideration o# the internal $ontrol +a $ondu$ted in a$$ordan$e +ith "enerall% a$$e'ted c. d.
auditin" tandard ) Esta+$is %ent and %aintenan#e o" interna$ #ontro$ is t e responsi+i$it' o" %anage%ent* Inherent li&itation o# the $lient@ internal $ontrol +ere e3a&ined)

27. The 'ri&ar% o!0e$ti(e o# 'ro$edure 'er#or&ed to o!tain an under tandin" o# internal $ontrol i to 'ro(ide a. b. c. d.
an auditor +ith E(idential &atter to u e in redu$in" dete$tion ri *) A !a i #ro& +hi$h to &odi#% te t o# $ontrol ) 5no($edge ne#essar' to p$an t e a!dit* In#or&ation ne$e ar% to 're'are #lo+$hart ) &ent and Internal Control

PSA 400 G Ri * A e

28. ;hi$h o# the #ollo+in" i not 'art o# the $ontrol en(iron&ent> a. Mana"e&ent 'hilo o'h% and o'eratin" t%le) b. Or"ani,ational tru$ture and &ethod o# a i"nin" authorit% and re 'on i!ilit%) c. In"or%ation and #o%%!ni#ation s'ste%s* d. The #un$tion o# the !oard o# dire$tor and it $o&&ittee ) 29. ;hen o!tainin" an under tandin" o# the a$$ountin" and internal $ontrol % te& the auditor &a% tra$e a
#e+ tran a$tion throu"h the a$$ountin" % te&) Thi te$hni6ue i 1 a # ) Re'er#or&an$e te t * Wa$-0t ro!g test ! d ) Te t o# tran a$tion ) Halidit% te t th #ollo+in" li*el% 30) ;hi$h o# e lea t a##e$t the nature, ti&in", and e3tent o# the 'ro$edure 'er#or&e ! d % the auditor to o!tain an under tandin" o# the a$$ountin" and internal $ontrol % te& o# an audit $lient> a. Materialit% $on ideration b. The auditor/ a e &ent o# inherent ri * c. T e $e)e$ o" a##epta+$e dete#tion risd. The i,e and $o&'le3it% o# the entit% and o# it $o&'uter % te&

31. The e(aluation o# de(iation that +ere o! er(ed u'on $o&'letin" te t o# $ontrol a. Ma% re6uire the need #or doin" &ore e3ten i(e under tandin" o# $ontrol) b. Ma% re6uire &ore e3ten i(e te t o# $ontrol ) c. Al+a% re6uire do$u&entation o# the !a i o# a e &ent o# $ontrol ri *) d. 1a' re,!ire %odi"i#ation o" t e nat!re& ti%ing& and e/tent o" p$anned s!+stanti)e pro#ed!res* 32. The #ollo+in" tate&ent are true a!out o! er(ation +hen u ed a te t o# $ontrol 'ro$edure , e3$e't) a. The auditor &a% u''le&ent hi o! er(ation +ith other te t o# $ontrol $a'a!le o# 'ro(idin" audit
e(iden$e)

b. Audit e(iden$e o!tained !% doin" o! er(ation 'ertain onl% to the 'oint in ti&e at +hi$h the
'ro$edure +a a''lied)

c. O! er(ation o# +ho a''lie a $ontrol 'ro$edure i u e#ul a a te t o# $ontrol 'ro$edure +hen d. 33. Te a. b. c. d. 34. Te a. b. c. d.
e(aluatin" $ontrol e##e$ti(ene o# !oth $o&'uteri,ed and &anual % te& Ordinari$'& %a-ing in,!iries pro)ides %ore re$ia+$e a!dit e)iden#e t an doing o+ser)ation ( en testing segregation o" "!n#tiona$ responsi+i$ities* t o# $ontrol &a% in$lude the #ollo+in", e3$e't1 Re'er#or&an$e o# internal $ontrol 'ro$edure In6uirie a!out, and o! er(ation o#, internal $ontrol +hi$h lea(e no audit trail) In 'e$tion o# do$u&entar% u''ort #or tran a$tion e(iden$in" authori,ation Ana$'ti#a$ pro#ed!res in)o$)ing #o%parison o" operating e/penses (it +!dgeted a%o!nt* t o# $ontrol are 'er#or&ed to o!tain audit e(iden$e a!out the e##e$ti(ene O'eration o# the internal $ontrol at the ti&e the te t are !ein" a''lied) O'eration o# the internal $ontrol in eli&inatin" #raud and error ) 7e i"n o# the internal $ontrol in eli&inatin" #raud and error ) Design o" t e a##o!nting and interna$ #ontro$s s'ste%s* o# the

Page 1! of 13

35. The auditor hould $on ider +hether the a e &ent o# $ontrol ri * i $on#ir&ed a. :'on $o&'letion o# under tandin" o# internal $ontrol) b. :'on $o&'letion o# te t o# $ontrol c. =e#ore the #inal audit 'ro"ra& i $o&'leted) d. Upon t e #on#$!sion o" t e a!dit& +ased on t e res!$ts o" s!+stanti)e pro#ed!res and ot er
a!dit e)iden#e o+tained* PSA 402 G Audit Con ideration Relatin" to Entitie : in" Ser(i$e Or"ani,ation

36. ;hi$h o# the #ollo+in" i lea t li*el% $on idered !% the auditor in deter&inin" the i"ni#i$an$e o# er(i$e a. b. c. d.
or"ani,ation a$ti(itie to the $lient and the rele(an$e to the audit> Ter& o# $ontra$t and relation hi' !et+een the $lient and the er(i$e or"ani,ation) The &aterial #inan$ial tate&ent a ertion that are a##e$ted !% the u e o# the er(i$e or"ani,ation) Client@ internal $ontrol that are a''lied to the tran a$tion 'ro$e ed !% the er(i$e or"ani,ation) T e #ontro$ po$i#ies and pro#ed!res o" t e #$ient o" re,!iring t at a$$ pa'%ents "or goods and ser)i#es +e s!pported +' re#ei)ing reports*

37. ;hen the auditor $on ider that the er(i$e or"ani,ation a$ti(itie are i"ni#i$ant to the $lient and
rele(ant to the audit and he $on$lude that it +ould !e e##i$ient to o!tain audit e(iden$e #ro& te t o# $ontrol to u''ort an a e &ent o# $ontrol ri * at a lo+er le(el) Su$h e(iden$e &a% !e o!tained !%, e3$e't a. Per#or&in" te t o# the $lient@ $ontrol o(er a$ti(itie o# the er(i$e or"ani,ation) b. O!tainin" a er(i$e or"ani,ation auditor@ re'ort that e3're e an o'inion a to the o'eratin" e##e$ti(ene o# the er(i$e or"ani,ation@ a$$ountin" and internal $ontrol % te& #or the 'ro$e in" a''li$ation rele(ant to the audit) c. Hi itin" the er(i$e or"ani,ation and 'er#or&in" te t o# $ontrol) d. Re)ie( t e ser)i#e #ontra#t +et(een t e #$ient and t e ser)i#e organi3ation*

38. ;hi$h tate&ent i in$orre$t re"ardin" the $lient auditor/ u e o# er(i$e or"ani,ation auditor/ re'ort> a. ;hen u in" a er(i$e or"ani,ation auditor/ re'ort, the $lient auditor hould $on ider the nature o#
and $ontent o# that re'ort)

b. The $lient auditor hould $on ider the $o'e o# +or* 'er#or&ed !% the er(i$e or"ani,ation auditor c.
and hould a e the u e#ulne and a''ro'riatene o# re'ort i ued !% the er(i$e or"ani,ation auditor) ;hen a T%'e = re'ort i to !e u ed a e(iden$e to u''ort a lo+er $ontrol ri * a e &ent, a $lient auditor +ould $on ider +hether the $ontrol te ted !% the er(i$e or"ani,ation auditor are rele(ant to the $lient@ tran a$tion - i"ni#i$ant a ertion in the $lient@ #inan$ial tate&ent . and +hether the er(i$e or"ani,ation auditor@ te t o# $ontrol and the re ult are ade6uate) Sin#e T'pe A reports %a' +e !se"!$ to a #$ient a!ditor in gaining t e re,!ired !nderstanding o" t e a##o!nting and interna$ #ontro$ s'ste%s& an a!ditor %a' !se s!# reports as a +asis "or red!#ing t e assess%ent o" #ontro$ ris-*

d.

39. ;hi$h o# the #ollo+in" i the lea t $on$ern o# the $lient auditor in re(ie+in" the re'ort o# er(i$e
or"ani,ation auditor on uita!ilit% o# internal $ontrol de i"n o# the er(i$e or"ani,ation> a. The a$$ura$% o# de $ri'tion o# the er(i$e or"ani,ation@ a$$ountin" and internal $ontrol % te& , ordinaril% 're'ared !% the &ana"e&ent o# the er(i$e or"ani,ation) b. The % te& @ $ontrol ha(e !een 'la$ed in o'eration) c. The a$$ountin" and internal $ontrol % te& are uita!l% de i"ned to a$hie(e their tated o!0e$ti(e ) d. T e t'pe o" do#!%entation o" t e !nderstanding o" t e ser)i#e organi3ation.s #ontro$ s'ste%*

40. ;hi$h o# the #ollo+in" i lea t li*el% entitled to the re'ort o# the er(i$e or"ani,ation auditor on the
uita!ilit% o# the de i"n and o'eratin" e##e$ti(ene a) !) Ser(i$e or"ani,ation/ &ana"e&ent Ser(i$e or"ani,ation/ $u to&er o# the er(i$e or"ani,ation> $ ) Client/ auditor d Ser)i#e organi3ation.s * sto#- o$ders

Page 13 of 13 True or 5al e

1. A 'art o# under tandin" internal, an auditor i not re6uired o!tain *no+led"e a!out the o'eratin"
e##e$ti(ene o# internal $ontrol)

2. A CPA/ $on ideration o# internal $ontrol in a #inan$ial tate&ent audit i u uall% &ore li&ited than that 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.
&ade in $onne$tion +ith an en"a"e&ent to re'ort on &ana"e&ent/ +ritten a ertion a to the e##e$ti(ene o# internal $ontrol) Pro'er e"re"ation o# dutie redu$e the o''ortunitie #or 'er on to !e in 'o ition to 'er'etrate and $on$eal error or #raud) Mana"e&ent/ a""re i(e attitude to+ard #inan$ial re'ortin" and it e&'ha i on &eetin" 'ro0e$ted 'ro#it "oal &o t li*el% +ould i"ni#i$antl% in#luen$e an entit%/ $ontrol en(iron&ent +hen &ana"e&ent i do&inated !% one indi(idual +ho i al o a hareholder) It i i&'ortant #or the auditor to $on ider the $o&'eten$e o# the audit $lient/ e&'lo%ee , !e$au e their $o&'eten$e !ear dire$tl% and i&'ortantl% u'on the a$hie(e&ent o# the o!0e$ti(e o# internal $ontrol) ;hen o!tainin" an under tandin" o# an entit%/ internal $ontrol, an auditor hould $on$entrate on the u! tan$e o# $ontrol rather than their #or& !e$au e &ana"e&ent &a% e ta!li h a''ro'riate $ontrol !ut not a$t on the&) In o!tainin" an under tandin" o# an entit%/ internal $ontrol in a #inan$ial tate&ent audit, an auditor i not o!li"ated to ear$h #or i"ni#i$ant de#i$ien$ie in the o'eration o# internal $ontrol) An inde'endent auditor &i"ht $on ider the 'ro$edure 'er#or&ed !% the internal auditor !e$au e the% are e&'lo%ee +ho e +or* &a% a##e$t the nature, ti&in", and e3tent o# audit 'ro$edure ) Internal $ontrol 'ro$edure are not de i"ned to 'ro(ide rea ona!le a uran$e that irre"ularitie +ill !e eli&inated) ;hen $on iderin" internal $ontrol, an auditor &u t !e a+are o# the $on$e't o# rea ona!le a uran$e, +hi$h re$o"ni,e that $o t o# internal $ontrol 'ro$edure hould not e3$eed the !ene#it e3'e$ted to !e deri(ed #ro& the $ontrol) The auditor/ re(ie+ o# the $lient/ internal $ontrol i do$u&ented in order to u! tantiate $o&'lian$e +ith "enerall% a$$e'ted auditin" tandard ) A#ter o!tainin" an under tandin" o# an entit%/ internal $ontrol , an auditor &a% a e $ontrol ri * at the &a3i&u& #or o&e a ertion !e$au e the auditor !elie(e internal $ontrol a$ti(itie are unli*el% to !e e##e$ti(e) The 'ri&ar% 'ur'o e o# the auditor/ $on ideration o# internal $ontrol i to 'ro(ide a !a i #or deter&inin" the nature, ti&in", and e3tent o# audit te t to !e a''lied) A#ter $on ideration o# a $lient/ internal $ontrol, an auditor &i"ht de$ide to in$rea e the e3tent o# u! tanti(e te tin" in area +here the $ontrol are +ea*) A $on ideration o# internal $ontrol &ade durin" an audit i u uall% not u##i$ient to e3're an o'inion on an entit%/ $ontrol !e$au e onl% tho e $ontrol on +hi$h an auditor intend to rel% are re(ie+ed, te ted, and e(aluated) E(iden$e a!out e"re"ation o# dutie i !e t o!tained !% dire$t 'er onal o! er(ation o# e&'lo%ee +ho 'er#or& $ontrol a$ti(itie ) An auditor/ #lo+$hart o# a $lient/ a$$ountin" % te& i a dia"ra&&ati$ re're entation that de'i$t the auditor/ under tandin" o# the internal $ontrol % te&) The 'ur'o e o# te t o# $ontrol i to 'ro(ide rea ona!le a uran$e that the $ontrol 'ro$edure are #un$tionin" a intended) A#ter do$u&entin" internal $ontrol in an audit en"a"e&ent, the auditor &a% 'er#or& te t on tho e $ontrol that the auditor 'lan to rel% on) The auditor o! er(e $lient e&'lo%ee in order to $orro!orate the in#or&ation o!tained durin" the initial re(ie+ o# the % te&)

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