Question

Every firm has its approach for understanding a client’s internal control structure. Some firms use a standardized internal control questionnaire to evaluate controls that are in place whereas other firms do not rely on internal controls at all and plan their audits as if there are no controls in place or consider them as not effective.

Assume you are training a new team of auditors for your CPA firm. Prepare a PowerPoint presentation to present the pros and cons of each approach. Then, select the approach that your firm uses (that is, the approach you think is best) and explain why. Include the following components in your presentation:

What effect, if any, does the size of the organization have on the decision?

What are the auditing standard requirements for obtaining an understanding of internal controls?

What are the differences, if any, in understanding internal controls for a public company versus a non-public company?

Your presentation should meet the following criteria:

Be 6-8 slides in length, not including the title and references slides.

Answer 1

Slide 1

Title: Strategies to evaluate Internal Control

Slide

Using Standardised Internal Control questionnaire

Pros

-Most suitable in case listed entities audit as the volume of data to be evaluated is huge

-Serves as documentary evidence for internal and external reviews by peer review board, US SEC etc

Cons

-Complex task to develop a standardised internal control questionnaire that serves various clients

-Need to consistently update the questionnaire based on regulatory changes

Slide 3:

Not Rely on Controls

Pros

- Results in increase in substantive audit procedures which gives better comfort to the auditor

-Reduces overall audit risk as not relying on controls would result in   lesser control risk

Cons

-Increase in time taken to complete the audit results in adverse audit efficiency

-Significant control deficiencies affecting the auditors opinion maybe ignored resulting in inappropriate audit opinion

Slide 4:

Approach – As per industry best practice

-Standardised Internal Control Questionnaire is the most suitable approach in evaluating the internal control of a company as it has the flexibility to adapt to both big and small clients

-It is an excellent means of documentation for reviews by regulatory authorities

-It also demonstrate the work done by the auditor for understanding the entities internal control as required by the auditing standards

Slide 5:

Effect of size of the Company and public/non public Company

Size of the organisation would have a significant effect on the design of internal control questionnaire

Eg: A client that is listed would need a lot of points to be included in the questionnaire based on the regulatory requirements which may not be necessary for private or a non listed client

Securities and Exchange Commission has a lot of disclosure requirements for all the companies listed in any stock exchange in the USA.

Slide 6 :

Requirement of Auditing Standard

Auditing Standard No. 12 – Requires the following for understanding the internal control over financial reporting:

The auditor should obtain a sufficient understanding of each component of internal control over financial reporting

(a) identify the types of potential misstatements

(b) assess the factors that affect the risks of material misstatement, and

(c) design further audit procedures

Slide 7:

Requirement of Auditing Standard

•Obtaining an understanding of internal control includes evaluating the design of controls that are relevant to the audit and determining whether the controls have been implemented

•Internal control over financial reporting can be described as consisting of the following components:

- The control environment,

- The company's risk assessment process,

- Information and communication,

- Control activities, and

- Monitoring of controls.