Question

Research, cite, summarize (in one or two sentences per standard identified) the auditing standards that address auditing firm, CPA’s responsibility in relation to evaluating a company's internal controls. Identify the most relevant paragraph(s) in each standard.

Answer 1

Auditing Standard No. 5 --> An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements Supersedes Auditing Standard No. 2 w.e.f. November 2007.

The auditor's objective in an audit of internal control over financial reporting is to express an opinion on the effectiveness of the company's internal control over financial reporting. Because a company's internal control cannot be considered effective if one or more material weaknesses exist, to form a basis for expressing an opinion, the auditor must plan and perform the audit to obtain appropriate evidence that is sufficient to obtain reasonable assurance about whether material weaknesses exist as of the date.

A direct relationship exists between the degree of risk that a material weakness could exist in a particular area of the company's internal control over financial reporting and the amount of audit attention that should be devoted to that area. In addition, the risk that a company's internal control over financial reporting will fail to prevent or detect misstatement caused by fraud usually is higher than the risk of failure to prevent or detect error. The auditor should focus more of his or her attention on the areas of highest risk. On the other hand, it is not necessary to test controls that, even if deficient, would not present a reasonable possibility of material misstatement to the financial statements.

The auditor should design his or her testing of controls to accomplish the objectives of both audits simultaneously -

• To obtain sufficient evidence to support the auditor's opinion on internal control over financial reporting as of year-end, and
• To obtain sufficient evidence to support the auditor's control risk assessments for purposes of the audit of financial statements.

The size and complexity of the company, its business processes, and business units, may affect the way in which the company achieves many of its control objectives