審計(jì)學(xué)一種整合方法阿倫斯英文版后答案Chapter10SolutionsManual

1、Chapter 10Section 404 Audits of Internal Controland Control Risk Review Questions10-1Management typically has three broad objectives in designing an effective internal control system.1. Reliability of Financial Reporting Management is responsible for preparing financial statements for investors, cre

2、ditors, and other users. Management has both a legal and professional responsibility to be sure that the information is fairly presented in accordance with reporting requirements such as GAAP. The objective of effective internal control over financial reporting is to fulfill these financial reportin

3、g responsibilities.2. Efficiency and Effectiveness of Operations Controls within an organization are meant to encourage efficient and effective use of its resources to optimize the companys goals. An important objective of these controls is accurate financial and non-financial information about the

4、entitys operations for decision making.3. Compliance with Laws and Regulations Section 404 of the Sarbanes-Oxley Act requires all public companies to issue a report about the operating effectiveness of internal control over financial reporting. In addition to the legal provisions of Section 404, pub

5、lic, nonpublic, and not-for-profit organizations are required to follow many laws and regulations. Some relate to accounting only indirectly, such as environmental protection and civil rights laws. Others are closely related to accounting, such as income tax regulations and fraud. 10-2Management des

6、igns systems of internal control to accomplish three categories of objectives: financial reporting, operations, and compliance with laws and regulations. The auditors focus in both the audit of financial statements and the audit of internal controls is on those controls related to the reliability of

7、 financial reporting plus those controls related to operations and to compliance with laws and regulations objectives that could materially affect financial reporting. 10-3Section 404 requires management of all public companies to issue an internal control report that includes the following: A state

8、ment that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting and An assessment of the effectiveness of the internal control structure and procedures for financial reporting as of the end of the companys fiscal year

9、.10-4Managements assessment of internal control over financial reporting consists of two key components. First, management must evaluate the design of internal control over financial reporting. Second, management must test the operating effectiveness of those controls. When evaluating the design of

10、internal control over financial reporting, management evaluates whether the controls are designed to prevent or detect material misstatements in the financial statements. When testing the operating effectiveness of those controls, the objective is to determine whether the control is operating as des

11、igned and whether the person performing the control possesses the necessary authority and qualifications to perform the control effectively.10-5There are eight parts of the planning phase of audits: accept client and perform initial planning, understand the clients business and industry, assess clie

12、nt business risk, perform preliminary analytical procedures, set materiality and assess acceptable audit risk and inherent risk, understand internal control and assess control risk, gather information to assess fraud risks, and develop an overall audit plan and audit program. Understanding internal

13、control and assessing control risk is therefore part six of planning. Only gathering information to assess fraud risk and developing an overall audit plan and audit program follow understanding internal control and assessing control risk.10-6The second GAAS field work standard states “The auditor mu

14、st obtain a sufficient understanding of the entity and its environment, including its internal controls, to assess the risk of material misstatement of the financial statements whether due to error or fraud and to design the nature, timing, and extent of further audit procedures.” The auditor obtain

15、s the understanding of internal control to assess control risk in every audit and that responsibility is the same for audits of both public and nonpublic companies. Auditors are primarily concerned about controls related to the reliability of financial reporting and controls over classes of transact

16、ions.10-7Section 404 requires that the auditor attest to and issue a report on managements assessment of internal control over financial reporting. To express an opinion on internal controls, the auditor obtains an understanding of and performs tests of controls related to all significant account ba

17、lances, classes of transactions, and disclosures and related assertions in the financial statements. PCAOB Standard 2 requires that the audit report on internal control over financial reporting under Sarbanes-Oxley include the auditors opinion as to whether managements assessment of the design and o

18、perating effectiveness of internal control over financial reporting is fairly stated in all material respects. This involves both evaluating managements assessment process and arriving at the auditors independent assessment of the internal controls design and operating effectiveness. 10-8The six tra

19、nsaction-related audit objectives are:1.Recorded transactions exist (occurrence).2.Existing transactions are recorded (completeness).3.Recorded transactions are stated at the correct amounts (accuracy).4.Recorded transactions are properly included in the master files and correctly summarized (postin

20、g and summarization)._5.Transactions are properly classified (classification).6.Transactions are recorded on the correct dates (timing).10-9COSOs Internal Control-Integrated Framework is the most widely accepted internal control framework in the U.S. The COSO framework describes internal control as

21、consisting of five components that management designs and implements to provide reasonable assurance that its control objectives will be met. Each component contains many controls, but auditors concentrate on those designed to prevent or detect material misstatements in the financial statements. 10-

22、10The COSO Internal Control Integrated Framework consists of the following five components:1. Control environment2. Risk assessment3. Control activities4. Information and communication 5. MonitoringThe control environment serves as the umbrella for the other four components. Without an effective con

23、trol environment, the other four are unlikely to result in effective internal control, regardless of their quality. 10-11The control environment consists of the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal c

24、ontrol and its importance to the entity. The following are the most important subcomponents the control environment: Integrity and ethical values Commitment to competence Board of directors or audit committee participation Managements philosophy and operating style Organizational structure Assignmen

25、t of authority and responsibility Human resource policies and practices10-12Internal control includes five categories of controls that management designs and implements to provide reasonable assurance that its control objectives will be met. These are called the components internal control, and are:

26、 The control environment Risk assessment Control activities Information and communication MonitoringThe control environment is the broadest of the five and deals primarily with the way management implements its attitude about internal controls. The other four components are closely related to the co

27、ntrol environment. Risk assessment is managements identification and analysis of risks relevant to the preparation of financial statements in accordance with GAAP. To respond to this risk assessment, management implements control activities and creates the accounting information and communication sy

28、stem to meet its objectives for financial reporting. Finally, management periodically assesses the quality of internal control performance to determine that controls are operating as intended and that they are modified as appropriate for changes in conditions (monitoring). All five components are ne

29、cessary for effectively designed and implemented internal control.10-13The five categories of control activities are: Adequate separation of dutiesExample: The following two functions are performed by different people: processing customer orders and billing of customers. Proper authorization of tran

30、sactions and activitiesExample: The granting of credit is authorized before shipment takes place. Adequate documents and recordsExample: Recording of sales is supported by authorized shipping documents and approved customer orders. Physical control over assets and recordsExample: A password is requi

31、red before entry into the computerized accounts receivable master file can be made. Independent checks on performanceExample: Accounts receivable master file contents are independently verified.10-14Separation of operational responsibility from record keeping is intended to reduce the likelihood of

32、operational personnel biasing the results of their performance by incorrectly recording information.Separation of the custody of assets from accounting for these assets is intended to prevent misappropriation of assets. When one person performs both functions, the possibility of that persons disposa

33、l of the asset for personal gain and adjustment of the records to relieve himself or herself of responsibility for the asset without detection increases.10-15An example of a physical control the client can use to protect each of the following assets or records is:1.Petty cash should be kept locked i

34、n a fireproof safe.2.Cash received by retail clerks should be entered into a cash register to record all cash received.3.Accounts receivable records should be stored in a locked, fireproof safe. Adequate backup copies of computerized records should be maintained and access to the master files should

35、 be restricted via passwords.4.Raw material inventory should be retained in a locked storeroom with a reliable and competent employee controlling access.5.Perishable tools should be stored in a locked storeroom under control of a reliable employee. 6.Manufacturing equipment should be kept in an area

36、 protected by burglar alarms and fire alarms and kept locked when not in use.7.Marketable securities should be stored in a safety deposit vault.10-16Independent checks on performance are internal control activities designed for the continuous internal verification of other controls. Examples of inde

37、pendent checks include: Preparation of the monthly bank reconciliation by an individual with no responsibility for recording transactions or handling cash. Recomputing inventory extensions for a listing of inventory by someone who did not originally do the extensions. The preparation of the sales jo

38、urnal by one person and the accounts receivable master file by a different person, and a reconciliation of the control account to the master file. The counting of inventory by two different count teams. The existence of an effective internal audit staff.10-17As illustrated by Figure 10-3, there are

39、four phases in the process of understanding internal control and assessing control risk. In the first phase the auditor obtains an understanding of internal controls, which includes an understanding of their design and whether they have been implemented. Next the auditor must make a preliminary asse

40、ssment control risk (phase 2) and perform tests of controls in every audit as part of their integrated audits (phase 3). The auditor uses the results of tests of controls for both the audit report on internal control over financial reporting and to assess control risk and to ultimately decide planne

41、d detection risk and substantive tests for the audit of financial statements, which is phase 4. 10-18Section 404 of the Sarbanes-Oxley Act requires management to document its processes for assessing the effectiveness of the companys internal control over financial reporting. Management must document

42、 the design of controls, including all five control components and also the results of its testing and evaluation. The types of information gathered by management to assess and document internal control effectiveness can take many forms, including policy manuals, flowcharts, narratives, documents, q

43、uestionnaires and other forms that are in either paper or electronic formats. PCAOB Standard 2 requires the auditor10-18 (continued) to evaluate the clients documentation when auditing internal control over financial reporting. The lack of management documentation of internal control over financial

44、reporting may prevent the auditor from concluding that the controls are adequately designed or operating effectively. When documentation is inadequate, the auditor may decide to withdraw from the engagement or to issue a disclaimer of opinion on internal control over financial reporting.10-19When ob

45、taining an understanding of internal control, the auditor must assess two aspects about those controls. First, the auditor must gather evidence about the design of internal controls. Second, the auditor must gather evidence about whether those controls have been implemented.10-20In a walkthrough of

46、internal control, the auditor selects one or a few documents for the initiation of a transaction type and traces them through the entire accounting process. At each stage of processing, the auditor makes inquiries and observes current activities, in addition to examining completed documentation for

47、the transaction or transactions selected. Thus, the auditor combines observation, documentation, and inquiry to conduct a walkthrough of internal control. PCAOB Standard 2 requires the auditor to perform at least one walkthrough for each major class of transactions.10-21A key control is a control th

48、at is expected to have the greatest effect on meeting the transaction-related audit objectives. A control deficiency represents a deficiency in the design or operation of controls that does not permit company personnel to prevent or detect misstatements on a timely basis. A design deficiency exists

49、if a necessary control is missing or not properly designed. An operation deficiency exists if a well designed control does not operate as designed or when the person performing the control is insufficiently qualified or authorized.10-22A significant deficiency exists if one or more control deficienc

50、ies exist that, more than remotely, adversely affect a companys ability to initiate, authorize, record, process, or report external financial statements reliably. A material weakness exists if a significant deficiency, by itself, or in combination with other significant deficiencies, results in a mo

51、re than remote likelihood that internal control will not prevent or detect material financial statement misstatements. The presence of one significant deficiency that is not deemed to be a material weakness may not affect the auditors report. In that instance, the auditors report on internal control

52、 over financial reporting would contain an unqualified opinion. However, if the deficiency is deemed to be a material weakness, the auditor must express an adverse opinion on the effectiveness of internal control over financial reporting.10-23The most important internal control deficiency which perm

53、itted the defalcation to occur was the failure to adequately segregate the accounting responsibility of recording billings in the sales journal from the custodial responsibility of receiving the cash. Regardless of how trustworthy James appeared, no employee should be given the combined duties of cu

54、stody of assets and accounting for those assets.10-24Maier is correct in her belief that internal controls frequently do not function in the manner they are supposed to. However, regardless of this, her approach ignores the value of beginning the understanding of internal control by preparing or rev

55、iewing a rough flowchart. Obtaining an early understanding of the clients internal control will provide Maier with a basis for a decision about further audit procedures and sample sizes based on assessed control risk. By not obtaining an understanding of internal control until later in the engagemen

56、t, Maier risks performing either too much or too little work, or emphasizing the wrong areas during her audit.10-25The extent of controls tested by auditors to express an opinion on internal controls for a public company is significantly greater than that tested solely to express an opinion on the f

57、inancial statements. To express an opinion on internal controls for a public company, the auditor obtains an understanding of and performs tests of controls for all significant account balances, classes of transactions, and disclosures and related assertions in the financial statements. In contrast,

58、 the extent of controls tested by an auditor of a nonpublic company is dependent on the auditors assessment of control risk. Whenever the auditor assesses control risk below maximum, the auditor must perform tests of controls to support that control risk assessment. The auditor will not perform tests of controls when the auditor assesses control risk at maximum. When control risk is assessed below the maximum, the auditor designs and performs a combination of tests of controls and substantive procedures. Thus, for a nonpublic company, the tests of