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Auditing I
Chapter 7 (Auditing Internal Control Over Financial Reporting) Mr. Freddy Loing
Discuss how the terms likelihood and magnitude play a role in evaluating the
significance of a control deficiency.
The auditor should take into account all of the following items when deciding
which locations or business units to test:
• The relative financial significance of each location or business unit.
• The risk of material misstatement arising from each location or business unit.
• The similarity of business operations and internal control over financial
reporting at the various locations or business units.
• The degree of centralization of processes and financial reporting applications.
• The effectiveness of the control environment, particularly
management’s direct control over the exercise of authority delegated to
others and its ability to effectively supervise activities at the various
locations or business units. An ineffective control environment over the
locations or business units might constitute a material weakness.
• The nature and amount of transactions executed and related assets at
the various locations or business units.
• The potential for material unrecognized obligations to exist at a location
or business unit and the degree to which the location or business unit
could create an obligation on the part of the company.
• Management’s risk assessment process and analysis for excluding a
location or business unit from its assessment of internal control over
financial reporting. (AS2, ¶ B10)
Exercise 7-7
How does the auditor evaluate the competence and objectivity of others who perform
work for management?
When evaluating the competence and objectivity of others, the auditor should consider the
following factors:
Competence:
• Their educational level and professional experience.
• Their professional certification and continuing education.
• Practices regarding the assignment of individuals to work areas.
• Supervision and review of their activities.
• Quality of the documentation of their work, including any reports or recommendations
issued.
• Evaluation of their performance.
Objectivity:
• The organizational status of the individuals responsible for the work of others in
testing controls, including—
a. Whether the testing authority reports to an officer of sufficient status to ensure
sufficient testing coverage and adequate consideration of, and action on, the findings
and recommendations of the individuals performing the testing.
b. Whether the testing authority has direct access and reports regularly to the board of
directors or the audit committee.
c. Whether the board of directors or the audit committee oversees employment decisions
related to the testing authority.
• Policies to maintain the individuals’ objectivity about the areas being tested,
including—
a. Policies prohibiting individuals from testing controls in areas in which relatives are
employed in important or internal control sensitive positions.
b. Policies prohibiting individuals from testing controls in areas to which they were recently
assigned or are scheduled to be assigned upon completion of their controls testing
responsibilities. (AS2, ¶119-120)
Exercise 7-10