Lecture 31 AC312 AUDITING SPRING 2002 Lecture 3. Systems Work and Internal Auditing

Lecture 32 Assessment of Control Risk Understand and evaluate accounting system and control systems, in order to: assess control risk andassess control risk and determine the extent of their substantive testsdetermine the extent of their substantive tests

Lecture 33 Accounting system “ the series of tasks and records of an entity by which transactions are processed as a means of maintaining financial records. Such systems identify, assemble, analyse, calculate, classify, record, summarise and report transactions and events ”

Lecture 34 Internal Control System b Comprises the control environment and control procedures. b It includes all the policies and procedures (internal controls) adopted by the directors and management to assist in achieving the orderly and efficient conduct of the business

Lecture 35 Control Environment  commitment to competence and integrity  communication of ethical values and control consciousness  appropriate organisation structure  appropriate delegation of authority  professional approach to financial reporting

Lecture 36 Basic Rules of Internal Control  segregation of duties  clear responsibilities  physical controls  authorisation and approval  arithmetic controls  personnel controls  supervision controls  management controls

Lecture 37 Recording Accounting and Control Systems  Narrative description  Internal control questionnaire  Flowcharts

Lecture 38 Compliance Testing To satisfy the auditor that internal controls are bring complied with and are effective. Examples include:  walk-through tests  block testing  operating staff at work  re-performance of control procedures  evidence of management reviews

Lecture 39 Internal Auditing Internal auditing is an independent appraisal function, established within an organisation to examine and evaluate its activities as a service to the organisation

Lecture 310 Types of Internal Auditing  Compliance auditing assessment of internal control system and procedures assessment of internal control system and procedures correct accounting treatments correct accounting treatments adequate disclosure in financial statements adequate disclosure in financial statements

Lecture 311 b Operational Auditing concerned with efficiency of whole organisationconcerned with efficiency of whole organisation audit of production, personnel, R & D etcaudit of production, personnel, R & D etc b Management Auditing concerned with effectiveness of managementconcerned with effectiveness of management formulation of objectives and extent to which they have been metformulation of objectives and extent to which they have been met

Lecture 312 b Value for money auditing economy - acquiring inputs at lowest cost and avoidance of unnecessary wasteeconomy - acquiring inputs at lowest cost and avoidance of unnecessary waste efficiency - maximising output from given set of inputs or resourcesefficiency - maximising output from given set of inputs or resources effectiveness - ensuring that activities are achieving organisational objectiveseffectiveness - ensuring that activities are achieving organisational objectives

Lecture 313 Reliance by external auditor on work of internal auditor b Assess effectiveness of internal audit status in organisationstatus in organisation scope of functionscope of function technical competencetechnical competence due professional caredue professional care b Extent of reliance, co-ordinating work b Documenting work of internal auditor

Lecture 314 Outsourcing the Internal Audit Function b Benefits reduce costsreduce costs broader range of experiencebroader range of experience greater independencegreater independence b Problems not available on demandnot available on demand lack of understanding of companylack of understanding of company potential conflict of interestpotential conflict of interest

Lecture 315 AC312 AUDITING SPRING 2002 Lecture 3. Systems Work and Internal Auditing