1. Learning Objectives LO5 Document an accounting system to identify key controls and weaknesses in order to assess control risk. LO6 Write key control tests for an audit program. LO7 Outline the auditor’s responsibility when internal control evaluation work detects or indicates a significant control deficiency or a high risk of fraudulent misstatement. 1

2. Communicating Internal Control Deficiencies Audit standards require the auditor to report weaknesses in controls to an appropriate level of management.  Nontrivial misstatements, fraud, and consequential illegal or possibly illegal acts must also be reported.  These matters are usually communicated to the client in a management letter. LO7 2

3. Communicating Internal Control Weaknesses For some regulators, the auditor will also prepare a well-being report.  Reportable conditions include:  absence of appropriate segregation of duties,  absence of appropriate reviews and approvals of transactions, or  evidence of failure of control procedures. LO7 3

4. Communicating Internal Control Weaknesses For some regulators, the auditor will also prepare a well-being report.  Reportable conditions include:  evidence of intentional management override, or  evidence of willful wrongdoing by employees or management, including manipulation, falsification, or alteration of accounting records. LO7 4

5. Control Objectives and Procedures The overriding objective of control procedures is to process transactions correctly.  This produces correct account balances, which produce correct financial statements. Control objectives are established to ensure transactions are properly recorded. LO7 5

6. Control Evaluation and Reasonable Assurance Control tests and substantive tests are covered as if they are easily distinguishable.  In practice, a single procedure may produce both substantive and control evidence.  These dual purpose tests can help lower the cost of the audit while maintaining effectiveness. LO7 6