The Public Accounting Oversight Board ( PCAOB ) late released scrutinizing standard figure 5 ( AS5 ) which pertains to “ An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audited account of Fiscal Statements ” which establishes certain demands for which an hearer may utilize while executing an audit on their patronages direction appraisal over their internal control processs and the efficiency of those processs. This memo focuses on a narrow portion of the AS5 but is critical in its importance of apprehension and acknowledging the alterations that has been made to it. In this memo I will concentrate on the summarizing of the top down attack to an audit of internal control every bit good as describe to you the differences between a stuff failing and a important lack and the communicating of the audit consequences.
The chief intent of utilizing a top down attack is to do it easy for hearers to take which controls they wish to prove. Based on the hearer ‘s findings by utilizing this attack, they can choose certain controls in which they want to be tested that adequately go to to the hazard of a misstatement. This attack begins with the hearers understanding the hazards that are related with the fiscal coverage on the fiscal statements. Once an apprehension is established, the hearer so focuses their attending on placing entity degree controls.
When placing entity degree controls it is of import to cognize what those controls include. The entity degree controls include such things as: the control environment, the controls over direction override, the companies risk assessment procedure, centralized processing and controls, controls to supervise the consequence of operations, controls to supervise other controls, controls over the period terminal fiscal coverage procedure, and besides policies that address important concern control and hazard direction patterns ( information shown in the AS5 ) . The hearer tests these controls in order to see if the company has an efficient internal control system for their fiscal coverage. An of import thing to observe is that by proving these controls it finally factors in or out extra testing used for other controls. It is besides of import to cognize that entity degree controls vary in character. Some controls indirectly have an consequence on the possibility of observing a misstatement while others are intended for merely that ground, so being able to cognize these controls and how they interact within the internal control environment is a important measure in accurately proving the controls.
Understanding the control environment holds more importance than others in that it straight relates to the effectivity of fiscal coverage. When measuring the environment the hearer needs to pay particular attending to and measure whether there are strong ethical and moral values implemented into the work force, particularly at the direction degree, and whether the direction squad runing manner is embedded throughout the company as an effectual and efficient beginning straight associating to the internal control over fiscal coverage.
Because of its importance in fiscal coverage and internal control, understanding the year-end fiscal coverage procedure is critical. This procedure includes everything from the processs used when you enter a dealing into the general leger all the manner to the readying of the one-year or quarterly fiscal statements and related revelations. The hearer needs to be able to measure the inputs, procedures, and end products in fixing the fiscal statements. Besides deriving an apprehension of IT engagement is of import every bit good as who does what, seting entry processs, location in which everything takes topographic point, and direction inadvertence. Knowing all this will guarantee that the appropriate assessed hazard it being taken attention of.
The following measure is to place important histories and revelations and their relevant averments. A fiscal statement averment is deemed to be relevant if the possible misstatement would do the fiscal statements to be materially misstated. The fiscal statement averments which are present in AS5 are: being or happening, completeness, rating or allotment, rights and duties, and presentation and revelation. In order to place the relevant averments that are in histories and revelations, the hearer must measure the “ qualitative and quantitative hazard factors ” ( AS5 ) that are related to the line points and revelations present on the fiscal statements. Hazard factors that are enlightening in this measure are such things as the size and composing of the history, exposure that a misstatement can happen make to error or fraud, sum and complexness of the minutess that run through the history, the implicit in nature, how complex the history is, exposures to losingss, possibility of contingent liabilities, besides changes in the features of the history. When looking for histories and revelations relevant averments, the hearer should besides be inquiring themselves what could travel incorrect and where, so they can find likely beginnings of potentially misstated fiscal statements that would do the fiscal statements materially misstated. It is of import to observe that the evaluated hazard factors found in placing important histories and revelations and their relevant averments and the audit of internal control over fiscal coverage are the same. With this understanding it will assist to contract down the sum of histories tested and assist convey misstatements to the surface.
There is a batch of judgement that is made by the hearer and so it is extremely recommended that the hearer perform in the audit. If that is non the instance, the hearer should oversee others who carry on the processs. When executing an audit the hearer should put out cardinal aims in which they wish to obtain. Some aims include: deriving an apprehension of how the minutess flow throughout the company relation to the averment, verifying the countries in which the hearer sees that misstatements that are material in affair may happen, doing certain that direction has implemented equal controls to extenuate the hazard of a misstatement, and doing certain direction has implemented sensing and bar controls to catch the hazards at the clip they hit or before in order to salvage the fiscal statements from being misstated. The above mentioned aims serve as a great manner to get down carry oning your audit. Besides, cognizing the clients IT system and how it works improves the assurance in doing a judgement. The most efficient manner to accomplish the aims of the audit is do engage in a walkthrough in which the hearer takes a dealing and follows it through the system from the clip of its beginning into the system to the clip at which it is reflected on the company ‘s fiscal records. Asking forces inquiries along the manner will besides assist to acquire a full position of how the system works and the procedure it takes.
After the hearer has gathered relevant information the last measure is to really prove those controls. The hearer should concentrate on the controls that are of import to his decision about how sufficient the company ‘s controls address each relevant averment. This top down attack is widely used and is really effectual in proving controls to guarantee the dependability a company gives its clients. To recap what I have merely antecedently discussed, the hearer performs this attack by concentrating on the broadest degree in the clients procedures which is the fiscal statements and so works their manner down until you can contract out certain minutess to prove and execute a walkthrough on. This is the kernel of a top down attack.
The following subject in which I would wish to speak about is the difference between a stuff failing and a important lack. A material failing is a lack in internal control over fiscal coverage in which there exists a sensible possibility that a misstatement that is material that will non be detected or prevented in a timely mode on the company ‘s fiscal statements. A important lack is a lack in internal control over fiscal coverage that is non every bit critical as a stuff failing is but is of import plenty for the people who are responsible for fiscal coverage to pay close attending to it. Although both footings are much alike it is hard to measure whether a hazard is terrible plenty to be material in nature or whether it should merely be monitored, therefore it is of import to separate when a possible misstatement is either a material failing or a important lack. Some indexs that allows us to sort a misstatement as stuff are ; if a fraud has been committed by senior direction, no affair how little the discourtesy is, it is ever considered to be material, if issued fiscal statements need to be restated to copy the rectification of a misstatement, if the hearer found a misstatement in the fiscal statements that would otherwise travel undetected, and besides if the audit commission is inefficient in supervising the company. One manner to make up one’s mind whether these indexs are of material failing position is to find whether clients ( investors? ) would alter their heads of holding sensible confidence that the fiscal statements are stated right. If the reply is no, the index is material in nature.
Once the hearer has decided whether the hazards are either a stuff failing or a important lack they must pass on all stuff failings, in written signifier, to the audit commission and direction. The written signifier merely mentioned above should be submitted before the hearer ‘s study on internal control over the fiscal coverage within the company. If the hearer ‘s decision about the inadvertence that the audit commission performs on the company ‘s external and internal control on fiscal coverage is deemed inefficient, the hearer must compose that decision and unwrap it to the board of managers.
As for important lacks, the hearer must pass on these in authorship to the audit commission. The hearer must besides pass on in composing the lacks in internal control over the fiscal coverage procedure that are non material in nature to direction. These communications must be mentioned to the audit commission. All lacks need to be communicated but none have to be repeated. Once a lack is written in communicating, nil else needs to be said about it. Since the hearer ‘s range of what they audit is narrow it is impossible to catch all lacks present, therefore the hearer is entirely responsible for the lacks that they are cognizant of and does non necessitate to observe that there may be a possibility of a lack still bing in the company. In the opportunity of a possible deceitful act being committed the hearer needs to cite their duty to take action under AU sec. 316, AU sec. 317, and Section 10A of the Securities Exchange Act of 1934. Everything antecedently mentioned is communicated to the audit commission.
As for what the audit study communicates, the study must include certain elements. First and foremost the rubric needs to include the word independent. Since an hearer ‘s independency from the company is viewed as holding high importance, it comes to no daze that the study must province the hearer ‘s independency from the client. Next is a statement that says that it is the direction ‘s duty to keep and measure the effectivity of internal control on fiscal coverage. Then, there is the direction ‘s acknowledgment on internal control. After this the hearer has his statement about how it is his duty to give an sentiment on the effectivity of internal control over fiscal coverage that reflects the consequences in his audit. A definition of internal control over fiscal coverage that is stated in AS5 follows following. A statement that says the audit was performed in conformity with the PCAOB criterions is added in after the definition. Next you have a statement that the PCAOB requires the hearer to be after and execute their audit in order to have sensible confidence that the internal control over fiscal coverage was effectual and maintained in all material facets. The study so includes the process the hearer performs in garnering his information, such as their apprehension of internal controls to proving the effectivity of those controls based on assessed hazard. After explicating the process that the hearer performed, the hearer so needs to set in a statement stating their audit is a sensible base for their sentiment. A subdivision needs to province that the audit may non forestall or observe future hazards due to alterations in the environment but instead at a specified day of the month based on the audit the company contained effectual internal controls over fiscal coverage. The hearers house needs to so subscribe it either manually or printed. The metropolis and province of where the audit was conducted demands to be added every bit good as the day of the month of the audit study. Once all these elements are present on the study, the study will be finished.
I hope this memo has been edifying and has given you a better apprehension of certain facets of AS5. Although there is much more information inside the criterion the points I have touched based on above have important value in understanding the audit procedure. Thank you for reading.