Evaluating Internal Controls Essay Example for Free

Evaluating Internal keep backs EssayAn compositions intrinsic checkers argon comprised of five components, which accept the control environment, venture assessment, control activities, monitoring, and information and communication. The five components of internal control ar considered to be criteria for evaluating an organizations financial insurance coverage controls and the bases for scrutinizeors assessment of control risk as it relates to an organizations financial statements (Lowers, et. al., 2007). Thus, scrutinizeors must consider the five components in terms of (1) understanding a invitees financial reporting controls and documenting that understanding, (2) preliminarily assessing the control risk, and (3) testing the controls, reassessing control risk, and using that assessment to plan the sleep of the visit work (Lowers, et. al., 2007, p. 161).Phase I UnderstandingThroughout the course of Phase I an canvas group provide work to obtain a clear understand ing of a go withs internal control environment and managements risk assessment. The audit squad entrust followup the flow of transactions through the companys accounting system, and the design of some client controlprocedures (Lowers, et.al., 2007). In this step the audit team pass on perform their assessments in a top-down risk-based elbow room that first examines company-level controls (CLCs) and because controls of significant business units within the company (Lowers, et.al., 2007). Controls within the control environment and companywide programs include Managements risk assessment Centralized processing and controls including shared service environments Period-end financial reporting process Controls to monitor results of operations Controls to monitor other controls Board-approved policies that address significant business control and risk management practices (Lowers, et. al., 2007, p. 161). Once the audit team has completed their examination of CLCs the audit team w ill then document their understanding through the use of narrative descriptions or flowcharts. The audit team will then use one of those tools to design a preliminary program of substantive procedures for auditing assertions related to the companys account balances, which is conducted in Phase II (Lowers, et. al., 2007).Phase II AssessmentAfter the audit team has completed Phase I the audit team will move into Phase II or the preliminary assessment of the companys control risks. Throughout the course of Phase II the audit team will analyze the control strengths and weaknesses of the company. A companys strengths are considered as limited features of good general and application controls while its weaknesses are considered as a lack of controls in crabbed areas (Lowers, et. al., 2007). The audit teams findings and preliminary conclusions should then be written up and documented in audit files known as the bridge workpapers.In Phase II the audit team will seek to answer the followi ng questions through its assessment. Can control risk be low or less than maximum? Is reduction of the control risk assessment cost- impelling? Once the audit team arrives at the answers of those questions it will then specify the controls to be tested and the degree of contour required. The distinction between the understanding and documenting phase and the preliminary control risk assessment phase is useful for understanding theaudit work. However, most auditors in practice do the two together, not as separate and distinct audit tasks (Lowers, et. al., 2007).Phase III TestingIn the third and final phase the audit team will then perform tests of controls of the specified controls and reassess control risk. During the testing phase the audit team will seek to answer the question of how the actual degree of company compliance compares with the required degree of compliance with the companys control policies and procedures. The audit team will then document the basis for assessing t he companys control risks, which are less than 100% or assess the companys spirited or maximum control risk and design an audit program for the company with more effective substantive procedures. The audit team will then perform a test on the mean or revised substantive procedures.ConclusionAn effective evaluation of a companys internal controls will provide the company with a reasonable assurance regarding the achievement of its objectives in the following triple categories reliability of financial reporting effectiveness and efficiency of its operations and compliance with applicable laws and regulations.ReferencesLowers, T.J., Ramsay, R.J., Sinason, D. H., Strawser, J.R. (2007). Internal Control and Evaluation. Auditing and Assurance Services. 2nd ed. The McGraw-Hill Companies.New York City, NY.