1. Timing of communication
    Early communication permitted; Written communication no later than 60 days after audit report release date (including matters communicated orally during the audit)
  2. Requirements of Reporting Significant Deficiencies
    • Must communicate the significant deficiencies and material weaknesses identified in the audit
    • May communicate lesser matters
  3. Form and Content of Report on Internal Control Issues
    • Restrict distribution of report
    • Required to be in writing
    • Never states that no significant deficiencies were found
  4. Material Weaknesses
    Deficiency (or combination of deficiencies) in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected on a timely basis.
  5. Significant deficiency
    Deficiency (or combination of deficiencies) in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance
  6. Characteristics of Internal Auditors Auditor Must Assess if Activities Are Deemed Relevant
    • Competence
    • Objectivity
  7. Competence
    • Education
    • Certification
    • Experience
    • Performance evaluations
  8. Objectivity of Internal Auditors
    Level to which internal auditors report (organizational status)
  9. Auditing Procedures when Internal Auditors Provide Direct Assistance
    • Assess internal auditor's competence and objectivity
    • Must supervise, review, evaluate, and test internal auditor's work
    • Independent auditor has final responsibility
  10. Audit Procedures Related to Internal Auditors
    • Inquire about organizational status, access, and professionalism
    • Review documentation of internal auditors' processes
  11. Access to assets and records
    Limited to authorized personnel
  12. Transaction cycles
    1) Revenue/receipts; 2) Expenditures/disbursements; 3) Payroll; 4) Inventory; 5) Fixed assets; 6) Investing/financing
  13. Why group by transaction cycle?
    Control risk is generally assumed to be constant within a category of transactions as all transactions are processed the same way.
  14. Transaction Cycle
    A group of essentially homogeneous transactions
  15. SCARE
    1) Segregation of duties; 2) Comparisons; 3) Access; 4) Records; 5) Execution of transactions
  16. Records Controls in Revenue/Receipts Sales
    • Sales invoices are pre-numbered
    • Shipping documents for outbound shipments are pre-numbered
    • Receivers are pre-numbered
  17. Internal Control Objectives Related to Revenue/Receipts Sales
    • Goods and services provided in accordance with management's orders
    • Terms of sale are in accordance with management's orders
    • Credit terms and limits are properly established
    • Deliveries of goods and services result in accurate and timely billings
    • Sales discounts and billings are in accordance with management's authorization
  18. Comparisons in Revenue/Receipts Sales
    • Aged accounts receivable trial balance to general ledger
    • Monthly statements to customers
    • Sales invoices to sales order to shipping documents
  19. Access Control in Revenue/Receipts Sales
    • Computer passwords limit access
    • Cash receipts are handled by someone without access to accounts receivable record keeping
  20. Segregation of Duties in Revenue/Receipts Sales
    • Independent employee should review customer statements
    • Credit to customers is granted by independent department
    • Returns are accounted for by independent clerk in shipping/ receiving
  21. Execution of Transactions Controls in Revenue/Receipts Sales
    • Management should review terms of sale and note approval
    • Management should establish "general" approval of sales within certain limits and "specifically" approve sales over limits
    • Management should specifically approve all adjusting journal entries
  22. Objectives of Internal Control in Cash Receipts
    • Access to cash receipts records and accounts receivable records is limited to authorized personnel
    • Detailed cash and account balance records are reconciled with control accounts and bank statements monthly
    • All cash receipts are recorded in period received
  23. Access Controls in Cash Receipts Cycle
    • Employees with access to cash should be bonded
    • Access to cash receipts should be limited to those authorized
  24. Segregation of Duties for Cash Receipts
    Handled separately:

    • Opening mail, handling checks received, and preparing remittance listing
    • Making deposit (daily)
    • Applying payments received to customer accounts
    • Preparing bank reconciliation on a timely basis
  25. Comparisons in Cash Receipts Cycle
    • Initial cash receipts listing to total in cash receipts journal to bank deposit
    • Cash accounts reconciled to bank statements by independent person
  26. Execution of Transaction Controls in Cash Receipts
    • Adjusting journal entries should be approved by management
    • Bank reconciliations should be reviewed
  27. Records Controls in Expenditures Cycle
    • Pre-numbered purchase orders
    • Pre-numbered checks
    • Appropriate physical control over unused checks
    • Supporting documents should be canceled as paid
  28. Vouchers Payable System
    Keeps track of individual transactions without summarizing amounts owed by vendor
  29. Segregation of Duties in Expenditure Cycle
    • Separate purchasing department
    • Purchasing personnel independent from receiving and recording
    • Bank reconciliations are prepared by someone not having other involvement in handling cash receipts, disbursements, or record-keeping
  30. Accounts Payable System
    Keeps track of payables by the name of the vendor
  31. Execution of Transaction Controls in Expenditures Cycle
    • All adjusting entries approved by management
    • Only authorized personnel can order goods and services
    • Should indicate received goods before payment
    • Two signatures should be required on checks
  32. Access Controls in Expenditure Cycle
    • Cash disbursement employees should be bonded
    • Access to cash disbursements or related documents should be limited to authorized personnel
  33. Segregation of Duties in the Payroll Cycle
    Following activities should be performed by different people:

    • Establishing and maintaining employee files
    • Timekeeping
    • Payroll preparation
    • Check distribution
    • Reconciling payroll bank account
  34. Records Controls in Payroll Cycle
    • Maintain current and accurate payroll information
    • Pre-numbered payroll checks
    • Separate bank account for payroll transactions
  35. Execution of Transactions Controls in Payroll Cycle
    • Payroll should be authorized by responsible official
    • Computations verified by independent person
    • Overtime payments approved by management
    • Payroll for management appropriately reviewed and approved
  36. Access Controls in the Payroll System
    • Access to personnel files limited to authorized personnel
    • Access to payroll checks limited to authorized personnel
    • Personnel with access to payroll checks should be bonded
  37. Comparisons in Payroll Cycle
    Payroll checks to payroll register
  38. Segregation of Duties in Manufacturing Cycle
    • Separate authorization, bookkeeping (recording), and custody of inventory
    • Sales returns should be counted by receiving clerk and a receiver prepared
  39. Objectives of Internal Controls in Fixed Assets Cycle
    • Transactions recorded in accordance with management's authorization
    • Estimates used to record depreciation, etc. are reasonable
    • Appropriate property insurance in force
    • Supporting details records properly maintained
    • Management approves adjusting journal entries
  40. Objectives of Internal Control in Production/Manufacturing Cycle
    • Resources obtained and used recorded timely
    • Transfers of finished goods recorded timely
    • Related expenditures are appropriately classified
    • Access to inventory restricted
    • Comparison of actual inventory to recorded amounts
  41. Internal Control Objectives in Investing/Financing Cycle
    • Transactions recorded in accordance with management's authorization
    • Investment assets reasonably secure from loss
    • Supporting detailed records maintained and compared to general ledger
    • Management approves adjusting journal entries
  42. Execution of Transaction Controls in Manufacturing Cycles
    • Acquisition and distribution of inventory in accordance with management's authorization
    • Should establish general approval of transactions with specified limits and require specific approval for amounts over limits
    • Any adjusting entries approved by management
  43. Access Controls in Manufacturing Cycle
    Access to physical inventory and to inventory records and documents limited to authorized personnel
  44. Records Controls in Manufacturing Cycle
    • Pre-numbered purchase orders
    • Pre-numbered receivers
    • Consider perpetual inventory system for high dollar items
    • Adequate support for general ledger accounts
  45. Comparison Controls in Manufacturing Cycle
    • Actual inventory to recorded inventory
    • Underlying accounting records to general ledger
Card Set