Internal Control Evaluation
Internal Control Evaluation
Every business should take the steps necessary to ensure that its internal controls are functioning effectively and efficiently. It is important to have accountability at every level of a business. Creating a checklist to evaluate internal controls will support the business in this effort. According to Louwers, Ramsay, Sinason and Stawser (2007), an internal control questionnaire aide an auditor in gathering evidence about the control environment and accounting and control procedures checking the system for errors. It will reveal if the business is following established controls. It will also identify weaknesses in the controls allowing the business to bring them into compliance before any material misstatements or audit findings are noted. There are five components of an internal control system, and there are three phases of evaluation. “Thus, auditors must consider the five components in terms of (1) understanding a client’s financial reporting controls and documenting that understanding, (2) preliminarily assessing the control risk, and (3) testing the controls, re-assessing control risk, and using that assessment to plan the remainder of the audit work” (Louwers, Ramsay, Sinason, & Stawser, 2007, pg. 161). This paper will provide a detailed discussion on the phases of internal control evaluation and a checklist for evaluating controls will follow the discussion.
Phase One – Understanding Controls
When evaluating internal controls the first step is to gain and understanding of the controls that the business has in place and how the controls are documented. During this phase the culture of the environment is evaluated. Once the auditor understands the environment and controls, a checklist can be created to evaluate the controls which will simplify the testing that will be performed in Phase Three. The auditor must perform a thorough review of controls in Phase One so that the control environment and risk can be
Every business should take the steps necessary to ensure that its internal controls are functioning effectively and efficiently. It is important to have accountability at every level of a business. Creating a checklist to evaluate internal controls will support the business in this effort. According to Louwers, Ramsay, Sinason and Stawser (2007), an internal control questionnaire aide an auditor in gathering evidence about the control environment and accounting and control procedures checking the system for errors. It will reveal if the business is following established controls. It will also identify weaknesses in the controls allowing the business to bring them into compliance before any material misstatements or audit findings are noted. There are five components of an internal control system, and there are three phases of evaluation. “Thus, auditors must consider the five components in terms of (1) understanding a client’s financial reporting controls and documenting that understanding, (2) preliminarily assessing the control risk, and (3) testing the controls, re-assessing control risk, and using that assessment to plan the remainder of the audit work” (Louwers, Ramsay, Sinason, & Stawser, 2007, pg. 161). This paper will provide a detailed discussion on the phases of internal control evaluation and a checklist for evaluating controls will follow the discussion.
Phase One – Understanding Controls
When evaluating internal controls the first step is to gain and understanding of the controls that the business has in place and how the controls are documented. During this phase the culture of the environment is evaluated. Once the auditor understands the environment and controls, a checklist can be created to evaluate the controls which will simplify the testing that will be performed in Phase Three. The auditor must perform a thorough review of controls in Phase One so that the control environment and risk can be
References: Louwers, T., Ramsay, R., Sinason, D., & Strawser, J. (2007). Auditing and Assurance Services: A look beneath the surface (2nd ed.). New York, NY: McGraw-Hill Companies, Inc..