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Good corporate governance will lead a company to achieve its objectives. This occurs by identifying and taking advantage of opportunities and identifying and managing risks. Control environment: The general environment in which internal control will operate including the attitudes and competence of management and employees of the organization. Risk assessment: The activities the organization performs to identify, assess, and prioritize risks. A breakdown in identifying or prioritizing risk will probably have a negative impact on the performance of the organization.
Control activities: The activities the organization performs to reduce the effect of risk on its performance. The range of possible control activities in any organization is extremely broad and depends on the nature of the environment and risks that are of concern. Information and communications: The production and distribution of information necessary for effective internal control. Monitoring: The oversight of internal control to determine if it is effective.
Though small a community bank can still have a policy on ethical behavior which is conveyed by the leadership and bought into by the employees. Control activities should be particularly tight to safeguard the cash and recording of cash transactions.
Management needs information on deposits, withdrawals, bank charges, loan activity etc. Bank expenses should be compared with budgeted expenses on a periodic basis. Monitoring should be performed by the Board, the management on hand at the bank, and any internal, external, state or federal bank auditors.
Monitoring and auditing are overlapping concepts but are also different concepts. Monitoring as restrictively defined by COSO, reflects an oversight over internal controls. Of course, COSO defines internal control broadly including financial reporting, operations, and compliance. Auditing is also much broader than financial statement auditing including compliance, operational, financial, environmental, fraud, and IT audits. The primary difference in the terms is that audits typically involve a more detailed investigation and scrutiny than is suggested by the term monitoring.
Financial statement audits have traditionally focused on attesting to the financial statements with the evaluation of internal controls being an optional subobjective of that goal. Since Sarbanes Oxley, this is only true for private companies.
Internal controls are typically instituted to maintain and improve existing systems to deal with risks. The Control environment is a critical part of any audit concerned with management fraud. The attitudes and values of upper management and its ability to effectively convey those values to employees and get them to buy into them greatly influences internal control. The Corporate Responsibility Report used AA assurance standard as the criteria for evaluation and was signed by five individuals from presumably independent organizations.
The reviewers of the responsibility report indicated that they inquired with management in obtaining evidence about the report. The audit failures which are highly publicized typically involve management fraud. Recognition of this led the profession to begin assessing the control 3. This requires that the auditor formally consider the nature of the CEO and upper management.
Prior to the promulgation of SAS 55 in , reviews of internal control did not formally consider the possibility that the CEO, who in those times basically appointed the external auditor, could be a fraudster. Assessing the control environment requires an evaluation of the nature of upper management and the corporate culture. What are the attitudes and values of management? Has the leadership developed policies on ethical behavior, disseminated that policy and gotten employees to buy into them?
Do Human Resources have appropriate policies to hire, motivate and retain competent, trustworthy employees. Or is the style more hands-off, which could entail another set of risks? Screening new clients is essential to obtaining a client portfolio with the preferred risk profile.
In the traditional audit, auditors were required to understand and evaluate internal controls but were not required to test or report on them. Internal control testing was utilized for the audit to substitute for substantive testing when the controls were judged to be effective.
Should the auditors find that the controls are effective, they are still able to use tests of controls to justify reduced substantive testing as under traditional audit approaches.
The planning phase has become more significant through time, but it is the evidence gathering phase that is the most expensive and labor intensive.
Internal control as defined by COSO, includes controls over financial reporting, operations, and compliance. Problems 1. Critical business risks of an Internet dating service include the following: New entrants to the market and fierce competition 4.
Controls to mitigate risks: Internal Controls: Managers with integrity Well-controlled database Secure access--password protected, firewalls, etc. Public relations business process Competitor database maintained Research and development business process Targeted marketing to increase probability of client fit External Controls: Private security investigations of client information Assurance service to attest to representations contained in database Paid chaperones to escort clients on first dates Regulations impacting industry practices Information technology consulting to improve database Advertisers encouraging use of website 2.
Strategic risk: a competitor with a well established brand name opens shop across the street Operations risk: Major clients are in an industry that is experiencing a major downturn and business failures. However, because the loss is not probable, the liability is not being accrued. Compliance Risk: The managing partner learns that the engagement partner for Enron, David Dinkins, has just shredded all documents relevant to the investigation.
The answer given will depend on the risk identified. What follows is an example of a hypothetical risk. Suppose they are concerned that they will lose customers due to problems with shipping. Risk Identification: Shipping risk e. Allow them to enter their zip code to precisely determine the shipping cost to them.
Make insurance on the jewelry shipment mandatory. Jewelry cases must have structural integrity and packing material must be adequate. Information Reliability: Have credit card information verified with a credit service or require they use a third-party service e.
Performance Results: Obtain feedback from customers on the quality of the shipment and the cost of handling Reaction by management: If carriers are unreliable which delays shipment, results in damage and returns, or is not competitive costwise, then management should consider other alternatives. IBM Mission Statement: At IBM, we strive to lead in the creation, development, and manufacture of the industry's most advanced information technologies, including computer systems, software, networking systems, storage devices, and microelectronics.
We translate these advanced technologies into value for our 6. Business Objectives: Be recognized as market leader in creating and selling information technology.
Provide expert solutions for information technology issues to customers. Strategic Risk Remaining a leader in the competitive information technology industry is uncertain. If the technology is not cutting edge, demand for its solutions will fall. Customer relationships must be maintained. Still there is always a low risk that they will miss a turn in the road as with the PC.. The solutions proposed might become outdated or the means for communicating these solutions may not be as effective as a competitor.
Food you crave. Comeback value. Customer-focused teams. Business Objectives: Satisfy customer needs for food that is craved. Create loyal customers. Strategic Risks Customer tastes may change Customers may become more fickle with a wider range of competitors.
Auditing: Assurance and Risk
What are the three broad objectives of a traditional audit conducted under generally accepted auditing standards? What fourth broad objective applied to audits of SEC-registered public companies in the United States? Describe three different auditing standards and their source. To achieve effective risk management, what must be recognized about the nature of risks? Define each component.
Auditing Assurance Risk by Robert Knechel
Focusing on auditing as a judgment process, this unique textbook helps readers strike the balance between understanding auditing theory and how an audit plays out in reality. The only textbook to provide complete coverage of both the International Auditing and Assurance Standards Board and the Public Company Accounting Oversight Board, Auditing reflects the contemporary evolution of the audit process. New additions to the book include expert updates on key topics, such as the audit of accounting estimates, group audit, and the Integrated Audit. Supplemented by extra on-line resources, students using this established text will be well-equipped to be effective auditors and to understand the role of auditing in the business world. Robert Knechel is the Frederick E. Steven E.