Evaluating Internal Controls Essay Example for Free

Evaluating Internal Controls EssayAn physical compositions informal overcomes are comprised of five components, which include the make environment, risk assessment, control activities, monitoring, and information and communication. The five components of internal control are considered to be criteria for evaluating an organizations financial insurance coverage controls and the bases for inspectors assessment of control risk as it relates to an organizations financial statements (Lowers, et. al., 2007). Thus, audited accountors must consider the five components in terms of (1) understanding a clients financial reporting controls and documenting that understanding, (2) preliminarily assessing the control risk, and (3) examen the controls, reassessing control risk, and using that assessment to plan the remainder of the audit work (Lowers, et. al., 2007, p. 161). build I UnderstandingThroughout the course of Phase I an audit team exit work to obtain a clear understanding of a companys internal control environment and managements risk assessment. The audit team will review 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 will perform their assessments in a top-down risk-based manner that first examines company-level controls (CLCs) and so controls of significant business units inwardly 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 undefiled their examination of CLCs the audit team will indeed document their u nderstanding 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 specific features of good general and application controls while its weaknesses are considered as a lack of controls in detail 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 following questions through its a ssessment. Can control risk be low or less than maximum? Is reduction of the control risk assessment cost-effective? Once the audit team arrives at the answers of those questions it will then specify the controls to be tested and the degree of compliance 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 troika 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 the companys control ris ks, which are less than 100% or assess the companys richly 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 planned 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 three categories reliability of financial reporting effectiveness and dexterity 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.