Evaulate the extent to whether the public limited company’s evaluation and testing of systems of internal control are normally more important than the yearly external audit
Intro:
– Overall definition of internal control systems and annual external audit. Summary of internal control systems evaluation and testing and external audit
Main:
– Outline objectives of internal control systems complying with laws and regulations, reliability of financial reporting, efficiency and effectiveness, assets being safeguarded, commitment towards management policies and requirements
– Outline – auditing understanding control risks and internal controls of client
– Importance of internal control – assets and records and safeguarded, agency responsibilities, efficiency and effectiveness maintained, decision making, controlling processes
– Components of internal control – control environment (foundation of effectiveness, attitudes, awareness, policies, communication, ethical values, competence commitment, participation when charged in governance, operating style and management philosophy, assigned authority and responsibilities, human resource practices and policies), entities risk assessment (identifying, evaluating to business risks and results), entity’s information systems and business processes (accounting systems, processing maps, job systems, maintain accountability), control activities (policies and steps to ensure management directives), monitoring controls (quality over time, evaluation of design and operations overall)
– Communication of material weakness of internal controls – requires to report material weaknesses to appropriate level of management
– Internal Test controls – designed for effectiveness of contols or policies – test control audit procedures include: appropriate client personnel, inspections of performance, policy and procedure of reports, media and documents, application observation of policy procedure, reperformance of policy and procedure by auditor, block testing, tests of reliability of budgets from managment.
– Limitations:
– Internal control can he faulty, inadequate changes of circumstances, human error
– controls ineffective if people circumvent a control or management overrides controls
– management recognizes risks of assets but doesn’t judge or implement controls if they are too expensive
– duties may be ignored or neglected
– humans are not perfect
– For external audits – honesty and human error
Conclusion: Internal controls more important than annual external audit as it ensures reliability overall for financial statements
Annual external audit: https://www.accaglobal.com/ca/en/qualifications/why-acca/competency-framework/job-profiles/advisory-audit-risk-and-assurance/external-auditor.html
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