1. Steps to understanding the ICS (ctrl envt, risk asst, ctrl activities, info and communication, monitoring) BUT FIRST, why do we (auditors) want to obtain an understanding of the ICS? Plan the audit Identify potential misstatements Consider factors that affect the risk of material misstatement (ARM) Design substantive tests (N,T,E)

2. Steps to understanding the ICS OBTAIN AN UNDERSTANDING of the design of the ICS (required by GAAS) Understand the general and pervasive characteristics of the control environment and system – a sufficient enough understanding to plan the audit of the IC procedures. A walkthrough is typically performed

3. Steps to understanding the ICS DOCUMENT THE UNDERSTANDING (required by GAAS) ICQ FC Narrative Memo Decision Tables

4. Steps to understanding the ICS PRELIMINARY/ TEMPORARY ASSESSMENT OF CR (what is CR?) (required by GAAS) CR is high – “CR at max” Don’t rely/ substantive approach ($$$) Document the understanding and conclusion of the ICS but not the basis of our decision to go substantive – why waste time? IC policies and procedures are ineffective and don’t pertain to the FS’s

5. Steps to understanding the ICS CR is low – “CR is below max” Rely/ Need to do TOC’s. This is not the substantive approach ($$$), it is the reliance approach Document the understanding and conclusion of the ICS as well as the basis of our decision to go reliance – it is worth the effort. IC policies and procedures are effective – likely to prevent and detect material misstatements

6. Steps to understanding the ICS TOC’s (not required by GAAS…why?) Hope for an add’l decrease of CR Not looking at ctrl envt, risk asst, info and communication, monitoring, but the Control Activities (optg effectiveness) Not necessarily dealing with $$$ but: –Reperformance –Inquiry –Inspection –Observation (the most effective TOC)

7. Steps to understanding the ICS REASSESS CR to determine an acceptable DR DR = AR/ IR x CR; DR deals w/ the N,T, and E of substantive testing (required by GAAS)

8. Steps to understanding the ICS DOCUMENT the CR assessment Reliance approach: Understanding, conclusion and the basis for the conclusion Substantive approach: Understanding and conclusion Note: you must always conduct some substantive testing: confirm, observe, reconcile, inspect, inquire, APR’s