1. Learning Objectives
LO1 Distinguish between management and auditor’s responsibilities regarding an auditee organization’s internal controls. LO2 Explain why the auditor evaluates an auditee’s internal controls. LO3 Define seven internal control objectives, relating them to the assertions in management’s financial statements. LO4 Describe general and application control activities found in an accounting information system.

2. Control Objectives There are seven control objectives.
Each control objective is intended to prevent a class of errors that may lead to material misstatement.
LO3

3. Control Objectives and Financial Statement Assertions
Control objectives are closely associated with management’s assertions.
LO3

4. Control Objectives and Financial Statement Assertions
An auditor may determine that not all of the control objectives are met for a particular account balance.
More substantive work will be required in those areas. This can be seen in the audit risk model AR = IR X CR X DR.
LO3

5. Phases of a Control Evaluation
The process of control evaluation takes place in three phases:
Understanding control
Assessing control risk
Testing Controls
A major audit goal is to be efficient. This means performing work in minimum time and cost while still doing high quality work.
LO3

6. Audit Cost Trade-off
Generally, the more auditors can rely on good internal controls, the less substantive work they need to do.
Auditor can opt not to rely on controls, and do extensive substantive procedures.
Auditor can perform a complete evaluation of control, assess control risk to be low, and minimize the substantive procedures.
Auditor needs to determine the most efficient mix of control and substantive procedures.
LO3

7. Audit Cost Trade-off
LO3

8. Phase 1 – Understanding the Internal Control
Understanding the internal controls:
Needs to be done early in the audit.
Obtain overall acquaintance with:
Control environment,
Flow of transactions, and
Effectiveness of key control procedures.
LO3