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. 1

2. Management Versus Auditor Responsibility for Control Management responsibility:  Management is responsible for its control environment, accounting system, and for establishing and maintaining a system of internal control procedures.  Cost of controls is balanced with the benefit of risk reduction LO1 2

3. Internal Control Internal control is defined as:  the process designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations. LO1 3

4. Management Versus Auditor Responsibility for Control External auditor’s responsibility:  Evaluating existing internal controls and assessing the risk of material misstatement related to them.  Find out what an organization does to avoid potential errors and irregularities in seven categories. LO1 4

5. General Categories of Misstatements 1. Invalid transactions are recorded. 2. Valid transactions are omitted. 3. Unauthorized transactions are executed. 4. Transaction amounts are inaccurate. 5. Transactions are classified incorrectly. 6. Transaction accounting is incomplete. 7. Transactions are recorded in incorrect period. LO1 5