Chapter 7 – Internal Controls

• Key topics: • Know the broad definition of internal control and its purposes, including the objective that is particularly relevant to an audit (i.e. reliability of financial reporting)
A process, effected by the entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations (effective and efficient operations), reporting (accurate financial reporting) and compliance (compliance with laws and regulations) • Describe the 5 components of internal control, related examples of each, and how each contributes to the overall control system within an entity (CRIME)
1. Control Environment: The foundation for the other internal control components; it is defined by the standards, processes, and structures that guide individuals in carrying out their duties. Basic principles include: Commitment to integrity and ethical values, Board of directors demonstrates independence from management and exercises effective oversight of internal control, Establishment of effective structure, including reporting lines, and appropriate authorities and responsibilities, Commitment to attract, develop, and retain competent employees, and Holding employees accountable for internal control responsibilities.
2. Risk Assessment: Risk assessment is management's process for identifying, analyzing, and responding to risks from internal and external sources that threaten their ability to meet objectives in the areas of operations, reporting, and compliance. In performing effective risk assessment, organizations should: Clearly specify objectives to allow the identification and assessment of risks related to those objectives, Identify and analyze risks to the achievement of its objectives to determine how they may be managed, Consider potential fraud