Accounting: Internal Control and Financial Statement Essay

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Question 2 Primary objective of every business all over the world is to maximize realizable profit. In order to achieve this intention, management of firms are trying to keep efficiency as a principal factor for themselves. Internal control is combination of policies and procedures designed by management to achieve goals of the company (Textbook, 2012). There are 3 main objectives of management to design internal control. Firstly, effective internal control helps management to issue reliable financial statement. Secondly, effective internal controls enhance efficiency of operation in the business. Thirdly, it is requirement of the company to establish and report internal control over financial statement based on Section 404 of Sarbanes-Oxley Act (ibid). Assessment of internal control is essential part of audit which evaluate audit risk in engagement with the company. By doing this, the risks associated with the client’s business, transactions and system which could lead to misstatements in financial statements are analyzed by the auditors; and auditors direct their testing to the risky areas. This question will discuss responsibility of auditor to discover significant deficiencies and material weaknesses in internal control of its clients. As part of their duty, management has responsibilities on internal control over financial statement. Management must design internal control to prevent material misstatement in financial statement. Likewise, it is management‘s responsibility to ensure that internal controls of the company operate effectively. The primary concern of management in internal control is effectiveness of internal control for achieving goals of the company. In order to establish appropriate internal control system, Committee of Sponsoring Organizations (COSO) issued Internal Control-Integrated Framework (COSO,2011). COSO internal control components help management to design appropriate internal control to efficiently run operations of the business and satisfy investors of the company.
Unlike management, external auditors only responsibility is to express opinion regarding the truth and fairness of information presented in the financial statements . According to the second field work standard of GAAS, auditor is responsible for understanding and testing the effectiveness of internal control of the client (Textbook, 2012). There are two primary concerns of CPAs about internal control such as control over reliability of financial reporting and control over classes of transactions. Auditors are concerned about fair representation of financial statement with existing internal control (ibid). Moreover, compliance with regulations of the client is another factor for CPA to understand internal control. After KPMG issued incorrect report about its client, New Century enabled to file Form 10-K. Form 10-K is report required by Security-Exchange Commission about internal control (Jacobs, 2009). In the case of New Century, KPMG could not appropriately assess the effectiveness of internal controls operating within the company. Another concern of auditor in assessment of internal control is classes of transaction. Auditors draw attention to classes of transaction, because accuracy of balances highly depend on accuracy of transactions (Textbook, 2012). Therefore, auditor are mostly focused on transaction related objectives. In order to issue opinion on internal control of client‘s financial reporting auditor must go through process of understanding of internal control. Understanding internal control is one of steps for auditor to determine sample size. International Standard on Auditing 530 require auditor to determine appropriate sample size to reduce sampling– detections risk (ISA 530, 2009). Therefore, understanding of clients internal control system will influence other steps on conducting audit. According to Textbook (2012) there are 4 general phases for auditor to reach understanding of internal control…