This is an analysis of the Public Company Accounting Oversight Board ‘s ( PCAOB ) Auditing Standard No. 5 ( AS5 ) . The AS5 papers is the most late established set of guidelines for scrutinizing companies ‘ internal controls over their fiscal statements. The undermentioned analysis briefly explains the top-down attack every bit good as contrasting stuff failings and important lacks.
The top-down attack is a systematic attack for assisting the hearers ‘ decide which controls are to be tested. This attack uses a series of cardinal stairss to assist the hearer reach their decision. These stairss are non designed to be in any peculiar order, nevertheless, a specific sequence of these stairss could be more good in certain state of affairss. The stairss include: placing the hazards to internal control, finding the right entity-level controls that fit the hazard, and placing histories and revelations.
The intent of entity-level controls is to do certain the entity, or company, is showing efficient internal control over their fiscal coverage. This entity-level testing consequences may hold an impact on what other controls will be tested by the hearer. Some entity-level controls are more precise than others, and some are quicker than others. The right entity-level control must be selected for the relevant issue. Entity-level controls trade with the control environment. The control environment addresses direction ‘s attitudes and their actions.
This includes direction manner, values, moralss, and corporate civilization. Entity-level besides controls direction ‘s ability to flex the regulations for their personal benefit. It besides controls the procedures for hazard appraisal, operational consequences monitoring, company policies, and period-end fiscal coverage. Period-end fiscal coverage reviews the assorted processs used when fixing fiscal statements.
This includes processs for choosing accounting policies, entering minutess and journal entries into the general leger, and for entering accommodations to fiscal statements. When reexamining the period-end fiscal studies, the hearer looks at informations used to set together fiscal statements, the use of their information engineerings in fixing the statements, who is involved, and locations involved.
Another measure in the top-down attack is the designation of histories and revelations. The relevant averments must besides be identified because these may incorporate the misstatements. Examples of fiscal averments are: completeness, rights and duties, and being or happening.
In order to place histories and revelations, the hearer must measure hazard factors, both qualitative and quantitative, that are related to the revelations and statement line points. Some of these hazard factors include: history size, susceptibleness due to fraud, exposure to losingss, and volume of activity. An hearer should be able to believe of possible beginnings that could do a material misstatement in the fiscal statements.
If an hearer must place likely beginnings of misstatements so they must hold a good apprehension of certain constructs. One construct is understanding minutess and their behaviours such as when it was made and who authorized the dealing. Another construct is that an hearer must hold a good apprehension of the controls created by direction.
This helps when placing possible misstatements. Last, the hearer must understand the function information engineering ( IT ) plays in the minutess. These aims require a good sum of judgement, therefore the hearer should execute these aims themselves or supply direct supervising to those that are making it. Walkthroughs are an effectual manner to execute these aims. By making this, the hearer follows the life rhythm of the dealing, and can derive an apprehension of the procedures used.
When choosing a control to prove an hearer must take merely controls that are relevant to the assessed hazard. There may be more than one control that is relevant, nevertheless, one may impact the hazard more than the other. An hearer needs to do certain they do non prove redundant controls.
Traveling on to contrast material failing and important lacks ; important lacks are lacks found in internal control ‘s fiscal coverage. They are non every bit serious as stuff failings, nevertheless, they still need to be corrected. When a important lack occurs in an entity they are showing their inability to describe informations faithfully and there is a little opportunity that the misstatement will non be detected. A material failing is a important lack, but there is a higher chance that the misstatement will non be detected.
An hearer must follow a set of processs in order to efficaciously pass on the lacks to the right parties. When pass oning a stuff failing, an hearer must make so in composing to both direction and the audit commission. Significant lacks should besides be considered.
If they are identified during the audit so the hearer must pass on this information in composing to the audit commission. All other lacks should besides be reported in the same mode. It is non necessary to reiterate any information from the stuff failing or important lacks. The hearer is merely needed to describe lacks that he or she is cognizant of. All lacks may non be found.
This memo sums up the chief points of the top-down attack found in the PCAOB ‘s AS5, and it besides explains the difference between a stuff failing and a important lack.