Question

1.What are the key considerations when evaluating the design and testing the operating effectiveness of internal controls in conjunction with a financial statement audit? Include considerations in determining what additional audit evidence to obtain about controls that were operating during the rollforward period.

Answer 1

Financial Statement Audit:

Financial Statements is a set of Final reports of business. Usually, (1) Balance Sheet, (2) Income Statement, (3) Cash Flow Statement and (4) Notes thereon, are collectively referred as Financial Statements.

The examination of Financial Statements of an organisation by an independent auditor to report the fairness of presentation is known as Financial Statement Audit (FSA).

FSA adds credibility to financial statements that represent performance of business and financial position of organisation.

Broadly, the steps in FSA are:

1. Understanding the entity and its business environment to plan the audit after assessing risks.

2. Testing of Internal Control over Financial Reporting. This determines the scope of audit work. If the internal controls are more effective, the auditor can perform relatively less audit procedures than that of ineffective controls.

3. Conducting Audit Procedures to obtain audit evidences to substantiate the fairness of Financial Statements.

Key considerations when testing of the operating effectiveness of internal controls in conjunction with a financial statement audit:

1. Inspection of supporting documents

2. Inquires and Observation of Internal Controls

3. Re-performance of Internal Controls

4. Testing of internal control on specific computerised applications

5. Tracing transactions through information systems of financial reporting.