Why is important for the auditor performed the four phases to obtaining and understanding of internal...

Why is important for the auditor performed the four phases to obtaining and understanding of internal control and assessing control risk?

Expert Solution

Four phases performed by auditor to obtain and understand internal control and assess control risk and their importance are -

1) obtain an understanding of internal control, design and operation

Importance - it reduces the risk of asset loss and help the auditor to decide that financial statements are reliable and entity's operations are conducted by adhearing the provisions of applicable laws and regulations.

2) assess control risk

Importance - assesment of control risk is done for each transaction related audit or class of transaction. Assesment of control risk is measure of expectation of the auditor that internal control do not prevent, detect and corret all the material misstatement. This is done to asses whether client's internal control system is effective or not.

3) design, perform, evaluate test of control

Importance - it is done to test the effectiveness of control maintained by the client to prevent material misstatement. By this test auditor can decide wheteher to rely on client's control or not.

4) decide planned detection risk and substantive tests

Importance - detection risk is the risk of not finding material misstatements in the client's financial statements. Auditor should plan detection risk in such a way that overall audit risk is maintained to an acceptable level and to do so he must do substantive tests.

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ekkarill92 answered 1 year ago

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