Question

• Describe the three broad objectives management has when designing effective internal control.
• What is the auditor's responsibility for obtaining an understanding of internal control?
• How does that responsibility differ for audits of public and nonpublic companies?

Answer 1

Answer:- The three broad objectives management has when designing effective internal control are:-

1. Reliability of financial reporting- Management is in charge for preparing financial statement for shareholders and other users. Managment has both constitutional and professional responsibilty to be assured that the data is adequately presented in accordance with an acceptable financial reporting groundwork. So, the objective of an effective internal control is to fulfill these financial reporting responsibilities.

2. Efficiency and Effectiveness of operations- Authority within an institution are determine to strengthen efficient and effective use of its resources to enhance the company's targets. So, an important objective of these authority is detailed financial and non-financial information about the entity's actions for decision making.

3. Compliance with laws and regulations- Section 404 of the Sarbanes-Oxley Act wants all public companies to publish a report about the performing effectiveness of internal control over financial reporting. In addition to the lawful provisionsof Section 404, the institutions like public, nonpublic, and not-for-profit are mandatory to follow many laws and regulations.

The auditor's responsibility for obtaining an understanding of internal control is to understand controls that are important to audit in order to identify and assess the risks of material misstatement of the financial statements due to mistake or fraud and to design attributes, timing, and duration of another audit methods.

So, To express an opinion on internal control for a large public company the auditor attains on understanding of controls for all important account balances, exposures and classes of transactions and related assertions in the financial statements. In contrast, for an audit of a nonpublic or a small public company, the auditor will obtain an understanding of internal control that are relevant to financial statement audit in order to assess risk of material misstatement. Thus, the level of understanding of internal controls required for the audit of internal controls exceeds the level required for an audit of only the financial statements.