Question

1a. Can we state and discuss the five components of internal Control?

1b. What is the role of materiality in planning an audit? Discuss

Answer 1

The five components of Internal control are as follows:

Control Environment: This includes the integrity and ethical values of top management and shows their promptness when it comes to establishing internal controls. It also includes organizational structure, the Assignment Authority, and Responsibility.

Risk Assessment: This involves risk assessment methodologies followed by the organization this includes planning various objectives and preparing risk control matrices.

Control Activities: These are the responses designed after risk assessment. Policies and procedure to detect and mitigate the risk.

Information and Communication: Evaluating the quality and timing of information. This also involves assessing how the information is being shared within the organization.

Monitoring: It covers ongoing monitoring of all the processes and reporting deficiencies in them so that corrections can be made.

Answer 1 b Role of materiality in planning an audit

Under Audit, the auditor has to obtain reasonable assurance that all the financial statements are free from any type of material misstatement. Materiality also helps the auditor to determine which of the misstatement is material enough to impact the decision making of the user of the financial statement.

In materiality, the auditor sets a benchmark for material items which will help him make professional judgments while performing the audit. The benchmark depends on the size and nature of the transaction.

Therefore, materiality becomes a core part of planning of audit.