Under what circumstances can auditors choose not to rely on a clients internal controls
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1.13 1. Factors that likely contributed to the oversights made by the Ernst & Young auditors during the 2004 AA Capital engagement were the fact that Orecchio was not forced to pay back the “loan” immediately. Also Stevens, the CFO had been covering for Orechhio and his loans taken out on behalf of the company. The fact that
the internal auditors saw this money as a legitimate loan says that there may have been an inside job between Orechhio and the internal auditors going on, which was not noticed until Stevens went on maternity leave and Aquino stepped in. 2. I believe it was appropriate for Ernst & Young to decide not to rely on AA Capital’s internal controls during the 2004 audits because of the large sum of money that was in question. Also the fact that Ernst & Young’s internal controls were only made up of a
few people could easily strike up the question of internal fraud occurring. 3. Professional auditing standards require that auditors apply the following procedures to related-party transactions; obtaining an understanding the business purpose of the transaction, examining invoices, executed copies of agreements, contracts, etc., determine whether the transaction has been approved by appropriate officials, testing for reasonableness the compilation of the amounts to be disclosed in the financial statements, arrange for the audits of You May Also Find These Documents Helpful
Related TopicsIn what circumstances can an auditor not place reliance on internal control?Furthermore, audit evidence cannot be obtained solely from internal controls as the following inherent limitations can affect their effectiveness:. IT systems weaknesses,. Documents signed without verification.. Management override of controls.. Changes in key personnel.. Changes in transaction processing.. Collusion.. Why would an auditor choose not to test controls?There is one reason, however, why you might not test controls even though they appear appropriate: substantive tests may take less time. Once risk assessment is complete, your responses—the further audit procedures—are based on efficiency and effectiveness. If control testing takes less time, then use this option.
Can auditors rely on internal controls?In integrated audits, auditors often rely on controls to reduce their substantive testing of financial statement accounts and disclosures. Thus, deficiencies in testing and evaluating internal control can lead to inadequate testing of accounts and disclosures in the financial statement audit.
What is the most likely cause of internal control failure?Lack of employee knowledge and training is one of the leading causes of internal control failure. By training employees, and involving them in the process, they can help you identify and rectify control weaknesses.
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