Problem: (Obtaining an understanding) In meeting the second generally accepted auditing standard of fieldwork the auditor is required to obtain sufficient understanding of each com-ponent of an entity's internal controls to plan the audit of the entity's financial statements.
Required:
a. What knowledge should be obtained about the control components in obtaining an understanding of it?
b. How does the auditor obtain the understanding?
c. Is it necessary in all cases to document the understanding?
d. Briefly discuss the alternative methods available for documenting the understanding and comment on the relative advantages or disadvantages of each.
Below are the components:
- Control environment sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure.
- Risk assessment is the entity's identification and analysis of relevant risks to achievement of its objectives, forming a basis for determining how the risks should be managed.
- Control activities are the policies and procedures that help ensure that man-agement directives are carried out
- Information and communication are the identification, capture, and exchange of information in a form and time frame that enable people to carry out their responsibilities.
- Monitoring is a process that assesses the quality of internal control performance over time.