Question

Chapter 7 & 8- Internal Controls Good internal controls try to separate what 3 types of activities (recording, custody, authorization) Being able to identify weakness in internal controls. What does it mean to assess control risk at the maximum to the audit procedures performed by the auditor.

Answer 1

Review of Internal Control is very crucial to identify and assess about the procedures to be performed while auditing a particular entity. At the time of the assessment if auditor finds any major loopholes in the internal controls than he would start more substantive audit procedures to give his opinion whereas if he finds that proper internal control are there than he may reduce the audit procedures since he has a comfort that entity is running in a controlled environment.

3 types of activities mentioned in the question are very essential to identify that proper segregation of duties has been done by the entity to ensure that multiple persons are doing a particular job w.r.t. initiating the transaction, approval of transaction etc.

These 3 activities are related to:

• Custody of assets.
• Authorization or approval of related trans­actions affecting those assets.
• Recording or reporting of related transac­tions.

So internal control review is related to audit procedures since depending on the assessment of internal control auditor decides his audit procedures.