- 5 Marks
Question
ISA 315 (Revised): Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment requires auditors to understand the entity’s internal control. An entity’s internal control is made up of several components.
Required:
In reference to the statement above, state the FIVE (5) components of an entity’s internal control and give a brief explanation of each component.
Answer
The five components of an entity’s internal control are:
- Control Environment:
This includes the governance and management functions, as well as the attitudes, awareness, and actions of those charged with governance and management concerning the entity’s internal control. It sets the tone of an organization and influences the control consciousness of its people. - Entity’s Risk Assessment Process:
This involves how management identifies business risks relevant to financial reporting, estimates their significance, and takes actions to respond to them. It helps assess risks that could affect the preparation of financial statements. - Information Systems, Including Business Processes:
These are systems relevant to financial reporting, including procedures and records that initiate, record, process, and report transactions and events in the entity’s financial statements. - Control Activities:
These are the policies and procedures that help ensure management directives are carried out. They include activities such as approvals, verifications, reconciliations, and reviews of operating performance. - Monitoring of Controls:
This involves assessing the effectiveness of internal control performance over time. Monitoring is done through ongoing activities, separate evaluations, or a combination of both to ensure controls remain effective.
- Tags: Control Environment, Entity’s Risk Assessment, Internal Control, ISA 315
- Level: Level 2
- Topic: Audit and Assurance Risk Environment
- Series: MAR 2023
- Uploader: Theophilus