PCAOB Staff Audit Practice Alert No. 11 – Part 3

January 10, 2014

By Alan Frank, CPA 

Obtaining an Understanding of Internal Controls

In an audit of internal control, a thorough understanding of the company’s internal control is important because it enables the auditor to appropriately plan and perform the necessary tests of controls.  This understanding helps to (1) identify the types of potential misstatements that can occur, (2) assess the factors that affect the risks of material misstatement, and (3) design tests of control and substantive procedures. The best way to gain this understanding may be by performing detailed process walkthroughs.  When designing your walkthroughs, keep the following common shortcomings in mind:

  • Performing inquiry and observation to confirm that there have been no significant changes to the processes instead of actually performing the walkthrough.
  • Obtaining an understanding through controls testing and substantive procedures. 
  • Reviewing walkthroughs performed by the company’s internal auditor who did not provide direct assistance under the firm’s supervision.
  • Relying on knowledge and experience obtained from prior years’ audits.

Also, when considering risk of material misstatement, within significant accounts and multi-locations, all areas should not be considered equal:

  • Segregate components of accounts including different revenue streams, etc.
  • Identify common or different controls in remote locations

Our next blog regarding the PCAOB Staff Audit Practice Alert No. 11 will cover selecting controls to test and testing management review controls.

About Alan Frank

Alan Frank is a Partner specializing in Process, Risk, and Technology Solutions (PRTS). His focus is internal audit and compliance. He provides consulting, internal audit, governance, risk, and compliance services to a variety of industries, and serves as the PRTS internal audit services leader.