Internal Controls in Smaller Entities (1)

Question 1

What is the case with many controls which would be relevant to a large entity?

Answer 1

They are neither practiucal not appropriate for the smaller entity

Question 2

Two key issues with this practicality (segragation)

Answer 2

Smaller entities are likely to have less segragation of duties due to limited numbers of staff

Question 3

Two key issues with this practicality (management)

Answer 3

Management override of controls is likely to be an increased risk as a result of the close involvement of directors/owners

Question 4

How do management compensate for these issues?

Answer 4

By instigating additional phyiscal authorisation, arithmetical, accounting and supervisory procedures

Question 5

What is particularly important for a smaller entity/

Answer 5

The attitudes, awareness and actions of management are of particular importance to auditor’s understanding and assessment of the control environment

Question 6

How can the level of substantive procedures be reduced?

Answer 6

Auditor is satisfied that internal control system in a smaller entity is robust

Auditor can test that direct controls are operating effectively

Question 7

What can these two issues discussed earlier mean?

Answer 7

Auditor often turns to substantive procedures to gain sufficient appropriate audit evidence when auditing a smaller entity

Question 8

What do substantive procedures include? (C)

Answer 8

Confirmations

Question 9

What do substantive procedures include? (Ag)

Answer 9

Agreeing samples related to different financial statement areas to source documents

Question 10

What do substantive procedures include? (An)

Answer 10

Analytical procedures where these are considered suitable