Auditing Report: Internal Control Analysis for Financial Reporting

This report provides a comprehensive analysis of auditing and internal control within a business context. It begins with an introduction to auditing, emphasizing the significance of internal control in ensuring accurate financial reporting. The literature review explores five key elements of internal control: control environment, risk assessment procedures, information and communication processes, control activities, and monitoring. The report then highlights the advantages of effective internal control, including the reliability of financial reporting, compliance maintenance, and operational effectiveness. It also discusses how internal control augments the performance of external auditors. The report also examines the limitations of internal control, such as collusion, human error, management override, and omitted segregation of responsibilities. The report concludes by summarizing the importance of internal control in the audit process and its impact on external auditors. The report references several academic sources to support its findings.

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Table of Contents
Introduction................................................................................................................................2
Literature Review.......................................................................................................................3
Five Important elements of Internal Control..............................................................................3
Advantages of effective internal control....................................................................................5
Augmentation of the performance of external auditors.............................................................6
Limitations of system of internal control...................................................................................7
Conclusion..................................................................................................................................7
References..................................................................................................................................9

Introduction
Auditing can be considered as the systematic along with independent procedure of inspection
of diverse financial accounts of corporations that in turn can help in ascertainment of the fact
that they are developed and registered both in a true and fair way. During the process of
carrying out audit, Internal Control of the corporation can be regarded as a vital part/section.
In itself, from the perspective of auditing and system of accounting, internal control indicates
towards the system that can ensure that all the accounting objectives of the business concern
are properly attained. Therefore, it can be hereby mentioned that internal control is liable for
maintaining functional effectiveness along with level of efficiency of the business concern.
For that reason it can be clearly mentioned herein that effective execution of the internal
control mechanism has utmost significance in the corporations. However, the primary aim of
the current study is to analytically evaluate the different aspects of the internal control in a
specific business corporation. Again, moving further, the current study also highlights diverse
key limitations of firm’s internal control within a specific corporation in a bid to make certain
the development of effective remedial stratagems.
Literature Review
Five Important elements of Internal Control
As rightly put forward by William Jr et al., (2016), the internal control has key significances
within a specific business concern. Particularly, it can be hereby specified in this context that
there are mainly five important elements of internal control that have influence of the external
audit of the business concerns.

Control Environment: As rightly mentioned by William Jr et al., (2016), the control
environment can be referred to as the approach of management along with attitude of
members of the staff to institute internal control. In addition to this, two major elements of
the control environment include governance as well as management function. In essence, it is
the liability of the management to institute effectual environment of control founded on the
principles of corporation, accounting standards as well as policies (Knechel & Salterio,
2016). Execution of the effectual internal control also aids the external assessors in
comprehending the specific philosophy along with the nature of the company management
since it is highly useful in audit functions.
Procedure of risk assessment: In itself, assessment of risk can be considered to be an
important aspect of internal control that can help in recognition of major material
misstatements in the financial assertions of the corporations. In particular, management of the
business concern is said to play an effective role since they are said have the liability to
determine the risks with the assistance of the internal control (Knechel & Salterio, 2016).
Recognition of key material risks by the firm’s management assists external assessors as the
main risks are already recognized.
Process of management of information and communication: This particular element
entails the financial information as regards organizational control necessarily needs to be
communicated with the management in an effectual manner (Acito et al., 2015). It is
necessary for the external assessors to acquire comprehensive understanding as regards
information and process of communication in the business concern. Again, effective
information and communication system also extensively assists external assessors.
Activities of control: The control actions indicate towards the utilization of effectual
accounting system, effective information technology as well as other systems in a bid to

enhance the overall effectiveness of the system of internal control within business concerns
(Acito et al., 2015). Essentially, with the assistance of these types of activities, the external
assessors of the corporation can comprehend the nature of endorsement of the firm’s
management. Besides this, all these actions also play a vital role in the process of shielding
and at the same time securing secret financial information for the external assessors (Power &
Gendron, 2015).
Monitoring: The system of monitoring can be regarded as a vital component of internal
control since this assists in the process of the evaluation of the overall effectiveness of the
entire process of internal control. In itself, this can be hereby specified in this case that report
presented by the management of the corporation on the monitoring procedure is crucial for
the external assessors of the firm. In essence, this report essentially aids all the external
assessors to detect loopholes/gaps in the system of internal control. Thus, this can be
considered to be a crucial part of the system of internal control (Beasley, 2015).
Advantages of effective internal control
The external assessors of a corporation can avail key opportunities by the successful
execution of the system of appropriate and effective internal control. Some of the important
advantages of the same are hereby mentioned below:
- Reliability of financial reporting- Essentially one of the important advantages of
internal control is that it assists in the process of development of reliable financial
assertions for undertaking diverse actions of external assessment. However, with the
assistance of effectual system of internal control, finance managers of business
concerns can acquire both true as well as fair presentation of pecuniary information.
This can aid in the process of development of the error free financial pronouncements

for the corporation. In essence, the external assessors can undertake the audit
functions by taking into consideration financial declarations (Glover et al., 2016).
- Maintenance of compliance- It is the accountability of the internal control of the
corporations to determine the fact that accounting as well as financial operations are
carried out as per appropriate principles and accounting standards. During the period
of registering financial pronouncements, diverse financial managers have the need to
conform to the directives as well as notions of appropriate accounting standard. As
such, this specific aspect can help in lessening the overall work stress from the
external assessors, since they do not have the necessity to examine the conformation
(Louwers et al., 2015).
- Reliability-Yet another major benefit of internal control is that it assists in the process
of enhancement of reliability of accounting system and the accounting information
presented in the reports. Basically, external assessors have the need to acquire enough
confidence on the financial as well as accounting information by the company
management.
- Operational effectiveness- Execution of the effectual internal control, can assist in
the process of enhancing overall level of effectiveness of business functionalities of
the business concern. It is for this purpose, the external assessors do not the necessity
to encounter difficulties whilst undertaking audit functionalities (Knechel & Salterio,
2016).
Augmentation of the performance of external auditors
As rightly put forward by DeFond & Zhang (2014), assessment of risk can be considered to
be a significant part of internal control and assessment of risk is said to play an important part
in the process of augmentation of performance of external assessors. These days, it has

become very important on the part of the external assessors to acquire comprehensive
understanding regarding diverse aspects of both management as well as accounting. In
addition to this, this effectual process can also aid the auditors in identification as well as
assessment of risk associated to material misstatement in a more effectual manner. Arens et
al., (2016) asserts that data analysis can be regarded as an integral part of internal control of a
corporation. Basically, based on the analysis of amassed data, external assessors can gain
deep insight and comprehensive understanding as regards specific threats of auditing firm by
carrying out tests of huge target population for the study.
Case Studies
Particularly, the instance of “Department for work and pension in United Kingdom can be
specified. As per Mark Repley who happens to be the head of the department of internal audit
of the firm DWP, the process of internal audit can be related to the life cycle of the program
of different projects of particularly DWP. The management also mentioned the fact that the
internal audit of the firm DWP delivers consistent pronouncements of periodic audit
engagement actions together with other internal audit functions. Therefore, in the present
instance presented on DWP, it can be hereby mentioned that internal control mainly plays a
very significant role in process of development (Wang et al., 2013).
Limitations of system of internal control
There are certain limitations of internal control that are hereby mentioned below:
Collusion: The system of collusion can be observed at the time when more number of
individuals is accountable for monitoring different systems of internal control.

Human Fault: There are several examples of human error that occurs at the time when
individuals accountable for internal control commit mistakes. As such, this can be regarded
as a major restraint of internal control (William Jr et al., 2016).
Management Override: This can occur at the time when management of a firm accountable
for firm’s internal control necessarily overrides important facets of internal control.
Omitted segregation of responsibilities: Under appropriate system of internal control, it is
obligatory to separate out liabilities among different members of the administration.
Lack of support of the management: It can be hereby observed that management does not
deliver adequate support to the firm’s system of internal control (Hayes et al., 2014).
Conclusion
In conclusion, it can be hereby mentioned that the current study helps in understanding the
fact that internal control is a significant factor in the procedure of audit. Based on the findings
presented in the current study, it can be hereby stated that there are mainly five different
elements of internal control that has an impact on external business control. Essentially, the
five components include control environment, assessment of risk, technology as well as
communication, activities of control and system of monitoring. Essentially, all these facets
have immense impact on different operations of external audit. Additionally, it can be hereby
witnessed that effectual execution of internal control delivers proper assistance to diverse
external assessors such as ensuring delivery of dependable financial information, presenting
effectual pecuniary reports and many others. According to ASA 315, proper execution of
effective internal control can assist in enhancement of performance of external assessors.

References
Acito, A., Hogan, C., & Imdieke, A. (2015). Integrated Auditing Standards and Financial
Reporting Quality. Working paper, Michigan State University.
Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2016). Auditing and assurance
services. Pearson.
Beasley, M. S. (2015). Auditing cases: An interactive learning approach. Prentice Hall.
DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of
Accounting and Economics, 58(2), 275-326.
Glover, S. M., Prawitt, D. F., & Messier, W. F. (2016). Auditing and Assurance Services: A
Systematic Approach 10th.
Hayes, R., Wallage, P., & Gortemaker, H. (2014). Principles of auditing: an introduction to
international standards on auditing. Pearson Higher Ed.
Knechel, W. R., & Salterio, S. E. (2016). Auditing: Assurance and risk. Taylor & Francis.
Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C.
(2015). Auditing & assurance services. McGraw-Hill Education.
Power, M. K., & Gendron, Y. (2015). Qualitative research in auditing: A methodological
roadmap. Auditing: A Journal of Practice & Theory, 34(2), 147-165.
Wang, C., Chow, S. S., Wang, Q., Ren, K., & Lou, W. (2013). Privacy-preserving public
auditing for secure cloud storage. IEEE transactions on computers, 62(2), 362-375.
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A
systematic approach. McGraw-Hill Education.