Comprehensive Report: Auditing and Internal Control

This report delves into the critical aspects of auditing and internal control, emphasizing their significance in ensuring reliable financial reporting and effective risk management. It begins by defining auditing and its relationship with internal control, highlighting the five key components: control environment, risk assessment, information and communication, control activities, and monitoring. The report then explores the benefits of a strong internal control system, including reliable financial reporting, compliance, and operational efficiency. Furthermore, it examines how internal control enhances the performance of external auditors, particularly through risk assessment and data analysis. A case example from the Department for Work and Pensions (DWP) in the UK illustrates the practical application of internal control. The report also addresses the limitations of internal control, such as collusion, human error, management override, missing segregation of duties, and lack of management support, concluding that despite these limitations, internal control remains a vital component of the auditing process. The references provide further reading on the subject.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction......................................................................................................................................1
Literature Review............................................................................................................................1
Five Components of Internal Control..........................................................................................1
Benefits of Strong Internal Control.............................................................................................3
Enhancing the Performance of External Auditors.......................................................................4
Case Example..............................................................................................................................5
Limitations of Internal Control........................................................................................................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................8

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Introduction
Auditing refers to the process of systematic and independent inspection of various
financial accounts of the companies in order to ascertain the fact that they are developed and
recorded in the fair and true manner (Arens, Elder & Mark, 2012). In the process of auditing,
Internal Control of the organizations is considered as a crucial aspect. In the language of auditing
and accounting, internal control refers to the process to assure that all the accounting objectives
of the companies are properly achieved. Thus, it can be said that internal control is responsible
for maintaining the operational effectiveness and efficiency of the organizations. Hence, it is
clear that effective implementation of internal control system has utmost importance in the
companies (Vijayakumar & Nagaraja, 2012). The main objective of this report is to analyze and
evaluate various aspects of internal control in the business organizations. The later part of this
report also focuses lights on the major limitations of internal control within the organizations so
that effective remedial strategies can be developed.
Literature Review
Five Components of Internal Control
It is mentioned in the above part that internal control has major importance within the
organizations. In this context, it needs to be mentioned that there are five major components of
internal control that have effects on the external audit of the companies. These five major
components are discussed below:
Control Environment: Control environment can be considered as the attitude of management
and the employees for the needs of establishing internal control. Two of the major components of

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control environment are governance and function of the management. It is the responsibility of
the management to establish effective control environment based on the organizational
principles, standards and policies. Implementation of effective internal control helps the external
auditors in understanding the philosophy and nature of the management as it is largely helpful in
audit operations (Chen, Shih & Ma, 2013).
Risk Assessment Process: It is a major role of internal control to identify major material
misstatements in the financial statements of the companies. In this process, management of the
organizations has an important role to play as they have the responsibility to ascertain the risks
with the help of internal control. Identification of major material risks by the management helps
the external auditors as the major risks are already identified (William Jr, Glover & Prawitt,
2016).
Information and Communication: This component implies that the financial information
regarding organizational control is required to be communicated with the management in an
effective way. It is required for the external auditors to gain understanding about the information
and communication in the business organizations. Effective information and communication
system largely helps the external auditors.
Control Activities: Control activities refer to the use of effective accounting system, information
technology and other systems in order to increase the effectiveness of internal control system
within the organizations. With the help of these activities, the external auditors of the companies
are able to understand the nature of authorization of the management. Apart from this, all these
activities play a crucial role in protection and securing confidential financial information for the
external auditors (Al Sawalqa & Qtish, 2012).

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Monitoring: Monitoring is considered as a crucial part of internal control as it helps in the
overall assessment of internal control effectiveness. It needs to be mentioned that the report of
monitoring process is essential for the external auditors as this report helps the external auditors
in identifying the loopholes in internal control. For this reason, this is a major part of internal
control (Bruynseels & Cardinaels, 2013).
Benefits of Strong Internal Control
It needs to be mentioned that the external auditors can avail major opportunities from the
successful implementation of strong internal control. Some of the major benefits are discussed
below:
Reliable Financial Reporting: One of the major benefits of internal control is that it helps in the
generation of reliable financial reports for carrying on various activities of external audit. With
the help of effective internal control system, the financial managers of the companies are able to
get true and fair financial information so that they can develop error free financial reports for the
companies. External auditors carry on the audit operations by considering these financial reports
(Abbott, Parker & Peters, 2012).
Maintaining Compliance: It is the responsibility of the internal control of the companies to
ascertain the fact that all the accounting and financial works are done according to the correct
principles and standards. At the time of recording the financial statements, financial managers
are required to comply with the regulations and principles of accounting standards. This
particular aspect reduces the work pressures from the external auditors, as they do not have to do
the compliance check (De Simone, Ege & Stomberg, 2014).

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Reliability: Another major benefit of internal control is that it helps in improving the reliability
of accounting and financial information. Confidence is a major aspect in financial aspects. Thus,
the external auditors of the companies need to have confidence on the provided financial and
accounting information by the management of the companies. In the presence of effective
internal control, external auditors can rely upon the provided financial as well as accounting
information by the management (Berber et al., 2012).
Operational Efficiency: The implementation of effective internal control helps in increasing the
overall efficiency of various business operations of the companies. For this reason, the external
auditors do not have to face many problems while conducting the audit operations. These are the
major benefits of the implementation of internal control for external auditors (Hoitash, Hoitash &
Johnstone, 2012).
Enhancing the Performance of External Auditors
Earlier discussion shows that risk assessment is a major part of internal control and risk
assessment plays an integral part in enhancing the performance of external auditors. As today’s
business environment is becoming more complex, it has become necessary for the process of risk
assessment to become more comprehensive and rigorous (iaasb.org, 2017). For this reason, it has
become more crucial for the external auditors to gain understanding about different aspects of
management and accounting. This process helps the auditors to identify and assess the risk of
material misstatement in a more effective way. Data analysis is considered as another major
aspect of internal control. With the help of data analysis, external auditors become able to gain
better understanding about various risks of the auditing entity (iaasb.org, 2017). Data analysis
makes it able for the external auditors to test large population of data; because of this, external
auditors become able to assess the audit risks in the earlier stages. Thus, from the above

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discussion, it can be seen that risk assessment helps the auditors to gain clear understanding
about the audit entities and their various operations. In this way, they become able to assess the
risk of material misstatements in a more effective way.
Case Example
In this case, the example of Department for Work and Pensions (DWP) in United
Kingdom can be mentioned. According to Mark Repley, the head of internal audit of DWP, the
internal audit process is highly associated with the program life cycle of various projects of
DWP. He has also stated that the internal audit of DWP provides continuous reports of periodic
audit engagement activities along with other internal audit programs (nao.org.uk, 2017). Thus,
from the example of DWP, it can be seen that internal control plays an important part in the
overall development of various processes of companies.
Limitations of Internal Control
In spite of so many advantages, there are some major limitations of internal control. They
are discussed below:
Collusion: Collusion in internal control can be seen when two or more people are responsible for
keep watch on various procedures of internal control.
Human Error: There are many instances when people responsible for internal control make
mistakes. This can be considered as a major limitation of internal control. In this aspect, it can
also be happened that the person responsible for internal control does not know the use of
various computerized system in internal control (Mnih et al., 2015).

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Management Override: It can be happened that a person from management who is responsible
for internal control overrides a major aspect of internal control for his/her personal advantage.
Thus, it is a major limitation of internal control.
Missing Segregation of Duties: Under proper internal control system, it is required to segregate
duties among all the members of the management. However, lack of segregation of duties can be
considered as a major disadvantage of internal control.
Lack of Management Support: Sometimes it can be seen that management does not provide
enough support to the internal control of the companies. This is another major limitation of
internal control (Lam, 2014).
Conclusion
The above discussion shows that internal control is an important aspect in the process of
auditing. According to the above discussion, there are five major components of internal control
having effect on external control; they are control environment, risk assessment, technology and
communication, control activities and monitoring. All these factors have major effects on various
operations of external audit. In addition, it can also be seen that effective implementation of
internal control provides major assistance to the external auditors like delivery of reliable
financial information, effective financial reporting and others. According to ISA 315 (Revised),
implementation of effective internal control helps in increasing the performance of external
auditors. However, internal control has some major limitations like human error, lack of
management support and others.

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References
(2017). Iaasb.org. Retrieved 22 November 2017, from
http://www.iaasb.org/system/files/meetings/files/ISA-315-Revised-Project-
Proposal_Final-September-2016.pdf
(2017). Nao.org.uk. Retrieved 22 November 2017, from
https://www.nao.org.uk/wp-content/uploads/2013/04/Internal-audit-in-practice-case-
studies.pdf
Abbott, L. J., Parker, S., & Peters, G. F. (2012). Internal audit assistance and external audit
timeliness. Auditing: A Journal of Practice & Theory, 31(4), 3-20.
Al Sawalqa, F., & Qtish, A. (2012). Internal Control and audit program effectiveness: Empirical
evidence from Jordan. International business research, 5(9), 128.
Arens, A. A., Elder, R. J., & Mark, B. (2012). Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
Berber, N., Pasula, M., Radosevic, M., Ikonov, D., & Kocic Vugdelija, V. (2012). Internal audit
of compensations and benefits: Tasks and risks in production systems. Engineering
Economics, 23(4), 414-424.
Bruynseels, L., & Cardinaels, E. (2013). The audit committee: Management watchdog or
personal friend of the CEO?. The Accounting Review, 89(1), 113-145.

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Chen, C. Y., Shih, B. Y., & Ma, J. M. (2013). RETRACTED: development for low-cost and
cross-platform robot control environment. Journal of Vibration and Control, 19(2), 228-
233.
De Simone, L., Ege, M. S., & Stomberg, B. (2014). Internal control quality: The role of auditor-
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Hoitash, R., Hoitash, U., & Johnstone, K. M. (2012). Internal control material weaknesses and
CFO compensation. Contemporary Accounting Research, 29(3), 768-803.
Lam, J. (2014). Enterprise risk management: from incentives to controls. John Wiley & Sons.
Mnih, V., Kavukcuoglu, K., Silver, D., Rusu, A. A., Veness, J., Bellemare, M. G., ... & Petersen,
S. (2015). Human-level control through deep reinforcement learning. Nature, 518(7540),
529-533.
Vijayakumar, A. N., & Nagaraja, N. (2012). Internal Control Systems: Effectiveness of Internal
Audit in Risk Management at Public Sector Enterprises. BVIMR Management Edge, 5(1).
William Jr, M., Glover, S., & Prawitt, D. (2016). Auditing and assurance services: A systematic
approach. McGraw-Hill Education.

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