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Relationships Among Deficiencies Deficiency in Internal Control Less than Significant Material Significant Deficiency Weakness Approach to Audit of Internal Control under Section 404b Plan the engagement Use a top-down approach to identify the controls to test Test and evaluate design effectiveness of internal control Test and evaluate operating effectiveness of internal control Form an opinion on effectiveness of internal control over financial reporting Internal Control in the Small Company Due to lack of employees, internal control is seldom strong in small businesses Specific practices for small businesses Record all cash receipts immediately Deposit all cash receipts intact daily Make all payments by serially numbered checks, with exception of petty cash disbursements Reconcile bank accounts monthly and retain copies Use serially numbered invoices, Pos, and receiving reports Issue checks to vendors only in payment of approved invoices that have been matched with purchase orders and receiving reports Balance subsidiary ledger with control accounts Prepare comparative financial statements monthly to disclose significant variations in any category of revenue or expense 7-* 2 2 3 3 4 4 5 5 7 6 6 8 9 7 11 7-* Internal Control Chapter 7 McGraw-Hill/Irwin Copyright ? 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Summary of Internal Control Definition A process, effected by the entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding, achievement of (the entity’s) objectives on: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and regulations Control Objectives In each area of internal control (financial reporting, operations and compliance) Control objectives and Subobjectives exist Example: Area of financial reporting Top level objective – prepare and issue reliable financial information Detailed level applied to A/R subobjectives