An organization’s internal controls are comprised of five constituents. which include: the control environment. hazard appraisal. control activities. monitoring. and information and communicating. The five constituents of internal control are considered to be standards for measuring an organization’s fiscal coverage controls and the bases for auditors’ appraisal of control hazard as it relates to an organization’s fiscal statements ( Lowers. et. Al. . 2007 ) . “Thus. hearers must see the five constituents in footings of ( 1 ) understanding a client’s fiscal coverage controls and documenting that understanding. ( 2 ) preliminarily measuring the control hazard. and ( 3 ) proving the controls. reevaluating control hazard. and utilizing that appraisal to be after the balance of the audit work” ( Lowers. et. Al. . 2007. p. 161 ) .

Phase I – Understanding

Throughout the class of Phase I an audit squad will work to obtain a clear apprehension of a company’s internal control environment and management’s hazard appraisal. The audit squad will reexamine the flow of minutess through the company’s accounting system. and the design of some client control processs ( Lowers. et. Al. . 2007 ) . In this measure the audit squad will execute their appraisals in a top-down risk-based mode that first examines company-level controls ( CLCs ) and so controls of important concern units within the company ( Lowers. et. Al. . 2007 ) . Controls within the control environment and companywide plans include:

• Management’s hazard appraisal
• Centralized processing and controls including shared service environments • Period-end fiscal coverage procedure
• Controls to supervise consequences of operations
• Controls to supervise other controls
• Board-approved policies that address important concern control and hazard direction patterns ( Lowers. et. Al. . 2007. p. 161 ) . Once the audit squad has completed their scrutiny of CLCs the audit squad will so document their apprehension through the usage of narrative descriptions or flow charts. The audit squad will so utilize one of those tools to plan a preliminary plan of substantial processs for scrutinizing averments related to the company’s history balances. which is conducted in Phase II ( Lowers. et. Al. . 2007 ) .

Phase II – Assessment

After the audit squad has completed Phase I the audit squad will travel into Phase II or the preliminary appraisal of the company’s control hazards. Throughout the class of Phase II the audit squad will analyse the control strengths and failings of the company. A company’s strengths are considered as specific characteristics of good general and application controls while its failings are considered as a deficiency of controls in peculiar countries ( Lowers. et. Al. . 2007 ) . The audit team’s findings and preliminary decisions should so be written up and documented in audit files known as the span workpapers.

In Phase II the audit squad will seek to reply the undermentioned inquiries through its appraisal. Can command hazard be low or less than upper limit? Is decrease of the control hazard assessment cost-efficient? Once the audit squad arrives at the replies of those inquiries it will so stipulate the controls to be tested and the grade of conformity required. “The differentiation between the apprehension and documenting stage and the preliminary control hazard appraisal stage is utile for understanding the audit work. However. most hearers in pattern do the two together. non as separate and distinguishable audit tasks” ( Lowers. et. Al. . 2007 ) .

Phase III – Testing

In the 3rd and concluding stage the audit squad will so execute trials of controls of the specified controls and reassess control hazard. During the proving stage the audit squad will seek to reply the inquiry of how the existent grade of company conformity compares with the needed grade of conformity with the company’s control policies and processs. The audit squad will so document the footing for measuring the company’s control hazards. which are less than 100 % or measure the company’s high or maximal control hazard and design an audit plan for the company with more effectual substantial processs. The audit squad will so execute a trial on the planned or revised substantial processs.

Decision

An effectual rating of a company’s internal controls will supply the company with a sensible confidence sing the accomplishment of its aims in the undermentioned three classs: dependability of fiscal coverage ; effectiveness and efficiency of its operations ; and conformity with applicable Torahs and ordinances.

Mentions
Lower berths. T. J. . Ramsay. R. J. . Sinason. D. H. . Strawser. J. R. ( 2007 ) . Internal Control and Evaluation. Auditing and Assurance Services. 2nd erectile dysfunction. The McGraw-Hill Companies.
New York City. NY.