Individual Assignment B

Part 1

ASA315 states: "The auditor shall obtain an understanding of internal control relevant to the audit". What is the principal purpose for obtaining an understanding of internal control and assessing control risk?

Part 2

John and Jane are discussing the importance of internal control in determining the amount of audit evidence required for an audit engagement. John is of the view, regardless of the size of the companies; he assesses the internal controls and then set the control risks of all companies in a similar manner. He normally prepares a standard internal control questionnaire on every audit as well as a flow chart of every transaction area. In addition, he says, the audit firm requires a careful evaluation of the internal control system, and a modification in the evidence accumulated based on the controls and deficiencies in the system.

Jane believes that the internal control system of many small companies are not adequate; therefore, she simply ignores internal control and acts on the assumption of inadequate controls. She sets the control risk as high. So rather than spend a lot of time obtaining an understanding of internal control and assessing control risk, Jane would rather spend the time it takes to fill out all those forms in testing whether the financial statements are correct.

Criticise the positions taken by John and Jane, and express your own opinion about the similarities and differences that should exist in understanding internal control and assessing control risk for different-sized companies.

Note:

- Chapters 7 and 8 of the Arens text are helpful in answering this question.

- ASA315 can be viewed online from the AUASB website. Copies of these are made available on Blackboard Course website>Resources