How to Identify Internal Control Weakness?
Internal controls that are designed and implemented properly will improve a financial report. The auditor as an independent professional is required to be able to identify whether there are any internal control weaknesses.
Internal control weakness can occur due to two causes. Firstly, it can occur because there is an absence of control. Secondly, the internal control weaknesses are caused by poorly designed controls.
The internal control weakness will increase the risk of material misstatement in the financial report, whether caused by error or fraud. If auditors succeed to identify internal control weaknesses on certain items or accounts then they can focus the substantive test on those items or accounts, so it will improve the efficiency of audit work.
Our Service Recommendations
There are three approaches to identify internal control weakness. The first approach is to conduct the mapping process. This mapping process starts by gathering all the information regarding activities of internal control. Then the auditor makes the flowchart and identifies the area where there are any possibilities of internal control weakness. This method required experience and sufficient knowledge regarding internal control, especially control activities.
The second approach is conducting a brainstorming of several possibilities of errors and fraud that can cause material misstatement in the financial statement. For example, the possibility of defective or obsolete inventories are still listed on the inventory list. The auditor shall assess whether a client has control activities to prevent those defective or obsolete inventories that are still recorded in the inventory list. This brainstorming method relies on the experience of the engagement team.
The third method is to agree on the control activities to the appropriate assertions. The auditor gathers all the information regarding control activities and then matches those control activities to the appropriate assertions. The auditor will identify the assertion where there is no control and conclude that the internal control weakness on that assertion.
In the practice, the auditor will combine those three approach methods in order to gain better identification of internal control weaknesses.
News & Articles Recommendations.
