Over the last several years, practitioners in public practice have expressed confusion relating to the concept of internal control and, specifically, internal control over financial reporting.

For example, auditors may no longer default to a maximum control risk. Instead,

the auditor should obtain an understanding of the five components of internal control sufficient to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. The auditor should obtain a sufficient understanding by performing risk assessment procedures to evaluate the design of controls relevant to an audit of financial statements and to determine whether they have been implemented. (AU section 314, Understanding the Entity an Its Environment and Assessing the Risks of Material Misstatement, AICPA, Professionals Standards, vol. 1)

This created a need for auditors to understand the concepts of internal control and, specifically, internal control over financial reporting.

Additionally, internal control deficiencies identified by an auditor that upon evaluation are considered significant deficiencies or material weaknesses should be communicated in writing to management and those charged with governance (SAS 115). This standard also has led to a great deal of discussion about what is or is not a control and what role an auditor can play, with respect to the client’s system of internal control.

Even if a practitioner in public practice does not perform audits but performs reviews and compilations, that practitioner must still understand internal control, due to the independence ramifications, because a practitioner’s independence would be impaired if he or she establishes or maintains internal control for a client (Interpretation No. 101-3).

This paper describes the concepts of internal control (specifically internal control over financial reporting) and discusses the types of services related to internal control that may be performed by practitioners in public practice.

Download the complete paper, Understanding Internal Control and Internal Control Services.



Copyright © 2009 American Institute of Certified Public Accountants, Inc., New York, NY 10036-8775

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