Prior to the start of any audit you must obtain an understanding of your client’s internal controls, over the accounts that you’ve deemed significant (based on risk for material misstatement). If you are auditing a public company, you not only need to understand the internal controls, you also need to test the internal controls.

In order to obtain an understanding of your client’s internal controls, you can have them provide you with their understanding of controls or you can inquiry with the client directly. There are a number of ways to document your understanding of internal controls, ie. Narratives, flow-charts, or questionnaires. Once an internal control understanding is obtained, a beginning to end (or cradle to grave) walkthrough must be obtained (walking through via looking at the controls the clients says are in place, ie.

Preparer/reviewer sign offs, matching procedures, ie. Shipping documentation to sales orders, etc). The walkthrough procedure allows the auditor to ensure what the client says they are doing in terms of internal controls, they are in fact doing.

Once all of this information is obtained, the auditor must assess whether there are any deficiencies within the internal control environment. There are 3 types is deficiencies the auditor is evaluating:

1) Control Deficiency

2) Significant Deficiency

3) Material Weakness

During this case simulation, you will understand an internal control process at your place of employment.

You should prepare a paper, including narrative documentation of your understanding of the control procedure and an evaluation of any deficiencies within this process. Some examples of internal control understandings could be over a specific cash control, ie. The revenue/AR cycle, payroll (this is always a significant area for auditors to understand the controls over), wire transfers, inventory.

When you are selecting a control to understand, it needs to relate directly back to the financial statements, as we are conducting a financial statement external audit.