An auditor is required to obtain sufficient understanding of each component of a company's internal control system to plan the audit of a companys financial statements, and to assess and evaluate the control risk for assertions that are part of the account balance, transaction class and disclosure components of the financial statements.

Required:

(a) What are managements incentives for establishing and maintaining a strong internal control system? Identify and explain the auditors main concerns with an internal control system. (4 marks)

(b) Briefly discuss the five components of internal control. (5 marks)

(c) Discuss three tools commonly used by auditors to document their understanding of a companys internal control system. Identify and explain the relative strengths and weaknesses of each tool. (6 marks)