Lecture Video 2

LECTURE 2: WHAT DO WE NEED TO KNOW ABOUT INTERNAL CONTROLS FOR THIS MODULE?

So what do we as auditing students need to know about internal controls?  When we are dealing with anything that we are doing as auditors, keep in mind that your objective is about the financial information of the company.

As an auditor, your job or your objective is to express an opinion. We can’t get away from that. Your objective as an auditor – express an opinion on the fair presentation of the financial statements. Which we can see obviously leads us to the financial information.

That means that you need to know how those financials are drawn up, with the circumstances under which they are drawn up, in order for us to make that kind of an assessment.

I cannot give an opinion on something that I know nothing about. So my starting point, as an auditor or auditing student, is to identify how companies should be putting financial statements together. If you want to assess whether a company has put a decent set of financial statements together, you are going to have to know how would they put those financials together. So, we’re starting there.

 

LAWS AND GUIDELINES

If there are laws or guidelines that management should be following when they prepare financial statements, you have to know what they are. And that is what we are going to look at. If there are laws, that’s going to come from the Companies Act. So there are laws in the Companies Act that is going to affect your opinion, that is going to affect the fair presentation of the financial statements, and you have to know what they are and how they would impact the financial information or how they would impact your audit report.

Guidelines are going to come from the Code of Corporate Governance, the King III code. Guidelines and laws we are going to get into a little bit later. But if there is any possibility that it has an impact on your objective as an auditor, you are going to have to know what goes in place there.

So these are internal controls that the company should be following. Whether it’s a law or a guideline, these are processes that the company should be following in order to ensure the integrity of the financial information and obviously in turn as an auditor; I need to know what they are.

 

SO WHAT DO I NEED TO KNOW?

  • Any laws and guidelines that should be put in place.
  • How they actually prepare their financial information.

This is where your cycles come from. What would they do in revenue? How would they run their sales; how would they run their debtors; their inventory; their purchases? How would they run things in order to make sure that their financial information is decent, is sound, is fairly presented? How does that actually work?

We are going to look at a lot of theory around internal controls. We’re going to look at:

  • The fundamentals of internal controls,
  • What makes a control good or bad,
  • The characteristics of controls and how to deal with them

You’re going to have to learn to apply when it would be good to use that control or when it would be bad to use that particular control.