What are the key considerations when evaluating the design and testing the operating effectiveness of internal controls in conjunction with a financial statement audit?

What are the key considerations when evaluating the design and testing the operating
effectiveness of internal controls in conjunction with a financial statement audit? Include
considerations in determining what additional audit evidence to obtain about controls that
were operating during the roll-forward period.
The internal control system refers to the rules and regulations that accompany implements
and are used as a strategy to guide their operations. An effective control system is fundamental to
any business venture’s success as it is one of the ways of eliminating possible threats and risks in
the future. All businesses focus on creating effective internal control policies that are in line with
the company’s strategic objectives. However, not all the company’s policies will develop and will
help achieve the set goals and objectives. There might be loopholes in the internal control system
of a company that results in their losses. Therefore, the effective internal control system of a
company needs to undergo an assessment by an auditor who is independent to identify some of
the loopholes present in the system. The paper aims to discuss the internal control system for
ZOU’s Fencing company according to the case study’s information current.
Was the engagement team’s assessment of the evaluation of the design of each control
appropriate (i.e., does the control identified by the team address the specific risk of
material misstatement and associated assertion)?
After analyzing ZOU’s Fencing Controls case study, it is evident that the company has an
issue with their internal control system. The audit engagement team realizes that they are done
with updating the procedure for risk assessment. Also, they have completed considering the
outcomes of monitoring the entity in the controls. They have also obtained an update to the status
of the status entity remediation of shortage and weakness in identifying the materials. The three

ZOU’S FENCING CONTROL 3
procedures are not persuasive enough and effective in managing the company’s internal control.
There is a need for the audit management team to pay more attention to other considerations
(Association of Government Accounts, 2018). The focus is to have a strategy and procedures that
will give room for evaluating the design and testing the internal control activities. The
engagement team needs to consider creating a link between the test’s assertion with the
company’s internal control system.
According to standards number five of accounting, there is a need to combine both
reliability and resonance assurance for internal control to be effective in financial reports. The
focus will be on implementing procedures that will ensure there is a collection of enough
evidence as to whether the company’s management has material weakness exit. There is a
possibility that there is no misstatement in the company’s various fiscal documents, but there is a
material weakness in the internal control procedures. Applies to the internal control on the matter
of financial reporting levels of operation require the auditor to possess the technical skills,
training and capacity to identify the issue in the internal management of the company. Die to
skepticism, and the auditor needs to be independent and provide professional care. From the
information in standard number five of the accounting principles, the level of effectiveness of
internal control and the audit procedure outcomes needs to be aware of the availability of risk in
the assessment (Financial Accounting Standards Board, 2010). By identifying the risks, it is
possible to create procedures that will determine the relevant test to increase efficiency and
internal control effectiveness.
Was the engagement team’s assessment of the risk associated with each control
appropriate?

ZOU’S FENCING CONTROL 4
Before the audit team starts the audit process, there needs to be a layout of the procedure
to conduct the audit. There is a matter that they need to consider to achieve a good plan and
positively affect the audit procedure. Some of the cases they should consider include knowing
the company’s internal control in reporting the finances. The knowledge can be obtained through
an engagement with other auditors that might have taken part in auditing the company in the
past. Another matter to consider is the issue affecting the industry in which the company is
operating. There is an issue related to the company’s business operation, which is equally
important. The extent to which recent changes have taken place in the company and the auditor’s
preliminary judgment on materiality (Association of Government Accounts, 2018). It might not
appear crucial to the auditor but are still essential and should be considered. Such includes the
relative complexity of the company’s activities, information on the risks, the available public
information on material finance statement misstatements, and efficiency in operations.
Was the team’s interim and rollforward planned procedures to test the operating
effectiveness of each control appropriate considering the risk associated with the control?”
The company’s control could be effective through size and the complexity in the
company’s business procedures. The most effective method that would yield positive outcomes is
scaling, which will be applicable in auditing the company. The auditors need to review the works
done by other auditors to reduce the number of tasks they will take part in at the moment. All
third parties, including the stakeholders, need to be notified of the effectiveness of the internal
control in financial reporting. In selecting the internal control test, the audit team needs to
consider an approach like top-down in the intern control. The course’s main aim will be to
increase the delegation of duties and ensure that all the executive members are aware of the audit
process in internal control for reporting the finances.

ZOU’S FENCING CONTROL 5
The assessment team’s method in evaluating the design for the internal control of not the
best. For the first risk, the realization of the risk mis-statement, especially if the audit team is the
one taking part in assessing the risks present in the internal control. There is a need to relate the
testing of internal control to other assertions. One of the most crucial things that the audit team
needs to consider before taking part in the assessment is the nature of the claims they will test.
Some of the assertions connected to the transaction in internal control include occurrence,
accuracy, completeness, cut-offs and even classification. Other arguments relate to the assets,
liabilities and equity of balances in the company. The ideas include rights and obligations,
valuation and completeness (Minjung and Young-Tae, 2019). The audit team needs to select an
assertion and test it separately to access internal control. Observation is a very vital tool in the
testing of the reports. The approach entails taking a look at the activities that other people are
taking part in gaining control. The most common observation is what other auditors are doing to
increase efficiency and effectiveness in internal control. In the audit process the premises is that
the auditor will behave in their best interest and not be under any pressure to make irrational
decisions.
Evaluation design present in risk number one stipulates that the internal control is one of
the automation mechanisms for invoicing the goods and services that have been shipped. There
will be an automatic recording of the goods that were imported from the warehouse. Through the
process, there will be a recording of non-shipped goods that are appropriately addressed and
connected with the risk of mis-statement and assertion (Barth and Landsman, 2010). The audit
team did not test the argument, and they lack evidence to prove the claim. There is also the
absence of a third party independent and would have taken the responsibility of evaluating the
design. However, for the planned effectiveness operation risk number one, the audit team needs

ZOU’S FENCING CONTROL 6
to carry out the testing for a second time for them to be able to gain the required control in
financial reporting. The auditor would benefit by performing tests of controls. The compnay’s
employees can purchase stock in the company, so internal controls must be reviewed to ensure
that management is reporting accurate numbers. If management chooses to purchase stock, then
they have a vested interest in the company’s performance. Management’s interest could create a
conflict of interest in financial reporting.
In conclusion, several sections of the three risks need to be tested again for internal
control. There is no sufficient evidence in the statement provided by the auditor in supporting
their claims. Auditors conduct several tests to evaluate the level of effectiveness of the internal
control system of a company. While testing the efficiency of ZOU’s Fencing company internal
control system, the auditor considered the factors before the conclusion. The very first step in the
process is to consider how the financial documents are retrieved. The papers’ assessment starts
with recording, summarizing, and analyzing the fiscal information, especially those relating to its
transactions. The evaluation should then be based on the person taking part in the process of a
business transaction. There are several considerations when determining the people involved in
the trades. For instance, there is an operation of responsibilities, rotation of duties, and the
employees’ supervision by the executive team of the organization.

ZOU’S FENCING CONTROL 7

References

Association of Government Accounts (2018). Resources. Citizen-Centric Reporting (CCR).
Retrieved February 9, 2018 from: https://www.agacgfm.org/Resources/Performance-
Accountability/CCR.aspx
Association of Government Accounts (2018). Resources. Completed Citizen-Centric Report.
Government CCRs. Retrieved February 11, 2018 from:
https://www.agacgfm.org/getattachment/Resources/Performance-
Accountability/CCR/Completed-CCRs/Government-entity-
CCRs/BaltimoreCityCCR2015.pdf.aspx
Barth, M. E., & Landsman, W. R. (2010). How did Financial Reporting Contribute to the
Financial Crisis? European Accounting Review, 19(3), 399-423.
Financial Accounting Standards Board (2010). Chapter 1, The objective of general-purpose
financial reporting, and Chapter 3, Qualitative characteristics of useful financial
information. (Statement of Financial Accounting Concepts No. 8). Norwalk, CT: FASB.
Retrieved from https://www.fasb.
org/jsp/FASB/Page/SectionPage&cid=1176156316498#2010
Minjung, K. & Young-Tae, Y. (2019). Investor perception of fair value evaluation: focusing on
financial instruments. Investment Management and Financial Innovations, 16(1), 203-
214.