Auditing and Internal Control Systems: Key Definitions

Internal Control and Auditing Terminology

Internal Control

A process effected by an entity's board of directors, managers, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the reliability of financial reporting, effectiveness and efficiency of operations, and compliance.

Risk Assessment

The management process for identifying and responding to business risks faced by an organization.

The Walk-Through

Refers to tracing several transactions through each step in the cycle.

The Control Environment

The collective effect of the overall attitude, awareness, and actions of an entity's board of directors on establishing and enhancing the effectiveness of specific controls.

Organizational Structure

Provides a basis for planning, directing, and controlling operations. It divides authorities, responsibilities, and duties among members.

Human Resources

Involves hiring, training, evaluating, and promoting employees.

The Accounting Information System (AIS)

Consists of all methods and records established to summarize and report the entity's transactions and maintain accountability for assets, liabilities, and equity. The system must:

• Identify and record all transactions.
• Describe transactions.
• Measure the value of transactions.
• Determine the time of transactions.
• Present transactions and related disclosures.

Control Activities

Policies and procedures that management establishes to achieve its objectives and ensure that accurate, reliable financial statements (FS) are produced. These activities include:

1. Performance Review

Management's use of accounting and operating data to assess performance and take corrective action.

2. Information Processing

Focuses on the authorization of transactions and the accuracy and completeness of transaction processing.

3. Physical Controls

Actions taken to ensure the physical security of assets and restrict access to records.

4. Segregation of Duties

Dividing duties so that no employee can make or conceal errors or irregularities in activities.

Monitoring of Control

The process used to assess the quality of internal control performance over time.

Operational Auditing

Refers to a comprehensive examination of an operating unit or a complete organization to evaluate its systems, controls, and performance measures used by management.

Audit Opinions

Unqualified Opinion

A standard report showing an adequate picture with no scope limitations.

Qualified Opinion

States that the financial statements (FS) are presented fairly in conformity with accounting principles, typically with a specific exception noted.

Adverse Opinion

States that the financial statements (FS) are not presented fairly.

Disclaimer of Opinion

Issued when the auditor is unable to express an opinion, typically due to a significant scope limitation.