6-1 What are managements incentives for establishing and maintaining

strong internal control? What are the auditors main concerns with internal
control?
Strong internal controls ensure that assets and records are properly
safeguarded. Management also needs a control system that generates
reliable information for decision-making. If the information system does
not generate reliable information, management may be unable to make
informed decisions about issues such as product pricing, cost of
production, and profit information.
The auditor uses the understanding of the entities internal control to
identify the types of potential misstatements, ascertain factors that affect
the risk of material misstatement, and design tests of controls and
substantive procedures. The auditors understanding of internal control is a
major factor in determining the overall audit strategy.
6-6 Why must the auditor obtain an understanding of internal control?
The auditor should obtain an understanding of each of the five
components of internal control in order to plan the audit. This
understanding includes knowledge about the design of relevant controls
and whether they have been placed in operation by the entity.
The auditor uses this knowledge to:

Identify the types of potential misstatement

Pinpoint the factors that affect the risk of material misstatement
Design tests of controls and substantive procedures

6-15 What are some of the factors that you should consider when deciding
whether to move to a reliance strategy?
The auditor should consider a reliance strategy if evidence is available
only in electronic form. Also, the auditor would need to test the system to
determine whether it is working as intended. If the system is working
effectively, the auditor is more likely to use a reliance strategy. The auditor
should also consider whether the firms knowledge of IT systems is
sufficient to allow it to use a reliance strategy; if not, a substantive
strategy may be more appropriate
b) Under what conditions should audit firm engage an IT expert? And what
information should the expert provide?
Audit firm should engage an IT expert only if the new system is complex
and the extent to which audit evidence is available only in electronic form.
c) How are the five components of the entitys internal control affected by
the entitys change to an IT based accounting system?

6-18 Describe factors Cook should consider before applying substantive

procedures to Generals balance sheet account.

The cost of substantive test to cover the final two months of the
year and provide the appropriate audit assurance at year end is
substantial
Cooks experience with the reliability of the accounting records and
management integrity.

b) How cook should design the substantive procedures covering the

balance as of 30 June 2013, and the transactions of the final two months
of the year.
Cook should do a comparison of year-end information with interim
information to identify and investigate unusual amounts.
6-19 How should Smith communicate the identified deficiencies in internal
control?