Page 422 - Introduction to Business

396 PART 4 Accounting

to a particular transaction among two or more employees. In particular, the physical
custody of an asset should be kept separate from the record-keeping function. For
example, the person who is responsible for writing checks for disbursements
should not be assigned the task of reconciling the bank account. Other preventive
controls include
• Hiring competent and ethical employees
• Written policies and procedures
• Physical security of firm assets
• Appropriate management supervision
• Adequate documents and records
feedback controls A type of internal Feedback controls are a type of internal control that reports the occurrence
control that reports the occurrence of of mistakes or intentional misrepresentations after they have occurred, so that
mistakes or intentional corrective action can be taken. Feedback controls are effective only if they
misrepresentations after they have
occurred, so that corrective action can include the following characteristics:
be taken
• Benefits exceed costs of operating the controls.
• Deviations from the benchmark (e.g., budget or standards) are reported on a
timely basis.
• Relevant and understandable information is provided.
• The manager takes action in a timely manner.
Examples of feedback or administrative accounting systems include credit
control, production quality control, and internal audit.

Role of the Auditor
The success of any organization depends on an effective control structure. Since
management is responsible for achieving a company’s goals and objectives, it is
responsible for the adequacy of the company’s control structure. The independent
auditor, on the other hand, has a responsibility to evaluate these controls and to
report any material weaknesses noted to management.
Auditing standards require that the auditor obtain knowledge about the client’s
internal control structure. Audit effectiveness is improved with better audit plan-
ning and more precise assessment of control risk. Auditing standards define the
relationship between internal control structure and assessing control risk and
financial statement assertions.
The accounting information system and its control structure are the founda-
tion on which financial information is gathered, verified, and disseminated. The
independent auditor must develop a thorough understanding of the client’s control
structure and system. Understanding, testing, and evaluating accounting information
systems has become more difficult due to the general complexity of systems, as well
as to their increasing computerization. Auditors must possess a clear understand-
ing of the impact of electronic data processing on the audit process. Statements on
Auditing Standards No. 48, “The Effects of Computer Processing on the Examina-
tion of Financial Statements,” states:

The auditor should consider the methods the entity uses to process accounting
information in planning the audit because such methods influence the design of
the accounting system and the nature of the internal accounting control proce-
dures. The extent to which computer processing is used in significant accounting
applications, as well as the complexity of that processing, may also influence the
nature, timing, and extent of audit procedures. 9
Computerized accounting information systems have several inherent advan-
tages over manual systems. The advantages include

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