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Idea List for the Financial Management Cycle
(Includes Cash Balances, Investments, Debt, Equity, Related Party Transactions and Interest Income and Expense)
Table of Contents
I Understand aspects of the business related to financial management
II Understand the accounting policies
III Understand the accounting system and control procedure
IV Identify key financial statement assertions and other significant assertions
V Identify cycle inherent risks and consider inherent risks relating to key assertions
VI Consider tile types of misstatements that could occur and assess control risk
VII Understand control procedures, assess control risk, identify key control procedures and test key control procedures for certain control risk level assessments
VIII Summary of effectiveness tests of key control procedures
IX Tests of key control procedures
X Design and perform analytical procedures
XI Summary of substantive tests of detail
XII Substantive tests of detail
Financial management cycle activities include the issuance of equity or debt, investment in securities or other assets and cash management. The financial management cycle also includes related party transactions.
VI. Consider the types of misstatements that could occur and assess control risk
After we identify tile cycle's inherent risks, we can consider the types of errors that could occur either because a control procedure fails or is not in place. We should consider the types of overstatements or understatement error that are likely to occur given the inherent risks of the cycle.
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VII. Understand control procedure, assess control risks, identify key control procedures and testing key control procedures for certain risk level assessments
Control risk is the risk that material misstatements could occur and not be prevented, detected or corrected on a timely basis by the client's internal control structure policies and procedures. An understanding of the control structure, including the control environment, accounting system and control procedures, is necessary in order to assess control risk. We may assess control risk at maximum (assuming no control procedures in place) or less than maximum. When we assess control risk at slightly less than maximum we should identify the control procedure and see if it is placed in operation. We do not test the procedures. When our control risk assessment is moderate based on assessment of the control environment and after identifying key control procedures, we test key control procedures by means of active inquiry or tests of controls. Moderate risk means we believe that control procedures will prevent or detect between 10% to 70% of misstatements that will occur (or there is a 30% to 90% chance that control procedures will fail). When our assessment of control risk is low we believe that 60% to 90% of the misstatements that have occurred will be prevented or detected.
The only difference in assessing control risk at moderate or low is the difference in our preliminary assessment control procedures are somewhat more or less effective. We cannot change our assessment by doing more tests.
VIII. Summary of tests of key control procedures
Develop tests of control procedures. Active inquiry procedures are necessary to assess control risk at moderate and should be used when key control procedures for an assertion in a cycle is not documented, for example, segregation of duties. We may use detail test of procedures listed below as tests of control procedures when we assess control risk as moderate or low and have identified and documented the key control procedures of an assertion. When we do not identify and document key control procedures in an assertion the tests of detail can be used as substantive tests of transactions. The audit planning forms document the control risk by cycle and assertion, the key control procedures and whether key control procedures are placed in operation and are functioning. We should test control procedures when we assess control risk as moderate or low, which levels of risk would allow us to reduce our substantive tests.
IX. Test of key control procedures
XI. Summary of substantive tests of detail
Design substantive tests of details considering the tests of control procedures performed at the assessment of control risk, the overall inherent risk and the direction of risk. When possible, combine substantive tests, both within and between cycles. Also consider the extent of reliance placed on related analytical procedures. Determine the nature, timing and extent of the substantive tests and determine whether scopes of the tests are sufficient detect material misstatements. Consider performing these substantive tests:
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