Page 89 - CA Final PARAM Digital Book.

Institute/Improve its Internal Control. In this context, Management wants to understand the concept of
components of Internal Control Structure in detail. Advise.
Answer The Internal Control structure in an organization is referred to as the policies and procedures established by
the entity to provide reasonable assurance that the objectives are achieved. The control structure in an

organization basically has the following components:
➢ Control Environment - Control environment covers the effect of various factors like management
attitude; awareness and actions for establishing, enhancing or miti gating the effectiveness of
specific policies and procedures.
➢ Control Procedure - Policies and procedures means those policies and procedures in addition to the
control environment and accounting systems which the management has established to achieve the
entity’s specific objectives.
➢ Accounting System - Accounting system means the series of task and records of an entity by which
transactions are processed for maintaining financial records. Such system identifies, \ assemble,
analyze, calculate, classify, record, summarize and report transactions and other events.

Specific Requirement under SA 315 - “Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment” deals with the auditor’s responsibility to identify and assess
the risks of material misstatement in the financial statements, through understanding the entity and its
environment, including the entity’s internal control.

In this regard, the management is responsible for maintaining an adequate accounting system incorporating
various internal controls to the extent that they are appropriate to the size and nature of the business. There
should be reasonable assurance for the auditor that the accounting system is adequate and that all the
accounting information required to be recorded has in fact been recorded.

Internal controls normally contribute to such assurance. The auditor should gain an understanding of the
accounting system and related internal controls and should study and evaluate the operation of those
internal controls upon which he wishes to rely in determining the nature, timing and extent of other audit
procedures. Where the auditor concludes that he can rely on certain internal controls, he could reduce his
substantive procedures which otherwise may be required and may also differ as to the nature and timing.
Author’s Note

Question wants to simply ask— What do you mean by “internal control structure”

QNO Circumstances in which risks can arise or change- Old Course – (N19E, N20E, SM21)
40.150 TITANIUM CNO—MRI.400
The Entity’s Risk Assessment Process includes how management identifies business risks relevant to the
preparation of financial statements in accordance with the entity’s applicable financial reporting
framework, estimates their significance, assesses the likelihood of occurrence and decides upon actions
to respond to and manage them and the results thereof. Elucidate the circumstances in which risks can
arise or change.
OR
For financial reporting purposes, the entity's risk assessment process 5 includes how management
identifies business risks relevant to the preparation of financial statements in accordance with the entity's
applicable financial reporting framework, estimates their significance, assesses the likelihood of their
occurrence, and decides upon actions to respond to and manage them and the results thereof. Explain the
circumstance under which risk can arise or change.
Answer ➢ Risks can arise or change due to circumstances such as the following:
(Shortcut PFA – TRAGIC risk assessment)

P- New Personnel.
New personnel may have a different focus on or understanding of internal control.

F- Expanded Foreign operations.
The expansion or acquisition of foreign operations carries new and often unique risks
that may affect internal control, for example, additional or changed risks from foreign
currency transactions.

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