Auditing standards require the identification and testing of entity-level controls. What are examples of entity-level controls? What are the auditor’s responsibilities with respect to evaluating and testing a client’s period-end financial reporting process?

Question

What will be an ideal response?

Answer 1

AS 2201.24 indicates that “Entity-level controls include –
Controls related to the control environment;
Controls over management override;
NOTE Controls over management override are important to effective internal control over financial
reporting for all companies, and may be particularly important at smaller companies
because of the increased involvement of senior management in performing controls and in
the period-end financial reporting process. For smaller companies, the controls that address
the risk of management override might be different from those at a larger company. For
example, a smaller company might rely on more detailed oversight by the audit committee
that focuses on the risk of management override.
The company’s risk assessment process;
Centralized processing and controls, including shared service environments;
Controls to monitor results of operations;
Controls to monitor other controls, including activities of the internal audit function, the audit
committee, and self-assessment programs;
Controls over the period-end financial reporting process; and
Policies that address significant business control and risk management practices.
The period-end financial reporting process is a significant process and must be evaluated by the
auditor because of its importance to financial reporting in general and to the auditor’s opinion on the
effectiveness of internal control over financial reporting and the financial statements as a whole.
The period-end financial reporting process includes the following –
Procedures used to enter transaction totals into the general ledger;
Procedures related to the selection and application of accounting policies;
Procedures used to initiate, authorize, record, and process journal entries in the general ledger;
Procedures used to record recurring and nonrecurring adjustments to the annual and quarterly
financial statements; and
Procedures for preparing annual and quarterly financial statements and related disclosures.
NOTE Because the annual period-end financial reporting process normally occurs after the “as-of ”

date of management’s assessment, those controls usually cannot be tested until after the as-
of date. (AS 2201.26)

As part of evaluating the period-end financial reporting process, the auditor should assess:
Inputs, procedures performed, and outputs of the processes the company uses to produce its
annual and quarterly financial statements;
The extent of information technology (“IT”) involvement in the period-end financial reporting
process;
Who participates from management;
The locations involved in the period-end financial reporting process;
The types of adjusting and consolidating entries; and
The nature and extent of the oversight of the process by management, the board of directors, and
the audit committee.
NOTE The auditor should obtain sufficient evidence of the effectiveness of those quarterly controls
that are important to determining whether the company’s controls sufficiently address the
assessed risk of misstatement to each relevant assertion as of the date of management’s
assessment. However, the auditor is not required to obtain sufficient evidence for each
quarter individually. (AS 2201.27)