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Understanding Conflict of Interest and Internal Control in Auditing

This chapter explores the critical principles of independence in auditing—including independence in fact and appearance—and outlines how auditors can unintentionally compromise their objectivity through relationships with clients. It emphasizes the importance of the Fraud Triangle's components: perceived pressure, opportunity, and rationalization. Additionally, it highlights the COSO framework for internal controls, focusing on elements such as risk assessment, control activities, and the necessity of segregation of duties to prevent fraud and ensure integrity in financial reporting.

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Understanding Conflict of Interest and Internal Control in Auditing

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  1. Chapter 2 Conflict of interest

  2. SEC guiding principles not in book Independence in fact Independence in appearance Auditors are not independent if relationships Create mutual or conflicting interests with client Audit their own work Act as management or employee of the client Be an advocate for the client

  3. Fraud Triangle • Perceived Pressure • Perceived Opportunity • Ability to Rationalize • This layout is similar to Appendix 1 in ISA 240

  4. a bit of a switch to Internal Control • Remember the COSO elements of Internal Control • Remember the Control Procedures

  5. COSO components of internal controls • Control environment Control environment • Risk assessment • Control procedures Control activities • Information & communication Accounting function • Monitoring

  6. 3. Control Procedures Adequate segregation of duties Proper authorization of transactions & activities Adequate documents & records Physical controls over assets & records Independent checks on performance segregation of duties system of authorization independent checks the Albrecht book physical safeguards documents & records

  7. Segregation of Duties Must separate Custody of Assets Authorization of Transactions Record-Keeping

  8. a bit of a switch to Internal Control • Perceived Pressure • Perceived Opportunity • COSO internal control framework • Control Environment • Risk Assessment • Control Activities (Procedures) • Accounting Function (info & communicate) • Monitoring • Ability to Rationalize • This layout is similar to Appendix 1 in ISA 240

  9. a bit of a switch to Internal Control • Perceived Pressure • Perceived Opportunity • COSO internal control framework • Control Environment • Risk Assessment • Control Activities (Procedures) segregation of duties system of authorization independent checks physical safeguards documents & records • Accounting Function (info & communicate) • Monitoring • Ability to Rationalize

  10. Page 153

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