Internal control

Management is responsible for implementing internal control AND ensuring that it is operating effectively (otherwise how will management be accountable for the safeguarding of the company's assets, for example?) Now please look at the overview at the beginning of Chapter 10. So with this is mind the auditor will consider whether it expects controls to be operating effectively in areas relevant to the financial statements (e.g. sales/credit control, purchases/payables, payroll, inventory management, capital expenditure, etc). IF controls are expected to be effective and IF the auditor wants to place reliance on those controls, the auditor must TEST those controls. For further explanation of the overview and why the auditor is likely to want to place reliance on controls please seem page 50 of the AA notes (in Chapter 8).

So my main confusion was w.r.t to example 1 of the Ethics article on ACCA website. It says this "The audit committee of, Mumbai Co, has asked the partner to consider whether it would be possible for the audit team to perform a review of the company’s internal control system. A number of recent incidents have raised concerns amongst the management team that controls have deteriorated and that this has increased the risk of fraud, as well as inefficient commercial practices. The auditor’s report for the audit of the financial statements of Mumbai Co for the year ended 31 March 2016 was signed a few weeks ago. Mumbai Co is a listed company." Required: Comment on the ethical issues raised and the actions your firm should take in response to the client’s request. The answer says its a self review threat and may possibly lead to assuming a management responsibility. I don't understand how its a self review threat as it is the auditors responsibility/duty to check/review the systems and control for any deficiency. i believe there is no ethical issue as its just a standard duty of auditor to check for the controls. Here the auditor isn't actually looking or detecting a fraud; he's just checking if the controls are fine.

Ah - if you can please give your queries in context I can answer in context. You are not the only student to be confused by this - the short answer is that to say there is no ethical issue can't be a sufficient answer for 6 marks. Please see what I wrote here https://opentuition.com/topic/ethical-and-professional-issues-q-mumbai

Apologies for not being specific, also thank you so much for the help. I understood the part where it will lead the auditor to assume management responsibility if he review controls and systems, but I'm still confused as to how it lead to a self review threat. Could you please help me out with this.

Because if the auditor assumes responsibilities for the internal control system that are management's responsibilities, the auditor would then be testing the controls of "their" system i.e. self-review. As auditor of the financial statements their objectivity would be impaired because, for example, the fact that they had been instrumental in the implementation of the system would mean that they cannot be objective in evaluating the operation of the system. How could they turn round to management and say "sorry but your controls are not operating effectively"?

Crystal clear. Thanks again.

You're welcome!