UNDERSTANDING THE COMPANY AND ITS ENVIRONMENT, INCLUDING
ITS INTERNAL CONTROL
This template provides an easy to use format that can be used to document the auditor’s understanding
of the company and its environment, including its internal control. It is intended that the template would be
used in conjunction with the Institute of Certified Public Accountants in Ireland publication “AUDIT WORK
PAPERS FOR A NOT FOR PROFIT ENTITY ENGAGED IN COMMUNITY DEVELOPMENT ACTIVITIES”.
Some example text is included in the template to illustrate the typical type of content that will be included
in the final document. An example document is also included in the above publication to illustrate the
typical content of audit papers documenting the auditor’s understanding of the company and its
environment, including its internal control. It is envisaged that this document will be a permanent
document that will be updated annually.
It is important that the auditor should amend the template content to reflect the actual audit risk identified
and the planned audit response to these risks. As it is intended that these work papers will be used on
audit assignments of a small company, it is assumed that the auditor will not place reliance on internal
controls and that consequently control risk is high.
Guide to using the work papers
The name of the firm, client, period end, prepared by and reviewed by can be inserted in the page header
and footer and this detail will then appear on each page printed.
In certain sections of the documents we have included a suggested text (in red text) that may be
appropriate in some assignment cases. The user needs to amend this text to suit the actual assignment
situation faced.
UNDERSTANDING THE COMPANY AND ITS ENVIRONMENT, INCLUDING
ITS INTERNAL CONTROL
Industry, regulatory and other external factors
Nature of client including selection and application of accounting policies
Parties identified as related parties of the company.
The financial framework adopted by the company in preparing the financial statements.
The client is preparing their financial statements in accordance with UK and Irish Financial Reporting
Standards.
The overall objectives and strategies pursued by the company and the related business risks
flowing from these objectives and strategies.
Procedures used to measure and review the financial performance of the company and
possible financial pressures on directors/management arising from the above procedures.
UNDERSTANDING THE COMPANY AND ITS ENVIRONMENT, INCLUDING
ITS INTERNAL CONTROL
Internal control
Auditor’s assessment of the control environment in which the company operates and the
implications of this for the risk of material misstatement in the financial statements.
We have assessed the environment in which the internal controls operate as _____. This assessment
is based on:
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In planning the audit strategy we will have regard to this positive assessment of the control
environment.
The manner in which the company assesses and manages risk and possible implications of
this for the risk of material misstatement in the financial statements.
As would be expected in a small company, the company does not have a formal risk assessment
process. The company identifies the risk that the company is exposed to through the regular review
of the company's activities by the directors. A review of the minutes of the directors meetings and
meeting with the directors will provide audit staff with an overview of the risks that the company is
exposed to and the possible impact of these risks on the results of the company for the year. Any
risks identified will be addressed in the audit plan.
The company’s accounting and information system (including controls over accuracy and
completeness of the processing of transactions from the initiation of the transaction through
to settlement of the transaction).
Income / debtors / receipts accounting cycle including controls in the cycle.
UNDERSTANDING THE COMPANY AND ITS ENVIRONMENT, INCLUDING
ITS INTERNAL CONTROL
Purchases/ creditors / payments cycle including controls in the cycle.
Wages cycle including controls in the cycle.
System and internal controls in place over cash handling (including fund raising activities),
accounting for and banking of cash receipts.
Preparation of the financial statements.
UNDERSTANDING THE COMPANY AND ITS ENVIRONMENT, INCLUDING
ITS INTERNAL CONTROL
Manner in which the company monitors the above controls
Monitoring of controls.
As is common in many small companies, a formal system of monitoring of controls does not exist
and monitoring of controls relies solely on the overview exercised by the directors. The directors
would appear to exercise the monitoring function in a diligent manner.
The company is also subject to review ...............