Assessing Internal Controls, Auditing Practices, and Materiality in Financial Reporting

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1Assessing Internal Controls, Auditing Practices, and Materiality in FinancialReportingQuestion OneThe duty to assess the internal controls of the company should be a decentralized activity.Entrusting management to control the process is counter-productive as it could easily result intosome unscrupulous managers using their positions of authority to manipulate junior employees.The use of different standards within the same organization is a deficiency borne out of thefact that this could easily lead to conflict of interest. The different sets of rules may proposediffering ways to handle the same activity, leading into confusion.The audit report fails to inspireconfidence into the user by using poorly selected words.AnswerThe assessment of internal controls within a company is an essential function for ensuring theintegrity and effectiveness of its operations. Traditionally, internal controls refer to policies andprocedures implemented by a company to safeguard its assets, ensure accurate financial reporting,and promote compliance with laws and regulations. When it comes to the duty of assessing theseinternal controls, it is often debated whether the process should be centralized or decentralized.Decentralization of Internal Control AssessmentA decentralized approach to assessing internal controls is one in which the responsibility isdistributed across different levels of management and departments within the organization. This isconsidered crucial for several reasons. First, decentralizationallows for more objective oversightand helps prevent conflicts of interest. When internal control assessments are solely managed bysenior management, there is a risk that managers might manipulate the process to suit their owninterests. For example, amanager who is responsible for monitoring internal controls mightdownplay weaknesses or irregularities in the system to avoid scrutiny, which could lead todishonest practices. This is particularly true in situations where junior employees might feel

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