 in this presentation we will take a look at an internal control flowchart mapping out the processes and procedures related to internal controls starting off with the develop and understanding of internal controls by first a word from our sponsor well actually these are just items that we picked from the youtube shopping affiliate program but that's actually good for you because these aren't things that were just given to us from some large corporation which we don't even use in exchange for us selling them to you these are things that we actually researched purchase and use ourselves acer 27 inch monitor i've been using an acer monitor as my primary monitor for a few years now this is the first acer monitor that i have used after having used a series of different brands of monitors in the past the acer monitor has been performing well and i'm trusting the acer brand more and more as i use the monitor i have a 27 inch monitor which i think is ideal for what i do which is of course the 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point that's what this red box then means that we have a question a yes or no type of question does the auditor intend to rely on the control so at this point we have to say do we rely on the controls or not now if we're thinking about a publicly traded companies we will probably be saying yes we're going to rely on the internal controls if we cannot rely on the controls we're in big trouble because we typically can't do enough substantive testing in the time frame given to really support the full audit of a publicly traded company however if we have something less than a publicly traded company it may may well be the case that we don't intend to fully trust or rely on the internal controls and therefore we're going to do more substantive testing so remember at this point publicly traded company are we going to are we going to rely on the internal controls we hoped we can at this point or else we're going to have to take into consideration what we're going to do going forward whether or not we can basically finish the audit within the scope of it if we're talking about smaller company we may say no and in that case we're going to do more substantive testing so you can imagine if we have a smaller company we're going to say okay this internal controls aren't something that we can completely rely on what are we going to do then we're going to do a substantive strategy meaning we're going to set control risk at the max we're going to say control risk is high meaning there's a high risk that the internal control set up by the organization by the business will not detect a material misstatement and therefore we need to do more testing on the substantive testing side so what are we going to do we're going to increase the amount of the substantive testing instead of wasting our time or going further thinking about testing the internal controls which we've determined not to be sufficient and therefore not something that we rely on within our audit process therefore instead of testing internal controls we're going to go straight to what we would think of as the more kind of substantive test that the tests of going right to the accounts and essence and start to test assertions related to account balances and transactions if we can rely on the controls which again we probably will have to hopefully to some degree for large organizations publicly traded companies then we're going to look at a reliance strategy and we're going to plan and perform tests of controls so if we're going to rely on the internal controls what we're going to do then is then do further planning and testing related to the internal controls because it should be easier to test the controls the checks and balances in the system as opposed to just trying to check the end result all the transactions that are resulting from the checks and balances so we're going to go in and basically check the checks and balances of the system depend on it hopefully and therefore or be able to depend on it hopefully if we trust them and then we can do less of the actual substantive testing set control risk based on the test of control so once we test the controls then we'll set the control risk at that point in time then we're going to ask ourselves another question at that point in time does the achieved level of control risk support the plan level of control risk so have whatever control risk we then set after looking at it does that meet what we've what we've decided on in terms of our planned control risk and then if if if the answer is no then we're going to revise the plan level of substantive testing so in other words if we have a reliance strategy we're going to set the level of the basically the control risk and then we're going to do the testing and if we have to make an adjustment then we make an adjustment and we adjust then and revise the level of substantive procedures so in other words if we cannot the control risk is different than what we assess the control risk to be in the planning stage we're going to account for that by revising the level of substantive testing testing on the account level and the assertion level the transaction level as opposed to on the checks and balances or internal control level will document the level of control risk that we have determined to be and then we'll perform the substantive procedures based on the level of assessed control risk so obviously once we set the control risk then we can move on to the next stage and say okay now we can determine how much substantive testing we need to meet our objectives go down to the to the ground floor the actual kind of thing that most people probably think of with the within audit is actually dig into those accounts on the substantive level going through accounts and transactions related to them if on the other hand going back up to this red item that we asked this question does the achieve level of control risk support the plan level of control risk if the answer is yes it does then we're going to rely on the on those controls and we'll go forward and go straight down to the perform substantive procedures based on level of assessed control risk that we have determined