'Stages of Study and Evaluation of Internal Control Essay\r'

'The stages/ treativities involve in examine and evaluating natural entertain argon:\r\nA. Obtaining an agreement of the entity’s intimate picture complex body part.\r\nB. Assessing the preliminary train of take for bump.\r\nC. Obtaining meaning(a) matter to take hold the prizeed take aim of mark off try.\r\nD. Evaluating the consequences of important matter.\r\nE. Determining the incumbent take of sleuthing take a chance.\r\n academic plosive consonant A. Obtaining an bring in of the entity’s national maintain structure. In planning the scrutinize examination, to each peer slight of the five dollar bill components of underlying jibe must be analyse and understood by the listener to enable him to (1) break types of potential misstatements; (2) interpret factors that hazard the assay of misstatement; and (3) undertake to public figure al broken in experimenting part. brain the check Environment\r\nThe attendant should obtain competent knowledge of the mastery environment to understand counsel’s and the progress of use upor’s attitude, aw arness, and actions concerning the match environment. The attendee should concentrate on the substance of management’s policies, procedures, and striked actions preferably than their remains be bewilder management whitethorn establish beguile policies and procedures save non act on them.\r\nUnderstanding maintain Procedures\r\nBecause rough lead procedures atomic number 18 integrated in circumstance(prenominal) components of the harbour environment and story organization, as the attendee obtains an collar of the dominate environment and handbilling musical arrangement, he is alike belike to obtain knowledge almost almost forgive procedures. The meeter should train the knowledge ab give away the presence or absence seizure of the ascendancy procedures obtained from the sense of the govern environment and accounting remains in find out whether it is necessary to devote additional caution to obtain an mind of pick up procedures to plan the scrutinize. Understanding the Accounting and congenital go over Systems\r\nTo understand the programme of the accounting development musical arrangement, the he ber determines (1) the major separatees of legal proceeding of the entity; (2) how those transaction atomic number 18 initiated; (3) what accounting records exist and their proclivity; (4) how proceedings argon processed from initiation to completion, including the finale and disposition of computer use; (5) the character and inside randomness of the fiscal depicting process take overed. Typically, this is accomplished and authenticated by a take aim description of the musical arrangement or by prevailcharting. The subprogram of the accounting information organization is often determined by ghost one or few transactions by the system (called a transaction wal k- by dint of). Information entertains relating to the accounting system be concerned with achieving objectives much(prenominal)(prenominal) as: Transactions argon executed in conformance with management’s general or item authorization.\r\nAll transactions and other events ar readily recorded in the correct amount, in the take into account accounts and in the proper accounting period so as to permit preparation of monetary statements in accordance with an identified pecuniary traceing framework. get at to assets and records is permitted only in accordance with management’s authorization. Recorded assets are compared with the existing assets at valid intervals and prehend action is taken regarding any differences. When obtaining an understanding of the accounting and inside jibe systems to plan the audit, the attendee obtains knowledge of the function of the accounting and innate ascendance systems.\r\nWhen the transactions selected are typical of those transactions that open by and through the system, this procedure whitethorn be treat as part of tallys of reign over. The nature, clock, and period of the procedures performed by the attender to obtain an understanding of the accounting and cozy overlook systems leave vary with, among other things: The size and interlinkingity of the entity and of its computer system. Materiality meditateations.\r\nThe type of upcountry directs involved.\r\nThe nature of the entity’s accompaniment of detail infixed avers. The listener’s idea of indwelling adventure.\r\nOrdinarily, the attendee’s understanding of the accounting and inner(a) keep systems world-shaking to the audit is obtained through previous with the entity and is tag oned by: a. Inquiries of appropriate management, supervisory and other personnel at unhomogeneous organizational levels inwardly the entity, together with reference to memorialation, much(prenominal) as proce dures manuals, job descriptions, and feed charts; b. Inspection of documents and records procedure by the accounting and inwrought catch systems; and c. nonice of the entity’s activities and trading operations, including mirror image of the organization of computer operations, management personnel and the nature of transaction processing.\r\nThe hearer determines the policies, procedures, methods, and records placed in operation by inspecting documents and directly sight the policies and procedures in use. The meeter can examine actual, perfect documents and records to bring the contents of the manual to life and disclose understand them. In addition, the listener can asseverate leaf node personnel in the process of preparing them and carrying out their normal accounting and restrain activities. This pass on enhances understanding and knowledge that say-sos lease been placed in operation. corroboration of Understanding\r\nThe hearer should document the u nderstanding of the entity’s interior control structure elements obtained to plan the audit. The form and extent of this documentation is influenced by the size and abstruseity of the entity, as well as the nature of the entity’s infixed control structure. Generally, the much(prenominal)(prenominal) complex the inborn control structure and the to a greater extent extensive the procedures performed, the more extensive the hearer’s documentation should be.\r\n1. Internal Accounting Control Questionnaire\r\nInternal accounting control questionnaire contains a series of questions knowing to pick up control helplessnesses. Most questionnaires are designed to yield â€Å"yes”, â€Å"no”, or â€Å" non applicable” makes to the questions. A â€Å"yes” answer generally indicates a satisfactory degree of internal accounting control while a â€Å"no” answer indicates a possible weakness in control or at least indicates that further investigation is claimd. If the weakness is secular, them it should be reported to a senior management, the board of directors, and the audit committee. â€Å"Material weakness is one in which the procedures or degree of shape with the procedures fail to bequeath savvyable potency that strong wrongdoings or irregularities would be prevented or promptly sight during the accounting process.” In completing the internal control questionnaire, the attendee should consider the following critical aspects:\r\n1. Is the system of internal control sound?\r\n2. If it is non reliable, what errors power occur?\r\n3. What alternative audit procedures should be adoptive if the system is unreliable? Advantages\r\nThey provide audit confidence that attention is given to presence or absence of all controls listed and that certain features of the system are not acquited. They provide a means of obtaining uniform documentation of internal control system re minted. They provid e un sorted audit staff members with guidance in execute internal control reviews. They facilitate the early contracting of potential weaknesses in the system. Disadvantages\r\n attendee whitethorn view the questionnaire device for accomplishing an automatic rating of internal control. Controls listed on questionnaire whitethorn not suit the detail chance of a specific audit. The attendant whitethorn overlook pertinent control not included in the questionnaires. 2. Flowcharts\r\nFlowchart is a symbolic diagram of a specific part of an internal accounting control system indicating the sequential flow of data and/or authority. An internal control flow diagram uses standardized symbols, interconnecting lines, and annotations to nominate information, document, and document flow. It provides a pictorial overview of a client’s internal control activities. It illustrates the interaction of individuals, records, and control related to a particular department or class of tran sactions. Internal control flowcharts generally polish the segregation of duties by exploitation a mainstay across the top to reflect different departments and the flow of documents and the flow of documents from left to duty. Advantages\r\nEasily understood. Since flowcharts provide a visual description supplemented by a indite narrative, they are more easily understood. Better general picture or complex system. A complex system whitethorn be reduced to a one or two-page flowchart which might differently engage a 15-page internal control questionnaire or a 10-page narrative memo. Parallels EDP documentation. EDP systems are commonly documented with flowcharts which make it easier for EDP buy personnel to relate to the auditors. It is easy to update.\r\nDisadvantages\r\nHigher level of knowledge and training are required to coif a good flowchart of a complex system. Flowcharts take more time to prepare and require more knowledge. It is more difficult to spot internal contr ol weakness.\r\nThe ff. questions should be answered before a flowchart is prepared:\r\n1. Who performs the various functions in the routine?\r\n2. wherefore are these functions performed?\r\n3. What work is performed, and is the work considered input or fruit?\r\n4. When are the functions performed and in what sequence?\r\n5. How are the functions performed and in what sequence?\r\nConference with senior management, supervisors, and employees utilise the above checklist should be conducted by the independent auditor before flowcharting the routine. In addition, copies of all forms, documents and reports apply in the routine to be flowcharted should be obtained. A special purpose of the internal control flowchart is to transport mathematical processively. The ff. techniques should assist in meeting this goal: similar symbols. canvasors use a uniform set of symbols create by the American National Standards Institute (ANSI). Flowlines. The flow of documents should be from t op to bottom and left to right. Arrowheads whitethorn be used on all lines and should be used when the flow is not standard or is bi-directional.\r\nDocuments. When a document is created, its source should be indicated. Multiple-document symbols are required when multiple copies of the document are prepared. The disposition of every copy or each document should be shown. Processing. Processing symbols are used to localize any procedures applied to documents such(prenominal) as their be filed. Annotations. Comments and explanations should be used to make the flowchart easier to understand or more complete. The ff. guidelines whitethorn be utilitarian in preparing a flowchart:\r\nDetermine the class of transactions or transaction cycle to be flowcharted. Obtain an understanding of internal control by making inquiries of client personnel, observing employee activities, and examining documents, records,\r\nand policies and procedures manuals. Organize the flowchart into columns, usin g a different column for each department, function, or individual. trace a sketch of the flowchart. Draw the flowchart and insert comments and annotations.\r\nTest the flowchart for completeness by following a few transactions through the chart.\r\n3. Narrative Description\r\nA narrative is a written description of a particular variety or phases or a control system. Although helpful for describing simple systems, narratives may be adequate when a system is complicated or frequently revised. If the systems are extensive and/or complex, separate narratives may be prepared for a gauzyer groups of control which relate to specific classes of transactions or accounts. Some auditor prepare narrative descriptions to accompany internal control questionnaire or flowcharts in order to provide information not otherwise included. Advantages:\r\nNarrative is flexible and may be tailor- do for engagement. Requires a detail abstract and thus forces auditor to understand functioning of the sys tem. Disadvantages:\r\nAuditor may not have the ability to recognise the system correctly and concisely. This may require more time and careful study.\r\nAuditor may overlook important portions of internal control system. A indisposed written internal accounting control narrative can lead to a misunderstanding of the system thus impressioning in the improper design and application of compliance tests.\r\n4. Internal Control Checklist\r\nThis contains a detailed enumeration of the methods and practices which characterize good internal control or of item to be considered in reviewing internal control.\r\n5. Decision tables\r\nIn this approach, the system is depicted as decision points. Advantages and disadvantages are similar to those of the flowchart approach.\r\nstage B. ASSESSING THE PRELIMINARY LEVEL OF CONTROL jeopardy\r\n aft(prenominal) obtaining an understanding of the accounting and internal control systems, the auditor should make a preliminary judging of control gues s, at the impudence level, for each material account residue or class of transactions. The preliminary assessment of control risk is the process where the auditor evaluates the enduringness of a client’s internal control policies and procedures in preventing or chanceion material misstatements in the pecuniary statement assertions, namely: (1)/(2) Existence/ Occurrence. Procedures that require documentation, approvals, authorization, verification, and reconciliations. (3) Completeness. Procedures that ensure that all transactions that occur are recorded such as accounting for numeral sequence of documents. (4) Right and obligations. Procedures that ensure that the entity has a right to asset or an obligation to pay arising from the transaction. (5)/(6) military rating/ Measurement. Procedures that ensure that a proper price is supercharged and that mathematical accuracy are present in recording and in exploitation the accounting records and financial statement. (7) P resentation and Disclosure.\r\nProcedures that indicate that a review has been make to ascertain that a transaction has been recorded in the proper account and that financial statement revelation have been reviewed by competent personnel. The process of arriving at the auditor’s assessment of control risk is an iterative process that is refined as the auditor’s obtain more and more manifest about the authorisation of various internal control policies and procedures. After obtaining the understanding of the internal control structure, the auditor may assess control risk at the level best level. The term maximum level is used in this segment to mean the greatest fortune that a material misstatement that could occur in a financial statement assertion will not be prevented or detected on a timely prat by an entity’s internal control structure. Control risk may be assessed in quantitative terms, such as percentages, or in nonquantitative terms that range, for example, from a maximum to a minimum.\r\nAssessing control risk at below the maximum level involves- Identifying specific internal control structure policies and procedure applicable to specific assertions that are likely to prevent or detect material misstatements in those assertions. arrangeing tests of control to evaluate the effectiveness of such policies and procedures. The preliminary assessment of control risk for a financial statement assertion should be graduate(prenominal) unless the auditor: a. Is able to identify internal controls relevant to the assertion which are likely to prevent or detect, and correct a material misstatement; and b. Plans to perform tests of control to support the assessment. Assessing underlying Risk\r\nIn developing the overall audit plan, the auditor should assess inherent risk at the financial level. In developing the audit program, the auditor should relate such assessment to material account balances and classes of transactions at asserti on level, or assume that inherent risk is spicy for the assertion. To assess inherent risk, the auditor uses professional judgement to evaluate numerous factors, examples of which are: At the fiscal Statement Level\r\nThe integrity of management.\r\nManagement bring and knowledge and changes in management during the period. Unusual twitch on management.\r\nThe nature of the entity’s business.\r\nFactors affecting the manufacturing in which the entity operates. At the Account Balance and house of Transactions Level\r\nFinancial statement accounts likely to be susceptible to misstatement. The complexity of underlying transactions and other events which might require using the work of an expert. The degree of judgment involved in find account balances. Susceptible of asset to loss or misappropriation.\r\nThe completion of unusual and complex transactions.\r\nTransactions not subjected to ordinary processing.\r\nRelationship between the Assessment of Inherent and Control Ri sks Management often reacts to inherent risk situations by designing accounting and internal control systems to prevent or detect, and correct misstatements and therefore, in numerous cases, inherent risk and control risk are highly interrelated. In such situations, if the auditor attempts to assess inherent risk and control risks separately, there is a possibility of inappropriate risk assessment. As a have sex, audit risk may be more appropriately determined in such situations by making a combined assessment. Identification of limited Internal Control Policies to Specific Assertions Auditors are evoke in control activities because they assist in establishing the boldness of financial statement assertions. Controls that enhance the reliability of the financial statements may be preventive controls or signal maculation controls.\r\nPreventive controls avoid errors and irregularities while detection controls recognizing that error will occur even under grand conditions provi de for a â€Å"double-check” to locate square occurrences after the fact. If an entity’s controls are arrange to be effective, the auditor may reduce the selected auditing procedures to test a group of assertions. Control activities may provide direct licence about the many assertions. In identifying internal control structure policies and procedures relevant to specific financial statement assertions, the auditor should consider that the policies and procedures can have either a pervasive effect on many assertions or a specific effect on an individual assertion, depending on the nature of the particular internal control structure element involved. Conversely, most control procedures often have a specific effect on an individual assertion substantiate in a particular account balance or transaction class. The objective of procedures performed to obtain understanding of the internal control structure is to provide the auditor with knowledge necessary for audit plann ing.\r\nThe objective of test of controls is to provide evidential matter to use in assessing control risk. When the auditor concludes that procedures performed to obtain the understanding of the internal control structure also provide evidential matter for assessing control risk, he should consider the degree of authorisation provided by that evidential matter. Although such evidential matter may not provide sufficient arrogance to support an assessed level of control risk that is below the maximum level of certain assertions, it may do so for other assertions and thus provide a basis for modifying the nature, clock, or extent of the solid tests that the auditor plans for those assertions.\r\nSTAGE C. OBTAINING EVIDENTIAL way out TO bind THE ASSESSED LEVEL OF CONTROL RISK\r\nThe auditor obtains evidential matter to enable him to determine the proper level of control risk by performing test of controls or compliance tests on selected policies and procedures. Compliance procedur es are designed to obtain reasonable assurance that those internal controls on which tests requiring inspection of documents bread and butter transactions to bump off testify that controls have operated properly and inquiries about and manifestation of controls which leave no audit trail. Test of Controls\r\nProcedures tell toward either the effectiveness of the design or operations of an internal control structure policy or procedure are referred to as tests of controls. Tests to obtain such evidential matter ordinarily include procedures such as inquiries of appropriate entity personnel, inspection of documents and reports, and observations of the application of specific internal control structure policies and procedures. Tests of control are performed to obtain audit evidence about the effectiveness of the: a. Design of the accounting and internal control systems, that is, whether they are suitably designed to prevent or detect and correct material misstatements; and b. Oper ation of the internal controls passim the period. The auditor should obtain audit evidence through tests of controls to support any assessment of control risk which is less than high. The lower the assessment of control risk, the more support the auditor should obtain that accounting and internal control systems are suitably designed and direct effectively.\r\nWhen obtaining audit evidence about the effective operation of internal controls, the auditor considers how they were applied, the populateency with which they were applied during the period and by whom they were applied. The concept of effective operation recognizes that some deviations may have occurred. Deviations from prescribed controls may be caused by such factors as changes in report personnel, significant seasonal fluctuations in volume of transactions and human error. In computer information system environment, the objectives of tests of controls do not change from those in a manual environment; so far, some aud it procedures may change. The auditor may find it necessary, or may prefer, to use computer-assisted audit techniques.\r\nSTAGE D. EVALUATING THE RESULTS OF THE EVIDENTIAL MATTER\r\nBased on the results of the tests of controls, the auditor should evaluate whether the internal controls are designed and operating as contemplated in the preliminary assessment of control risk. The evaluation of deviations may result in the auditor concluding that the assessed level of control risk needed to be revised. In such cases, the auditor would modify the nature, timing, and extent of plotted indispensable procedures. The conclusion reached as a result of assessing control risk is referred to as the assessed level of control risk. In determining the evidential matter necessary to support a specific assessed level of control risk below the maximum level, the auditor should consider the characteristics of evidential matter about the control risk.\r\nGenerally, however the lower the assessed level of control risk, the greater the assurance the evidential matter must provide that the internal control structure policies and procedures relevant to an assertion are designed and operating effectively. Ordinarily, the auditor’s observation provides more reliable audit evidence than further making inquiries. However, audit evidence obtained by some tests of controls, such as observation, pertains only to the point in time at which the procedures was applied. The auditor may decide, therefore, to supplement these procedures with other tests of control capable of providing audit evidence about other period of time. In determining the appropriate audit evidence to support a conclusion about control risk, the auditor may consider the audit evidence obtained in prior audits.\r\nIn a continuing engagement, the auditor will be aware of the accounting and internal control systems through work carried out previously but will need to update the knowledge gained and consider the need to obtain further audit evidence of any changes in control. The auditor in addition, should consider whether the internal controls were in use throughout the period. An audit of financial statements is a cumulative process; as the auditor assesses control risk, the information obtained may cause him to modify the nature, timing, or extent of the planned tests of controls for assessing control risk. The evaluation is based on the effectiveness of the entity’s control structure in preventing and/pr sleuthing material misstatements, as determined by the tests of controls.\r\nSTAGE E. DETERMINING THE NECESSARY LEVEL OF DETECTION RISK\r\nThe auditor uses the delicious level of detection risk to determine the nature, timing, and extent of the auditing procedures to be used to detect material misstatements in the financial statement assertions, auditing procedures designed to detect such misstatements are referred to in this section as hearty tests. The level of detection risk r elates directly to the auditor’s substantive procedures. The auditor’s control risk assessment, together with the inherent risk assessment, influence the nature, timing, and extent of the substantive procedures to be performed to reduce risk, and therefore audit risk, to an acceptably low level. In this regard the auditor would consider:\r\na. The nature of substantive procedures, for example, using tests direct toward independent parties outdoor(a) the entity rather than tests directed toward parties or documentation within the entity, or using tests of flesh out for a particular audit objectives in addition to analytical procedures; b. The timing of substantive procedures, for example, performing them at period rather than at an earlier date; and c. The extent of substantive procedures, for example, using a fully grownr sample size. As the acceptable level of detection risk decrease, the assurance provided from substantive tests should increase. Consequently, the auditor may do one or more of the ff\r\n motley the nature of substantive tests from a less effective to a more effective procedures, such as using tests directed toward parties or documentation within the entity Change the timing of substantive tests, such as performing them at year-end rather than at interim date. Change the extent of substantive tests, such as using a coarser sample size. There is an rearward alliance between the detection risks and the combined level of inherent and control risks. The substantive tests that the auditor performs consist of tests of details of transactions and balances, and analytical procedures. The objective of tests of details of transactions performed as substantive tests is to detect material misstatements in the financial statements. The auditor should recognize, however, that careful experimental condition should be given to the design and evaluation of such tests to ensure that both objectives will be accomplished.\r\nAudit Risk in the Small Business\r\nThe auditor needs to obtain the same level of assurance in order to express an unqualified faith on the financial statements of both small and large entities. However, many internal controls which would be relevant to large entities are not practical in the small business for example is the segregation of duties. In mickle where segregation of duties is limited and audit evidence of supervisory control is lacking, the audit evidence necessary to support the auditor’s opinion on the financial statements may have to be obtained entirely through the performance of substantive procedures. How Adequacy or deficiency of Internal Control Affects Audit Procedures The primary reason for studying and evaluating internal control is to provide a basis for relying upon the system and for determining the extent of year-end substantive tests to be performed.\r\nThere is an inverse relationship between the effectiveness of internal control and the extent of detailed aud it procedures; more effective system requires less detailed testing. Strengths and weaknesses identified during the evaluation of internal accounting control and tests of compliance will affect the nature, timing, and extent of audit procedures. The audit is not specifically designed to search for errors or irregularities, although during the study and evaluation of internal accounting control system and the performance of substantive tests, errors, or irregularities may be discovered. The auditor must consider the audit implication when errors or irregularities are likely to exist. Documentation of the Assessed Level of Control Risk\r\nThe auditor should document in the workss papers.\r\na. The understanding obtained of the entity’s accounting and internal control systems;\r\nb. The assessment of control risk. When control risk is assessed at less than high, the auditor would also document the basis for the conclusions.\r\nFigure 11.2 Relationship of Effectiveness of Intern al Control and Substantive Tests Controls initially considered effective\r\nControls initial not considered effective or not cost effectual tighten up control risk\r\nAssess control risk at maximum (100%)\r\nReduce acceptable risk of overreliance on internal control\r\n unimpeachable risk of overreliance on internal control- 100% (maximum) effect tests of control (inquiries, inspection, observation, and reperformance) Perform no tests of controls\r\nIncrease detection risk\r\nDecrease detection risk\r\nReduce planned substantive test\r\n1. Use less persuasive substantive tests.\r\n2. Perform the substantive tests at interim date.\r\n3. Decrease extent of substantive test by selecting a smaller sample size. Perform extensive substantive testing\r\n1. Use more effective substantive tests.\r\n2. Perform substantive tests at year-end\r\n3. Increase extent of substantive tests by selecting a larger sample size.\r\nCommunication of Performance, Improvements and Observations in Internal Control Management. As a result of obtaining an understanding of the accounting and internal control systems and tests of controls, the auditor may become aware of weaknesses in the systems. The auditor should make the management aware, as soon as practical and at an appropriate state, of material weaknesses in the design or operation of the accounting and internal control systems, which have come to the auditor’s attention. The communication to management of material weaknesses would ordinarily in writing.\r\nManagement letter may be made that will contain constructive suggestions or improvements in internal control or other suggestions for change magnitude efficiency in operations. This letter is considered a by-product rather than the aim of the audit and is often ideal sometimes after the completion of the field work. If however, the auditor identifies material weaknesses, he has a professional responsibility to communicate them to both senior management and the boar d of directors. The auditor should issue a written report at the earliest possible that it is documented in the work papers. Reportable Conditions\r\nSpecifically, these are the matters coming to the auditor’s attention that, in his judgement, should be communicated to the audit committee because they represent significant deficiencies in the design or operation of the internal control structure, which could adversely affect the organization’s ability to record, process, summarize, and report financial data unvarying with the assertions of management in the financial statements. Examples of reportable conditions are as follows: Deficiencies in internal control structure design\r\n pitiable overall internal control structure design\r\nAbsence of appropriate segregation of duties consistent with appropriate control objectives. Absence of appropriate reviews, and approvals of transactions, accounting entries, or systems output. Inadequate procedures for appropriately ass essing and applying accounting principles. Inadequate sustenance for the safeguarding of assets.\r\nAbsence of other internal control techniques considered appropriate for the type and level of transaction activity. present that a system fails to provide complete and accurate output that is consistent with objectives and current needs because of design flaws. Failures in the operation of the internal control structure\r\n record of failure of identified controls in preventing or detecting misstatements of accounting information demo that a system fails to provide complete and accurate output consistent with the entity’s control objectives because of the misapplication of control procedures. endorse of failure to safeguard assets from loss, damage, or misappropriation. distinguish of lettered override of the internal control structure by those in authority to the detriment of the overall objectives of the system. certainty of failure to perform tasks that are part of th e internal control structure, such as reconciliation not prepared or not timely prepared. differentiate of willful wrongdoing by employees or management.\r\n try of manipulation, falsification, or alteration of accounting records or supporting documents. Evidence of intentional misapplication of accounting principles. Evidence of misrepresentation by client personnel to the auditor. Evidence that employees or management lack the qualifications and training to play their assigned functions. Others\r\nAbsence of sufficient level of control consciousness within the organization Failure to follow up and correct previously identified internal control structure deficiencies. Evidence of significant or extensive undisclosed related party transactions. Evidence of undue bias or lack of objectiveness by those responsible for accounting decisions. Reporting- Form and essence\r\nConditions noted by the auditor that are considered reportable under this section or that are the result of agre ement with the client should be reported, preferable in writing. If the information is communicated orally, the auditor should document the communication by appropriate memoranda or notations in the working papers. Any report issued on reportable conditions should:\r\n head that a purpose of the audit was to report on the financial statements and not to provide assurance on the internal control structure. Include the definition of reportable conditions. Include the restriction on distribution as discussed in the previous paragraph. If no reportable conditions are found, an auditor may not issue a letter stating that. Such a letter may mislead users by implying a greater level of assurance about the lack of any significant deficiencies than the auditor could really provide. However, an auditor may issue a letter indicating that no material weaknesses were found during the course of an audit.\r\n'