Are You Evaluating Internal Controls Top-Down? | AccountingWEB

Are You Evaluating Internal Controls Top-Down?

SAS No. 109, COSO and SOX all suggest consideration of internal control systems from the top down, by management and by auditors.  The concept of top-down is, of course, starting with key controls at both the entity level and the activity level.

Performing a top-down evaluation of internal control is not particularly easy, especially if we’ve not done it before.  Here are some considerations that may help.

Key or Entity-Level Controls

Key controls are those elements of the five components of internal control that have a pervasive affect upon the accomplishment of management’s control objectives.  For smaller entities, these controls may be informal and ordinarily carried out by one or a few persons such as an owner/manager.  The design and operation of these key controls can prevent material misstatements due to error or fraud from occurring and going undetected.  Successful operation of key controls, subjected to auditors’ tests of controls, may reduce control risk to some level less than high, maybe even moderate.  An assessed lower level of control risk can result in reductions of more expensive tests of balances evidence, even on small audits!

Components of key controls for both large and small entities are:

•    Management’s integrity and ethical values
•    Management’s commitment to doing things right.
•    Management’s ways of doing things.
•    The involvement of persons charged with governance.
•    The delegation of authority and responsibility.
•    Personnel policies and procedures.

Activity-Level Controls

The COSO Report states that control activities are the policies and procedures established to help ensure that management directives are carried out.  The key controls described above are primary to accomplishing this objective.  Absent the design of key controls, or when key controls are designed but not operating, key activity-level controls may be necessary to prevent misstatements from occurring and going undetected.  

These controls may be applied through features in an accounting software system, by personnel while performing accounting procedures or by the design of documents or data.  If key controls are not designed or operating, certain activity-level controls may prevent errors from occurring and going undetected.  Knowledge of these controls should be part of the auditor’s risk assessment procedures.  The degree to which these controls may be regarded as substantive evidence by an auditor depends on the extent to which formal or informal tests of controls may be performed.

How Do Key Controls Affect an Audit?

Here are some ways:

1.  If key controls are designed and operating properly there should be limited risks of misstatements.
2.  When risk assessment procedures reveal limited risks of material misstatements, less evidence is required from costly tests of balances.  In such cases, significant time savings can be achieved, even on small audits!
3.  If key controls are not designed, or designed controls are not operating effectively, risk of material misstatements may occur.  These risks of material misstatements will ordinarily be significant deficiencies or material weaknesses reported in the internal control communication letter.

Why Aren’t More Auditors Evaluating Internal Control Top-Down?

First, there is a lingering perception that there are limited benefits that can be obtained from evaluating and testing internal control.  Auditors’ evaluations, therefore, are often cursory and performed only to satisfy the requirements of the auditing standards.

Second, internal control questionnaires are not ordinarily constructed to identify key controls.  In this situation, many auditors are not sure about how to identify the key controls.  The result is that the auditor completes the entire questionnaire to comply with auditing standards and rarely achieves a level of risk assessment less than high, particularly on small audits.

On our website,, you can register for live and on-demand webcasts, or purchase small PDF books on various auditing topics including understanding internal control.  Each of these internal control products is accompanied by a Small Audit Internal Control Questionnaire that identifies key controls.  The bottom line is that identifying and testing key controls may enable the auditor to reduce risk of material misstatement to a level less than high.  This reduction can reduce audit time charges and enable CPA firms to make more money on audits, even smaller ones!

This blog

by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (, an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.


Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.


Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.


Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".


William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.


Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (, a software development firm of high-volume, high-productivity accounting and payroll technology.


Eva Rosenberg, MBA, EA, is the publisher of, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.


Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website:
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.


The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.


FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.


Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.


Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of a website devoted to training for governmental auditors.


AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish share their ideas, insights, and perspectives from across the pond.