IPCC Audit Notes: Internal Control & Auditor’s Review
|Internal control & Auditor
- Auditor should obtain an understanding of the accounting & internal control systems sufficient to plan the audit & develop an effective audit approach.
The auditor generally assesses control risk at a high level for some or all assertions when:
- The entity’s accounting & internal control systems are not effective.
- Evaluating the effectiveness of the entity’s accounting & internal control systems would not be efficient.
In the above 2 cases the auditor would obtain sufficient appropriate audit evidence from substantive procedures & from any audit work carried out in preparation of financial statements.
The preliminary assessment of control risk for a financial statement assertion should be high unless the auditor:
- Is able to identify internal controls relevant to the assertion which are likely to prevent or detect & correct a material misstatement.
||At the level of financial statements
- The integrity of management.
- Management’s experience & knowledge & changes in management during the period.
- Unusual pressures on management.
- Nature of entity’s business.
- Factors affecting the industry in which the entity operates.
||At the level of account balance & class of transactions
- Quality of accounting system.
- Financial statements are likely to be susceptible to misstatement.
- The complexity of underlying transactions & other events which might require using the work of an expert.
- The degree of judgment involved in determining account balances.
- Susceptibility of assets to loss or misappropriation.
- The completion of unusual & complex transactions, particularly, at or near period end.
- Transactions not subjected to ordinary processing.
|Review of internal control by auditor
- Its an important part of overall audit program.
- Auditor should gain an understanding of the accounting system & related internal controls & should study & evaluate the operations of these internal controls to determine the nature, timing & extent of audit procedures.
- The review of internal controls helps the auditor to know:
- Whether errors & frauds are likely to be located in the ordinary course of operations of business.
- Whether an adequate internal control system is in use & operating as planned by the management.
- Whether an effective internal auditing department is operating.
- Whether any administrative control has a bearing on his work.
- Whether the controls adequately safeguard the assets.
- How far & how adequately the management is discharging its function in so far as correct recording of transactions is concerned.
- How reliable the reports, records & the certificates to the management can be.
- The extent & depth of the examination that he needs to carry out in the different areas of accounting.
- What would be appropriate audit technique & the audit procedure in the given circumstances?
- What are the areas where control is weak & where its excessive.
- Whether some worthwhile suggestions can be given to improve the control system.
|Internal control review methods
- This is a complete & exhaustive description of the system as found in operation by the auditor.
- Actual testing & observation are necessary before such a record can be developed.
- Its used in cases where no formal control system is in operation & the scale of operation is small.
- Basic disadvantages are:
- To comprehend the system in operation is quite difficult.
- To identify weaknesses or gaps in the system.
- To incorporate charges arising on account of reshuffling of manpower.
- This is a series of instructions and/or questions which a member of the auditing staff must follow and/or answer.
- Answers to the check list are mostly yes, no or not applicable.
- Examples are:
- Are tenders called before placing orders?
- Are purchases order forms pre-numbered?
- The checklist is studied by Principal/Manager/Senior to ascertain existence of internal control & evaluate its implementation & efficiency.
||Internal control questionnaire
- This is a comprehensive series of questions concerning internal control.
- It’s the most widely form for collecting info about the existence, operation & efficiency of internal control in an organization.
- Its given to the client & the client is requested to fill it.
- If on perusal of answers, inconsistencies are noticed, the matter is further discussed by auditor’s staff with the client’s employees.
- Omission of significant internal control review procedure is less.
- All internal evaluation can be completed at one time or in sections.
- Review can be more easily made on an interim basis.
- It provides an orderly means of disclosing control deficiencies.
- It’s a graphic presentation of each part of the company’s system of internal control.
- Its considered as the most concise way of recording the auditor’s review of the system.
- It minimizes the amount of narrative description & thereby achieves a consideration or presentation not possible in any other form.
- It gives a bird’s eye view of the system & the flow of transactions & integration & in documentation, can be easily spotted & improvements can be suggested.
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