Steps for Internal Control and Audit Evaluation - Auditing & Secretarial Practice | Auditing and Secretarial Practice - B Com PDF Download

Steps for Internal Control and Audit Evaluation

A review of internal control can be done by a process of study, examination and evaluation of the control system installed by the management. The first step involves determination of the control and procedures laid down by the management. By reading company manuals, studying organization charts and flow charts and by making suitable enquiries from the officers and employees, the auditor may ascertain the character, scope and efficacy of the control system. To acquaint him-self about how all the accounting information is collected and processed and to learn the nature of controls that makes the information reliable and protect the company’s assets, calls for considerable skill and knowledge. In many cases, very little of this information is available in writing; the auditor must ask the right people the right questions if he is to get the information he wants. It would be better if he makes written notes of the relevant information and procedures contained in the manual or ascertained on enquiry. To facilitate the accumulative of the information necessary for the proper review and evaluation of internal controls, the auditor can use one of the following to help him to know and assimilate the system and evaluate the same:

1. Narrative record;
2. Check list;
3. Questionnaire; and
4. Flow chart;

(1) The narrative record is a complete and exhaustive description of the system as found in operation by the auditor. Actual testing and observation are necessary before such a system is in operation and would be more suited to small business. The basic disadvantages of narrative records are:

1. To comprehend the system is operation is quite difficult.
2. To identify weaknesses or gaps in the system
3. To incorporate charges arising on account of reshuffling of manpower, etc. 

(2) A check list is a series of instruction and/or answer. When he completes instruction, he initials the space against the instruction. Answers to the check list instruction are usually Yes, No or Not applicable. This is again an on the job requirement and instructions are framed having regard to the desirable element of control. A few examples of check list instruction are given hereunder: 

1. Are tenders called before placing orders?

2. Are the purchases made on the basis of a written order?

3. Is the purchase order form standardized?

4. Are purchase order forms are pre-numbered?

5. Are the stock control accounts maintained by persons who have nothing to do with:

1. Custody of work;
2. Receipt of stock;
3. Inspection of stock; and
4. Purchase of stock.

The complete check list is studied by the principle/manager/senior to ascertain existence of internal control and evaluate its implementation and efficiency.

(3) Internal control questionnaire is a comprehensive series of questions concerning internal control. This is the most widely used from for collecting information about the existence, operation and efficiency of internal control in an organization. An important advantage of the questionnaire approach is that oversight or omission of significant internal control review procedures is less likely to occur with this method. With a proper questionnaire, all internal control evaluation can be completed at one time or in sections. The review can more easily be made on an interim basis. The questionnaire form also provides an orderly means of disclosing control defects. It is the general practice to review the internal control system annually and record the review the detail. In the questionnaire, generally questions are so framed that a ‘Yes’ answer denotes satisfactory position and a ‘No’ answer suggests weakness. Provision is made for an explanation or further details of ‘No’ answers. In respect of questions not relevant to the business, ’Not applicable’ reply is given.

The questionnaire is annually issued to the client and the client is requested to get it filled by the concerned executives and employees. If on a perusal of the answers, inconsistencies or apparent incongruities are noticed, the matter is further discussed by auditor’s staff with the client employees for a clear picture. The concerned auditor then prepares a report of deficiencies and recommendation for improvement.

(4) A flow chart is a graphical presentation of each part of the company’s system of internal control. A flow chart is considered to be the most concise way of recording the auditor’s review of the system. It minimizes the amount of narrative explanation and thereby achieves and consideration or presentation not possible in any other form. It gives bird’s eye view of the system and the flow of transactions and integration and in documentation, can be easily spotted and improvements can be suggested. It is also necessary for the auditor to study the significant features of the business carried on by the concern: the nature of its activities and various channels of goods and materials as well as cash, both inward and outward, : and also a comprehensive study of the entire process of manufacturing, trading and administration. This will help him to understand and evaluate the internal controls in the correct perspective.