4-7 Procedures To Obtain An Understanding Of Internal Control And Related Documentation: -
The auditor’s understanding of the client’s internal control is usually gained through the following procedures: -
Prior experience with the entity: -
This can be a major source of audit efficiency in recurring audits. Because systems and controls usually don’t change frequently or significantly from year to year, information obtained by the auditor in previous audits of the entity can be updated and carried forward to the current year’s audit.
Inquiries of management, supervisory, and staff personnel within the entity: -
For example, the auditor may inquire about the types of accounting documents used to process sales transactions and about the entities control activities that have been placed in operation for authorizing a credit sale.
Observation of client activities and procedures: -
The auditor can observe client personnel in the process of preparing accounting records and document and carrying out their assigned accounting and control functions.
Inspection of accounting documents and records: -
By inspecting actual, completed documents and records, the auditor can better understand their application to the entity’s internal control. The auditor may wish to obtain copies of sample documents used by the entity for inclusion in the permanent file.
Entity’s policy and system manuals: -
This includes both: -
Policy manuals and documents, such as a corporate code of conduct. (2)
System manuals and documents, such as an accounting manual and an organization chart.
Observation of activities and inspection of accounting documents and records can provide knowledge about the design of controls and whether they have been placed in the operation. They can be conveniently and effectively combined in the form of a transaction walk-through. With that procedure, the auditor selects the appropriated documents for the initiation...
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