How an Auditor Evaluates the Efficiency of Internal Control System?
1. How an auditor evaluates the efficacy of internal control system?
Ans:
The auditor has to decide whether he can place reliance on the internal control. If internal control is adequate, he can restrict nature, timing and extent of his checking accordingly. If not, he is left with no alternative but to resort to detailed checking.
The manner of evaluation of internal control may be in the following lines: 1. Making preliminary evaluation of the system 2. Compliance procedures to evaluate the adequacy and continuity of the system in practice 3. Supplementing the compliance procedure with limited substantive procedures
Making preliminary evaluation:
For making preliminary evaluation, the auditor makes use of of the following techniques: a. Narrative method b. Questionnaire method c. Flow charting
Narrative method:
This method describes the actual working of the internal control system in an essay form. The audit assistants prepare their observation of the system. Narrative method of evaluation has certain limitations. It is lengthy; it may lack specificity and miss certain areas. It is not uniform and may vary according to persons preparing them.
Questionnaire method:
This method makes use of well-structured specific questions covering each and every area of operation such as purchase, sales, stock-keeping, wage payment. Each question is framed with the aim of assessing the strength of control at various stage of operation. Generally the questions range over authorization of transaction, flow of transaction, documents make use of in the flow, recording of transaction, division of work aiming at internal check, handling of asset, reporting of transactions to management and review of operation. Each question seeks responses in terms of ‘yes’ or ‘no ’or ‘not applicable ‘. The questionnaire are filled by responsible officials or by auditor himself after having specific comments for each question from the staff or after having
Ans:
The auditor has to decide whether he can place reliance on the internal control. If internal control is adequate, he can restrict nature, timing and extent of his checking accordingly. If not, he is left with no alternative but to resort to detailed checking.
The manner of evaluation of internal control may be in the following lines: 1. Making preliminary evaluation of the system 2. Compliance procedures to evaluate the adequacy and continuity of the system in practice 3. Supplementing the compliance procedure with limited substantive procedures
Making preliminary evaluation:
For making preliminary evaluation, the auditor makes use of of the following techniques: a. Narrative method b. Questionnaire method c. Flow charting
Narrative method:
This method describes the actual working of the internal control system in an essay form. The audit assistants prepare their observation of the system. Narrative method of evaluation has certain limitations. It is lengthy; it may lack specificity and miss certain areas. It is not uniform and may vary according to persons preparing them.
Questionnaire method:
This method makes use of well-structured specific questions covering each and every area of operation such as purchase, sales, stock-keeping, wage payment. Each question is framed with the aim of assessing the strength of control at various stage of operation. Generally the questions range over authorization of transaction, flow of transaction, documents make use of in the flow, recording of transaction, division of work aiming at internal check, handling of asset, reporting of transactions to management and review of operation. Each question seeks responses in terms of ‘yes’ or ‘no ’or ‘not applicable ‘. The questionnaire are filled by responsible officials or by auditor himself after having specific comments for each question from the staff or after having