EVALUATING THE INTERNAL CONTROL SYSTEM

Use of the major symbols in flow charts The Document symbol Each document in the flowchart should have a vertical flow-line. Such vertical flow-lines represent a movement in time within a particular department. When the document is moved to another department, this movement in position will be represented by a horizontal line; departments are therefore listed across the page. Here the document is originated in Dept A. It is moved to Dept B, then Dept D and then Dept C. Note that only vertical and horizontal lines are used, never diagonal lines.

Cont.…

Cont.… The Operation symbol Various operations will be performed on a document. It will, for instance: be prepared, added up, used to prepare other documents, etc. Any operation, other than a check function, is represented by the cross symbol. Each operation symbol should be supported by a brief narrative explaining the nature of the operation. Note that the operation symbol is positioned on a vertical flow-line. It should never appear on a horizontal flow-line.

Cont.…

The Information flow symbol

The Information flow symbol Here one document is prepared from another. The movement of information to the sales invoice is shown by a dotted line. Such information flow-lines are always horizontal, never vertical. Note that flow-lines then continue for both the order and the invoice.

The filing symbol Once documents have been processed they will often be filed away. Such files are either permanent or temporary. The two sorts of file are denoted by the same symbol but the temporary files are marked with a letter ‘T’. It will often be useful to indicate the order of filing either numerically, alphabetically or in chronological order. This can be done by marking the symbol with the letter N, A, or D.

Cont.…

The book of account symbol

Cont.… The flowchart should use the book symbol to show the book which is already existence. It should also show the book being re-filed once the posting is completed. Note that the same flow-line principles apply to books as to documents. A vertical flow line is needed which ends with the re-filing of the sales day book which will be kept chronologically.

Depicting multi-part sets of documents

Preliminary Evaluation of the System Having ascertained, confirmed and recorded the system, the auditor now needs to carry out a preliminary evaluation of the system in order to make a decision as to whether he will: Rely on internal controls and adopt a systems audit approach, or, Perform extensive testing. Using a verification approach to the audit.

Internal Control Questionnaire An ICQ is a formal and usually standardized document which comprises: A list of internal controls in existence and Highlights any weaknesses. Features: Used in large company audit Used to place reliance on internal controls Used to design audit approach

Objectives To determine a clients systems of accounting and internal control To evaluate the control system thus recorded, and hence To identify those controls which indicate strengths in the system upon which the auditor will seek to place reliance, and To identify those areas over which there are weak or no controls and which therefore must be subjected to more extensive substantive testing and reported by inclusion in the Management Letter.

Construction of an ICQ It is good practice when designing ICQs to state, as a brief introduction: a list of control objectives which each sub-system under consideration should seek to achieve any business considerations specific to the enterprise under review which should be taken into account. The reason for this is essentially to highlight for the audit staff key areas for their consideration to the audit staff.

Cont.….. II. The questions in an ICQ should be designed to ascertain whether the control objectives are being achieved and should therefore cover such aspects as: instructions given to staff in the performance of their duties authorization procedures documents and procedures used to originate transactions recording procedures sequence of procedures custody procedures relative independence of the persons involved at each stage of a transaction

Cont.….. (III) The questions should be framed such that a Yes/No answer is given, with a No answer usually indicating a control weakness. (IV) An ICQ should carry such basic information as: (a) the name of the document (ICQ) (b) the system to which it relates (e.g. purchasing cycle) (c) the client to whom it relates (d) the accounting period under review (e) evidence of who has prepared and reviewed the document

Cont.….. the provision of columns for: Yes and No answers comments where neither Yes or No are applicable indicating the significance or otherwise of apparent weaknesses references to audit programs references to Management Letters.