Sunday, 29 December 2019

Unit 5: Evaluation of Internal Control System

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Unit 5: Evaluation of Internal Control System


Internal controls, even if fairly simple, helps in enhancing the confidence level of the auditor.

The most important objective in studying and evaluating internal control system is to establish the reliance an auditor can place on the system in determining the nature, timing and extent of his substantive auditing procedures.

Two most common techniques of internal control evaluation are the flow charts and the internal control questionnaires.

The flow charting technique is an important technique for evaluation of the internal control system.

It is a graphic presentation of internal controls in the organization and is normally drawn up to show the controls in each section or sub section.

A sound knowledge of internal control requirements is essential for adopting flow charting technique for evaluation of internal controls, also it demands a highly analytical mind to be able to see clearly the inter division of a job and the appropriate control at relevant points.

A questionnaire is a set of questions framed in an organized manner, about each functional area, which has as objective, the evaluation of the effectiveness of control and detection of its weaknesses, if any.

Evaluation of Internal Control System   A professional accountant often asks to formulate schemes of internal control in various Notes functional areas of an organization.

When a scheme of internal control is drafted, the various statements are given in the form of instructions, whereas in an internal control questionnaire, the auditor asks specific questions from the client.

Understanding of various stages of a transaction is very important to formulate a scheme of internal control or drafting an internal control questionnaire.

An internal control scheme should provide for a periodic review of the system to ensure that the prescribed scheme is being followed as far as practicable.


Evaluation: Evaluation is a systematic determination of a subject's merit, worth and significance, using criteria governed by a set of standards.

Flow Charts: A graphic representation of a system which depicts the various operations, controls, and stages involved in a system.

GAAP: Generally Accepted Accounting Practices.

Internal Control Questionnaire: A list of various questions which an auditor may ask in order to verify the existence and effectiveness of an internal control system.

Questionnaire: A questionnaire is a research instrument consisting of a series of questions and other prompts for the purpose of gathering information from respondents.

SEC: Securities Exchange Commission (of America).

Substantive Procedures: Tests designed to obtain evidence to verify balance of an account or a specific financial statement assertion.

Systems Control Evaluation (SCE): It is based on the questions and answers exercise illustrated above, is thus designed to identify the controls in the system which would satisfy the general audit objectives (prevent or detect the various types of material errors).


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