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Unit 7: Internal Control

provide reasonable assurance that the transactions are recorded and executed in accordance Notes
with the general and /or specific authorization of the Management, recording of transactions
to ensure the preparation of financial statements in conformity with the generally accepted
accounting principles and any other criteria applicable to such statements, proper
maintenance of accountable of assets, Management’s authorization of access to assets and
accountability for the physical verification of assets.
From the above it is clear that in an audit engagement the distinction between the two types of
controls requires considerable dexterity as the two are very often inter-related. Needless to say
that the distinction should not be artificially made and administrative controls generally have
a nexus with the accounting controls even if the linkage is indirect.

7.5.4 Scope of Review

Naturally therefore, the scope and objectives of the Statutory Auditor would vary and depend
upon both the size and structure of the entity as also the requirements of the Management.
Normally, however, the Statutory Auditor operates in one or more of the following areas.
1. Review of the Accounting Systems and the related internal controls. Thus while the
adequacy of the accounting systems is the responsibility of the Management, the Statutory
Auditor is usually assigned the specific responsibility for reviewing the accounting systems
and the related internal controls, as also monitoring their operations.
2. Review of financial and operating information including identification, measurement,
and classification and reporting such information specifically enquiring into individual
items including detailed testing of transactions, procedures and balances.
3. Examination of the economy, efficiency and effectiveness of operations including
non-financial controls.
Thus, before an evaluation is undertaken the auditor should determine:-
1. The degree of reliance that can be placed on the various systems and procedures in existence.
2. The nature, extent and timing of substantive audit tests to be applied. In this process due
to factors including the limitations of time, the volume of transactions and magnitude of
operations the Auditor can conduct:-

3. Selective Verification in areas where he finds that internal control is effective.
4. Detailed or comprehensive verification of transactions in areas where the internal control
is weak.

5. Internal control investigation and evaluation is most relevant in the context of
(a) Independent financial audits,
(b) Special systems study engagements.

7.5.5 Advantages of Internal Control Evaluation

1. Enables an Auditor to restrict his detailed examination in areas where internal controls is
satisfactory, and intensifying the scrutiny in areas where the controls are weak.
2. Resultantly, the time available to the auditor is more gainfully employed.
3. Highlights areas of weakness in the operating systems, for suitable remedial action to be
taken by the Management.

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