Page 135 - DCOM204_AUDITING_THEORY

Unit 7: Internal Control

Self Assessment Notes

Fill in the blanks:
5. Methodology for internal evaluation include:................ ; ................. and ......................
6. Answers of internal control questionnaire are compiled by the auditor on the basis of his
.............................. with the auditee.
7. The corrective action taken for rectification by the management and its periodic assessment
through ...................................... method enables the fulfillment of the principal objectives
of internal control procedures.

7.7 Summary

The internal audit activity evaluates risk exposures relating to the organization’s
governance, operations and information systems, in relation to: Effectiveness and efficiency
of operations; Reliability and integrity of financial and operational information;
Safeguarding of assets; Compliance with laws, regulations, and contracts.
Internal check is an element of internal control. Weak internal check mechanisms mandate
a greater degree of auditing procedures.
Control procedures encompass policies and procedures established by the Management,
in order to provide for the attainment of certain objectives. These could include the existence
of systems for: An effective system of reconciliation of Books of Accounts; Check of the
arithmetical accuracy of the records; Controls over computer applications and environment;
Maintenance of control accounts and Trial Balances; Approval and control of balances;
Comparison of results of cash, security and inventory checks with accounting records;
Limiting direct physical access to assets and records, etc.
A strong control environment (e.g. one with tight budgetary controls and an effective
audit function) can significantly complement specific controls.
Control procedures encompass policies and procedures established by the Management,
in order to provide for the attainment of certain objectives.

Evaluation of Internal Controls by the questionnaire methods (used in conjunction with
other methods.) is a convenient and efficient medium for documented evidence of such
review having actually taken place.

7.8 Keywords

Internal Auditing is an independent, objective assurance and consulting activity designed to
add value and improve an organization’s operations.
Statement on Standard Auditing Practices (SAP): The Statement on Standard Auditing Practices
(SAP) pertaining to the “Study and Evaluation of the Accounting System and Related Internal
Controls in connection with an Audit”, defines the inter-relationship between the Statutory
Auditor and internal control.
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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