Page 73 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes  Analyze the formulation of internal control schemes
 Discuss the evaluation of Internal Control with special reference to Audit of Public Sector
Enterprises

Introduction

In the previous units, you have noted that in the present scenario of complex business
environment, organizations are recognizing the importance of an effective internal control
system. In fact, due to enormous growth in the volume and size of the business, it is almost
impossible to manage it smoothly without having an effective internal control. Miracle inventions
in data computing and communicating systems have altogether changed the principles and
practices of management. New management techniques and controls are being introduced in
organizations regularly.
Evaluation of internal control systems can be done in a variety of ways. It would be reasonable
to expect that the desired degree of documentation would be in proportion with the size and
activities of the organisation. The general methods for evaluation are flow charts and internal
control questionnaire.
5.1 Objectives of Evaluation

The basic objectives of evaluating internal control system arise from the fact that internal control
system has certain purposes to fulfil. The auditor, in forming his opinion on financial statements,
looks for a fair confidence that transactions are properly recorded authorized and in the
accounting records and that certain transactions are not being omitted. Internal controls, even if
fairly simple, helps in enhancing the confidence level of the auditor. The important objectives of
evaluation of internal control system can be summarized as follows:

 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.

 The next important objective is to identify the areas of weakness in the system so that an
auditor can draw his audit programme and procedures for conducting audit.

Example: Normally, investments and cash are physically verified at the end of the year
and this routine is known to the client and his employees. In case auditor comes across a
weakness in the system he may provide in the programme for surprise cash or investments
verification as per his convenience.

 The other important objective in studying and evaluating internal control system is to
gain evidence that those internal controls on which the auditor intends to rely operate
generally as identified by him and that they function effectively throughout the period of
intended reliance.

 The last but not the least, objective of evaluating internal control system is to reduce the
auditor’s work and save his time and also resources of the organization.

Self Assessment

Fill in the blanks:
1. The basic objectives of evaluating internal control system arise from the fact that internal
control system has certain ………………. to fulfil.

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