Page 75 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes Organization charts, procedure manuals, job description, and flow charts etc. are some of
the tools to have an idea about internal controls system. The auditor can also discuss with
different officials of organization. Sometimes, he may have to rely on direct observations
and inquiry only. The auditor should, especially in the case of first audit, maintain a
detailed written record of his observations on the internal controls system.
(ii) Test through compliance procedures: Having reviewed the system, the auditor may select
the specific controls on which he intends to rely and which, therefore, need to be tested
through compliance procedures. He may decide not to rely on certain internal controls
which are defective in design, or reliance on which may not be cost effective. It is important
to test the application of internal controls in practice.

Example: An auditor may take up a few sales bills at random and examine all the related
documents right from the order of the customer to the payment received from the customer.
At each stage, the auditor would see whether the transaction has taken place as stipulated in the
flow chart or in the procedure manual. Thus, if the flow chart prescribes that the detail terms and
condition of each order of customer has to be verified by a particular manager, the auditor
should examine whether or not this has been done in practice.

The objective of compliance tests is to provide a fair confidence to the auditor that the
internal controls procedures are being effective as prescribed. The auditor should carry
out such tests in case of all procedures on which audit reliance is intended to be placed.
Tests of compliance are concerned primarily with the following questions:

 Were the necessary procedures complied with?
 How were they complied with?
 By whom were they complied with?

(iii) Evaluating the system: Based on his observation during the tests made by him, the auditor
has to make an estimate of how far he can depend on various internal controls. Normally,
he should have a reasonable confidence that the system is such that the errors and fraud
can be discovered automatically. He has to ascertain whether the control procedures as
designed to implement are in practice and competent in preventing or detecting material
errors and fraud in the accounting system. This is essentially a question of individual
judgment in a particular situation. If he finds certain errors or weaknesses in the system,
he should try to evaluate the impact of the same on various transactions. Let us suppose he
finds weaknesses in the system of maintaining debtors’ ledger. Since this is a material
item, he should ask for independent confirmations from the debtors. Thus, the auditor’s
evaluation of internal control system will determine the nature, timing and extent of his
substantive procedures.

Self Assessment

Fill in the blanks:
3. The auditor should understand the internal control system with the purpose to have an
idea of the flow of ……………… and the various control procedures.
4. The objective of compliance tests is to provide a fair ……………….. to the auditor that the
internal control procedures are being effective as prescribed.

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