Page 76 - DCOM509_ADVANCED_AUDITING

Unit 5: Evaluation of Internal Control System

5.3 Techniques of Evaluation Notes

Different techniques may be used by an auditor to have an idea and assessing the effectiveness
of an internal control system. The selection of a particular technique is a matter of the auditor’s
judgment.
Two most common techniques of internal control evaluation are:
1. the flow charts and

2. the internal control questionnaires.
The auditor may prepare flow charts of the various categories of transactions in order to have a
quick grasp of the system. An internal control questionnaire lists a series of questions which an
auditor may wish to ask in order to understand and evaluate an internal control system.
1. Flow Charts: 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. As distinct
from a narrative form, it provides the most concise and comprehensive way for reviewing
the internal controls and the evaluator’s findings.
2. Internal Control Questionnaires: Because of the wide experience that auditors possess
about the business operations in general and the knowledge about the appropriate control,
most of the auditing firms have developed their own standardized internal control
questionnaire on a generally applicable basis. In developing the standard questionnaire,
endeavour is made to make it as wide as possible so that all situations, generally found,
are included therein but all of these may not be applicable in a particular case. 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 weakness if any.

Self Assessment

Fill in the blanks:
5. The selection of a particular …………………is a matter of the auditor’s judgment.
6. Two most common techniques of internal control evaluation are the ……………….. and
the internal control questionnaires.

5.4 Flow Charts

In a flow chart, narratives, though cannot perhaps be totally banished but are reduced to the
minimum and by that process, it can successfully bring the whole control structure, especially
the essential parts thereof, in a condensed but meaningful manner. It gives a bird’s eye view of
the system and is drawn up as a result of the auditor’s review thereof. It should, however, not be
understood that details are not reflected in a flow chart. Every detail relevant from the control
point of view and the details about how an operation is performed can be included in the flow
chart. Essentially a flow chart is a diagram full with lines and symbols and, if judicious use of
them can be made, it is probably the most effective way of presenting the state of internal
controls in the client’s organization. A properly drawn up flow chart can provide a neat visual
picture of the whole activities of the section or department involving flow of documents and
activities. More specifically it can show:
(a) At what point a document is raised internally or received from external sources.

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