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Advanced Auditing
Notes 2. Alternatively, the questionnaire may be given to auditee who could furnish answers on
separate sheets. The advantage of this method is that the auditee would have an opportunity
to review his own systems of internal control through the mere process of answering the
questionnaire.
3. The auditor should then conduct a test check in order to ascertain the accuracy of the
replies and the actual operation of the system.
4. All negative answers are to be reviewed by the auditor with the auditee. The auditor may
also decide whether any qualification would be necessary in his report.
5. In the light of the questionnaire, the auditor should formulate his Audit Plan and
Programme.
6. A review of the questionnaire, in the event of any major changes that may have taken
place in the auditee organisation, should be conducted by the auditor.
5.8.4 Systems Based Audit (SBA)
As can be seen from the nature of the above sample questions, the objective of the auditor is to
formulate an opinion on the existence, effectiveness and adequacy of internal controls and
whether these are designed as far as possible, to ensure the completeness and accuracy of records
as also to safeguard the assets. The auditor cannot rely on the controls of the auditee, for the
prevention and detection of fraud and errors. Therefore he is bound to obtain some degree of
assurance through his own substantive testing. The quantum would depend on the effectiveness
of the internal controls for preventing and detecting material errors.
5.8.5 Systems Control Evaluation
The Systems Control Evaluation (SCE) 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). Having identified the
controls, the auditor assesses the adequacy of the process. He would necessarily be required to
adopt a critical approach attempting to envisage situations in which they might fail to operate
and consequently result in the occurrence of an error or fraud. Further, the auditor should also
consider how promptly errors could be identified and the impact on the financial statements; in
the event of their remaining undetected. Such evaluation should necessarily cover the entire
operation of controls for the entire accounting period. This should be borne in mind while
conducting Compliance Testing. Having completed this evaluation, the auditor should then
formulate his assessment based upon the suggested guidelines and categorize the assessment of
internal controls.
Self Assessment
Fill in the blanks:
13. Methodology for internal evaluation include:................;................. and......................
14. Answers of internal control questionnaire are compiled by the auditor on the basis of his
.............................. with the auditee.
15. The corrective action taken for rectification by the management and its periodic assessment
through...................................... method enables the fulfilment of the principal objectives of
internal control procedures.
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