Page 90 - DCOM509_ADVANCED_AUDITING

Unit 5: Evaluation of Internal Control System

 A professional accountant often asks to formulate schemes of internal control in various Notes
functional areas of an organization.

 When a scheme of internal control is drafted, the various statements are given in the form
of instructions, whereas in an internal control questionnaire, the auditor asks specific
questions from the client.

 Understanding of various stages of a transaction is very important to formulate a scheme
of internal control or drafting an internal control questionnaire.
 An internal control scheme should provide for a periodic review of the system to ensure
that the prescribed scheme is being followed as far as practicable.

5.10 Keywords

Evaluation: Evaluation is a systematic determination of a subject's merit, worth and significance,
using criteria governed by a set of standards.
Flow Charts: A graphic representation of a system which depicts the various operations, controls,
and stages involved in a system.
GAAP: Generally Accepted Accounting Practices.
Internal Control Questionnaire: A list of various questions which an auditor may ask in order
to verify the existence and effectiveness of an internal control system.
Questionnaire: A questionnaire is a research instrument consisting of a series of questions and
other prompts for the purpose of gathering information from respondents.
SEC: Securities Exchange Commission (of America).
Substantive Procedures: Tests designed to obtain evidence to verify balance of an account or a
specific financial statement assertion.
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).
5.11 Review Questions

1. Describe the objectives of evaluation of internal control system.
2. Explain the steps in evaluation of internal control system.
3. Discuss flow charts and internal control questionnaire.

4. What are the points to be consider in formulating internal control scheme?
5. Distinguish between control environment and control procedures.
6. Write short notes on:
(a) Internal Control Questionnaire

(b) Systems Control Evaluation
7. What are the advantages of internal control evaluation?
8. Explain the concept of EDP Environment the New Dimension.

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