OVERVIEW
Objective
¾
To describe the “common techniques” for documenting the understanding and assessment of control risk.¾ Description
¾ Objectives
COMPARISON
Narrative notes Questionnaires
INTERNAL CONTROL QUESTIONNAIRES
¾ Description
¾ Features
¾ Illustration
¾ Construction
“WALK-THROUGH”
TESTS
FLOW CHARTS
INTERNAL CONTROL EVALUATIONS ¾ Purpose
¾ Symbols
¾ Illustration
Commentary
Nearly all documentation techniques may be either manual (i.e. complete a pre-printed schedule or use a blank sheet) or computerised (e.g. complete a computerised
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1
COMPARISON OF COMMON TECHNIQUES
Example 1
Indicate, with a tick (9)
,
the relative advantages of the following methods. Use 8 for not an advantage and ? for possibly.Narrative notes Flowcharts
Questionnaires
Easy to read/understand Little formal training required Quick
Comprehensive Diagrammatic/visual Highlights key features/controls Standardized
Little narrative necessary “Story” approach
Easy to amend
Used to assess controls
2
“WALK-THROUGH” TESTS
2.1
Description
Involves tracing a few transactions through the accounting system.
2.2
Objectives
¾
To obtain knowledge of the design and operation of the system3
FLOWCHARTING
3.1
Purpose
¾
To reduce procedures to basic components and emphasise logical relationships.¾
To facilitate tracing a connected pattern of activity from beginning to end.¾
To depict a sequence of events and the department/function responsible for each.3.2
Symbols
12 3
N
YES NO
A4 Document (eg Sales Order)
Account Book
Operation
Alternative Routine
Check or Inspection
File with Letter in Centre: 'A' for Alphabetical Order; 'N' for Numerical Order; 'D' for Date Order;
'T' (TA, TN or TD) for Temporary Filing Time Flow of Document Information Flow Document Flow Documents Crossing Prenumbered Set ‘Ghosting’ of Documents 3 Parts or Copies
Connector
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Illustration 1
Narrative OpNo F Bloggs A Clark
Passed daily from warehouse
Invoice raised
Quantities checked
Posted weekly
Delivery note
Invoice N 1 2
3
1
2
3
Sales ledger
D
4
INTERNAL CONTROL QUESTIONNAIRES (ICQS)
4.1
Features
¾
Checklists of questions designed to discover the existence of internal controls identify possible areas of weakness.
¾
Questions are framed in order to highlight situations where there is no subdivision of duties between essential functions controls do not exist, or essential aspects of management supervision of controls do not exist.
An ICQ is phrased consistently so that, for example, a “yes” answer indicates a strength, and a “no” answer a weakness.
Illustration 2
Client: Normanton
Year end: 31 December 2004 Prepared by: B. E. Mignano
Cycle: Sales Date: 7.5.06 Yes/No
or N/A Flowchart Reference
1. To ensure all orders received are processed to keep errors to a minimum
Are persons responsible for preparation of sales orders
independent of credit control, custody of inventory and recording sales
transactions?
Are sales orders pre-numbered?
Do sales order clerks check the goods ordered are available in quantity and quality required?
Are standard prices, delivery and payment terms in written form for the use of sales order clerks?
2. To ensure that sales orders are not accepted in respect of a bad credit risk
Is the credit controller independent of the sales order clerks?
Are new credit customers vetted for creditworthiness by reference to independent persons or organisations? etc.
4.3
Construction
Step 1 — Identify the cycle
E.g. Sales
What do we start with? What do we do to change it? What do we end up with?
opening trade receivables transactions
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Step 2 — Consider overall audit approach
¾
Opening balances – agree to prior year working papers¾
Transactions – controls help ensure completeness and accuracy¾
Closing balances – auditor can obtain comfort on completeness and accuracy.Step 3 — Break down the transaction types into components
Customer order → sales order → despatch note → sales invoices → sales day book →
ledger(s)
Step 4 — Ask “what could go wrong?”
Customer order
Sales order
Despatch note
Invoice
Sales day book
Can goods be despatched without authorisation?
Can invoices be raised but not recorded? Can goods be despatched but not invoiced? Can invoices be raised
if no goods despatched?
Sales (receivables)
ledger
Can goods be charged to the wrong customer? General ledger
Dr SLC a/c Cr Sales
Sales day book
Step 5 — Formulate internal control questions
¾
Questions should be phrased consistently. For example: Are invoices pre-numbered and issued in strict numerical sequence? Are there procedures to ensure that all invoices are cancelled?
Alternative structure
¾
Instead of structuring “subsidiary” questions around “key” questions, the objectives can be rephrased as control objectives. E.g.“Can goods be ordered
without authorisation?” ⇒ “To ensure that goods cannot be ordered without authorisation”
Example 2
Solution
5
INTERNAL CONTROL EVALUATIONS (ICEs)
5.1
Description
An ICE may be used as well as or instead of an ICQ. Many audit firms make no distinction between an ICQ and an ICE. However, an ICE usually goes further than an ICQ.
¾
Contains only key control questions on which reliance is sought.¾
Records the key control which satisfies the key control question (an ICQ may well be required to distinguish the key control from the non-key controls).¾
Describes nature and extent of tests of controls.¾
Records test conclusions and how substantive procedures effected.FOCUS
You should now be able to:
¾
describe the methods by which accounting and internal control systems are documented and assessed;3508
EXAMPLE SOLUTION
Solution 1 — Relative advantages of methods
Narrative notes Flowcharts
Questionnaires
Easy to read/understand 9 ? ?
Little formal training required 9 8 9
Quick ? ? 9
Comprehensive ? ? 9
Diagrammatic/visual 8 9 8
Highlights key features/controls
8 9 9 (ICEs)
Standardised 8 9 (may be) 9 (may be)
Little narrative necessary 8 9 9
“Story” approach 9 8 8
Easy to amend ? ? 9 (ICQs)
Used to assess controls 8 8 9
Solution 2 — Purchases cycle
Purchase requisition
Purchase order Goods received note
Purchase day book General ledger
Dr Purchases Cr PLC a/c
Can goods be ordered without authorisation?
Can a liability be raised for the wrong supplier? Can goods be received
without a liability being
raised? Invoice
Can a liability be recorded for the wrong amount?
Payables ledger Can goods be received
without authorisation?
